Good morning, and welcome to H&R Real Estate Investment Trust 2024 first quarter earnings conference call. Before beginning the call, H&R would like to remind listeners that certain statements, which may include predictions, conclusions, forecasts, or projections in the remarks that follow, may contain forward-looking information, which reflects the current expectations of management regarding future events and performance and speak only as of today's date. Forward-looking information requires management to make assumptions or rely on certain material factors and is subject to inherent risk and uncertainties, and actual results could differ materially from the statements in the forward-looking information.
In discussing H&R's financial and operating performance, and in responding to your questions, we may reference certain financial measures which do not have a meaning recognized or standardized under IFRS or Canadian generally accepted accounting principles, and are therefore unlikely to be comparable to similar measures presented by other reporting issuers. Non-GAAP measures should not be considered as alternatives to net income or comparable metrics determined in accordance with IFRS as indicators of H&R's performance, liquidity, cash flows, and profitability. H&R's management uses these measures to aid in assessing the REIT's underlying performance and provides this additional measure so that investors can do the same.
Additional information about the material factors, assumptions, risk, and uncertainties that could cause actual results to differ materially from the statements in the forward-looking information and the material factors or assumptions that may have been applied in making such statements, together with details on H&R's use of non-GAAP financial measures, are described in more details in H&R's public filings, which can be found on H&R's website and www.sedarplus.com. I would now like to introduce Mr. Tom Hofstedter, Chief Executive Officer of H&R REIT. Please go ahead.
Good morning, and thank you all for joining us today to discuss our first quarter results. With me on the call are Larry Froom, our Chief Financial Officer, and Emily Watson, Chief Operating Officer of our Lantower division. This year to date, properties and properties under contract to be sold total CAD 417 million. This is in addition to the CAD 2.5 billion of property sales and CAD 2.4 billion of assets spun out between the announcement of the plan and the end of last year. As of March thirty-first, two thousand and twenty-four, the residential and industrial segments comprised 62% of our total real estate portfolio, and as at March thirty-first, two thousand and twenty-four, our total office portfolio comprised 23% of total real estate assets.
After the sales, of course and TELUS, we will be left with 18 office, office properties with a total value of CAD 2.2 billion. Based on our current unit price of CAD 9.30, compared to our NAV per unit of CAD 21.05, as if the market is giving us zero value for these properties, highlighting the deep value inherent in our unit price. Average term to maturity in our leases, on our office leases is 6.6 years. 81.2% of our office tenants have investment-grade ratings, underscoring the quality and location of our properties, and six of our office properties can be redeveloped into residential properties with a significant increase to the current square footage. We will continue to realize value through the sale of our office properties and execution of our strategic plan.
With that, I'll turn the call over to Larry for an update on our results.
Thank you, Tom, and good morning, everyone. My comments to follow. References to growth and increases in operating results are in reference to the three months ended March 31, 2024, compared to the three months ended March 31, 2023. H&R same property net operating income on a cash basis increased by 1.4%. Breaking the growth down between our segments, Lantower, our residential division, had a 3.2% increase, and Emily will provide more details on this shortly. Industrial same property NOI on a cash basis increased by 5.1%, driven by rent increases for new and renewed tenants, as well as an increase in occupancy.
The tenants at our two new industrial developments in Mississauga, totaling 336,000 sq ft, have taken possession, and their rent-free fixturing period will end in Q2 and Q3 2024, respectively. The average rent of CAD 8.57 per sq ft on our Canadian industrial portfolio is well below market rent, which bodes well for our industrial, industrial portfolio, continuing to deliver strong results. Office same property NOI on a cash basis decreased by 3.7%. This decrease was largely attributable to a decrease in occupancy at our properties slated for future development, including 3777 Kingsway in Burnaby, BC, which is under contract to be sold.
Our office properties are in strong urban centers with a weighted average lease term of approximately 6.5 years and leases to strong creditworthy tenants, with 81.2% of office revenue coming from tenants with investment-grade ratings. Last year, H&R received a lease termination payment of CAD 3.4 million from a tenant at one of our office properties, 6900 Maritz Drive in Mississauga. In Q1 2024, this property was transferred from investment properties to properties under development. The former 105,000 sq ft office property is being converted into a brand new 122,000 sq ft industrial building. Construction of the new building has just begun. And lastly, retail same property NOI on a cash basis increased by 5.7%, primarily driven by increased occupancy at River Landing.
Q1 2024's FFO was CAD 0.297 per unit, compared to CAD 0.31 per unit in Q1 of 2023. H&R's cash distributions of CAD 0.15 per unit for the quarter resulted in an FFO payout ratio of 50.5% and an AFFO payout ratio of 61%. Net asset value per unit at March 31, 2024, was CAD 21.05 per unit, an increase from CAD 20.75 at the end of 2023. Debt to total assets at the REIT's proportionate share at March 31, 2024, was 44.5%, and liquidity at March 31, 2024, was in excess of CAD 800 million, with an unencumbered property pool of approximately CAD 4.3 billion.
Our unencumbered assets to unsecured debt coverage ratio was 2.2 times at March 31st, 2024. Looking at our debt stack, we only have CAD 243 million of mortgages due in 2024. CAD 111 million of those are secured by properties which we have under contract to be sold, and the balance will be refinanced or repaid from the proceeds from our assets held for sale. With that, I will now turn the call over to Emily.
Thank you, Larry, and good morning, everyone. Today, I'm excited to share our first quarter performance for our multifamily platform, highlighting significant operational achievements and providing insights into our future strategies. We've seen same-store revenue growth this quarter align perfectly with our expectations. Our multifamily platform continues to benefit from strong demand, as evidenced by stable resident retention and positive traffic trends. While new supply is at a 30-year high, 100,000 units were absorbed in Q1, marking a 20-year high and showcasing the economic backdrop of a continued job and wage growth. Furthermore, our diversification across both Sunbelt and Gateway Cities has served us well in driving solid results. Our operational efficiency shines through our financial metrics.
We achieved the same asset revenue growth in U.S. dollars, increasing by 1.5% for the first quarter, and same asset net operating income from our portfolio in U.S. dollars, increasing by 3.2% for the three months ending on March 31, 2024, compared to the respective 2023 period. Occupancy ended the quarter at 94.4%. We continue to see positive signs of demand, with Q1 resident retention at 54% and 94% occupancy in the Sun Belt, and our gateway cities achieving 74% retention and 97% occupancy. Move-outs to home purchase continue to trend in a historical lows at 9% of total move-outs, and rent-to-income levels remain affordable at approximately 19%, excluding Jackson Park, allowing for future headroom and rental growth.
We've included additional disclosures on page 8 of the MD&A, which includes occupancy and average monthly rent per unit by region. The first quarter passed without a decrease in interest rates, which continued to stagnate transaction velocity. Nonetheless, based on recent sales comparisons in the Sun Belt and a recent third-party appraisal, we are maintaining our fair market value capitalization rate at 5% for our Sun Belt portfolio. We anticipate these valuations to remain attractive for institutional quality assets in our target markets. Turning to developments, our Lantower West Love project in Dallas achieved its first temporary certificate of occupancy on schedule with 75 units in April and early April.
In addition to these units, we opened the leasing center and the majority of the property amenities on April fifteenth, and with over 30 leases to date, we are encouraged by the leasing in the first full month of lease up. We are looking forward to entering the summer leasing season with this best-in-class development. Prospective renter feedback has been extremely favorable, with our co-working spaces and cold brew on tap ranking as a crowd favorite. At Lantower Midtown, also in Dallas, construction has progressed well, with the development now 100% framed and the first turn of units finishing cabinets, flooring, and countertops. We plan to commence lease up at Midtown this summer. On the Real Estate Development Trust number 1 front, the investor interest to invest alongside Lantower's existing development pipeline was highlighted by accelerated fundraising results.
We feel this construct will create value for H&R shareholders as well as our REDT investors, while maintaining financial flexibility and taking advantage of favorable depressed Sun Belt supply pipeline in the upcoming years. Lantower Sunrise, a 330-unit development in the Orlando market, and Lantower Bayside, a 271-unit development in the Tampa market, are progressing as expected. We expect these developments to reach completion in early to mid-2026, which we believe to be an excellent time to deliver units. We look forward to providing updates on these developments in the coming quarters.... In conclusion, Lantower's platform has demonstrated remarkable resilience and performance, outpacing many of our peers. While we navigate some near-term supply challenges, our focus on innovative practices and enhancing NOI margins through strategic initiatives continues to yield positive results.
I want to extend my gratitude to our incredible team, whose dedication to excellence and innovation has been pivotal in achieving these outcomes. With that, I'll turn the conversation back to Tom. Thank you for your continued support and trust in our vision.
Thanks, Emily, and operator, please open the call for questions.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press Star followed by one. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press Star followed by two. And if you are using a speakerphone, please leave the handset before pressing any keys. Our first question comes from the line of Sam Damiani from TD Cowen. Please go ahead.
Thank you. Good morning, everyone. Maybe Emily, just to start off with, with Lantower, what would be your updated views on the, the trends in the supply in your markets? When do you think they're gonna taper off meaningfully? Any, any different views on that versus last quarter?
Hi, Sam. Thanks for the question. No, actually, that really hasn't changed. We delivered, you know, as you know, 100,000 units just in our markets in 2023, and it will edge that a little bit more in 2024. So far, the demand side of the equation, I don't think, gets enough fanfare, frankly, in the headlines. But with wage growth and starting to see the migration kind of be the same levels as it has before, I think 2025, it's going to drop off pretty significantly. And then again, 2026, I think, is really gonna be set for a banner year.
I think 2025 will still probably absorbing some of the overhang of 2024, but, you know, I, I would see 2026 being set up to, you know, 6%-7% rent growth just because we'll still have a supply shortage of all the folks that are coming to the Sun Belt states.
That's helpful. Just given the success of the REDT, would you think about maybe starting construction on more projects in the near term? And if so, would you bias to do, you know, another REDT deal or do it more on balance sheet?
Well, I think we're always open to opportunities. So given the, given the strength of the appetite that we saw so quickly, you know, probably a better question for Tom, but I'd say, yes, we would, we wouldn't pass on an opportunity to continue to develop at the attractive rate.
Yeah, Sam, when things change and things get better, that the market will let us use our capital to grow, then, obviously we'll do it on our own balance sheet. But until then, we continue using the REDT formula going forward.
Okay, and thank you. And last one, last one for me. Just on, on the mezz loan conversion to ownership in, in Brooklyn, how big was that mezz loan? And also, with the remaining mezz loans, is there any, any sort of high-level description you can give about the underlying properties?
Good morning, Sam. I believe that mezz loan on Brooklyn was about $40 million. And the rest of the mezz loans, you wanted a bit of a update on what our current plans are on the rest of the mezz loans?
Looking to get a sense of what types of underlying properties are behind that pool of mezz loans.
It's mostly the same. It's mostly land, mostly land in the U.S.
Yeah, it's but not very material. And Sam, this was converted for 1031 reasons, so we wouldn't convert otherwise. It just, what we're really doing is parking our 1031, if you look at it that way. When we find a replacement, when the market wants us to find a replacement, which again, at this point in time, we're not spending cash, then we'd look ahead to exit and relate to something. At this stage of the game, we're just deferring our, our tax, so to speak, by parking the 1031.
Okay, last one for me-
Transaction to look at in that regard.
Sam, I should just also add, there are a couple of ones that are not based on land, and those are like the one we just did for the sale of 160 Elgin. We had a VTB of CAD 30 million on that property sold. There's a-
Yeah.
There's that and one or two others that are-
They're not... Yeah, they're not really material. This was the most material, and this was just deferring our tax.
Gotcha. And just lastly, on the mezz loans or I guess former mezz loan, any update on The Cove on the Jersey side?
That's the mezz loan over there. My guess is that will be converted to equity. With 80-20 split, we'll have 80, they'll have 20. But, the timing on that will probably happen in 2024.
Thank you.
Again, if you would like to ask the question, please press star one. Thank you. Our next question comes from the line of Jimmy Shan from RBC Capital Markets. Please go ahead.
Thanks. Maybe just a clarification on the mezz loan you're referring to. This is not relating to the Brooklyn asset or the development site that you bought, or is that something different?
... It's relating to the Brooklyn assets, correct?
It is. Okay. Yeah, okay. All right, got it. Any update on the Echo Portfolio and how you're thinking about the potential of selling your LP interest in that business?
Yeah, we're making progress. I'm more optimistic that it'll happen. And I don't have a date on that, but we're getting the feeling that it's a liquid portfolio as far as the quality goes. It's safe. It's fully leased, 98% leased. It's primarily 54% of it is the Giant Eagle chain. It's desirable. It's the value of that is in and around 7, 7-ish, 7, 7.5. So because it's the same product as Publix would have in Florida, and Publix would trade at a 5, and this will trade at 7, 7.5, because it's Ohio, Pennsylvania. I think it'll be desirable.
The markets will be looking for this, and I think we will be able to make an exit within the next 12 months.
Okay. Is it, is it on the market today?
No.
Okay. Not yet. Okay.
It's being underwritten, but it's not on the market at this point in time.
Okay. Maybe just a few modeling type questions, Larry. So the net proceeds from the TELUS Tower and the Corus Quay, how do we model the use of proceeds in order?
I think the safest would be to just model a prepayment of debt.
Prepayment of debt. Okay. All right. And the straight line was CAD 5 million in the quarter. I think it maybe has something to do with the Meadowvale assets. And I guess, how do we model that one? Is it - does it run off once the free rent goes away? Like, how - what, what's that number look like?
Well, the free rent on Meadowvale will, after the fixture period, drop off, and that will be replaced by actual cash rent.
Yes.
Overall, on an FFO, it won't make a difference because FFO takes both rent and rent smoothing into account. FFO will be the same. FFO will be higher because it'll be rent instead of non-cash rent.
Okay. So out of that CAD 5 million, roughly, would be like a couple of million from those, or?
Well, you could model it. I think the easy way to model it is just take a high teens rent on, on those properties if you need the square footage, and that will probably give you the NOI coming from those properties. High teen rent on the square footage would be the, the best way.
Okay. Sorry, lastly, the Brampton industrial sale where the tenant exercised the option, is it... Do you have a lot of assets that are structured that way, where they're able to buy? I guess they were able to buy at a certain fixed price option.
We have two. I wouldn't say a lot of assets, but we have chunky. We have two other assets that have that option by the tenant, where we expect, because of the increase in the values of the building and land, that the tenants will be exercising their option. That won't happen for another couple of years, though.
Just a note on that, when that does happen, and a tenant in those isolated circumstances does have an option to purchase, we cap our fair market value, our IFRS value, at that purchase option, even if the IFRS market value may be higher.
Right.
Understood. Okay. Thank you.
Thanks.
Our next question comes from the line of Sumaiya Syed from CIBC. Please go ahead.
Thanks. Good morning. Just firstly, on 69 Yonge, so now you have the amendment to convert it to residential. Just wondering what would be maybe the construction cost per square footage for an asset like that today?
Good morning, Sumaiya. It's Matt Kingston. The construction cost for 69 Yonge is a bit higher than standard. It probably is gonna be somewhere CAD 100-CAD 150 per sq ft higher than a traditional project, just because of the heritage nature of it and the fact that it's a retention project, so it has an inherent premium.
Okay, that's helpful. And then, I guess, switching to the balance sheet, the debt up did tick up a little bit higher. Just wondering, Larry, where do you expect that to settle over the Corus of the year?
Well, with the proceeds that we're gonna be getting from Corus Quay, that happens post March 31st, and the latter that will be used to pay back debt, you'll you should see that drop again. But overall, that's a short-term drop, and I think you should expect to see it stabilize at around 9.2, 9.3 times.
Oh, nine. Okay. And also just wanted to confirm that the decline in occupancy and office, that was primarily all related to Kingsway.
Primarily related to Kingsway, but not solely related to Kingsway. There were other drops in occupancy. Some tenants did vacate, but some other properties, we had a 30,000 sq ft tenant, I believe, be one of our other properties to be redeveloped. But it was mostly, most of it came from Kingsway.
Okay, great. Thank you.
Our next question comes from the line of Romel Sabat from Scotiabank. Please go ahead.
Hey, good morning. We noticed that we haven't done any buybacks over the last two quarters, and following the recent announcement of the dispositions, how do you view the appeal of to restart NCIB versus paying down debt?
... We're open to the NCIB, but at this point in time, we're protecting our balance sheet, so we don't expect to be engaging in the NCIB.
All right. Makes sense. Thank you. My next question is related to the new Lantower, the new disclosures on the residential portfolio. So, is it possible to provide a little bit more color on the leasing spreads that you're seeing right now?
Sure. What, in particular, questions do you have in between renewals or?
Yeah, like the new renewals, new leasing spreads, mark-to-markets.
Sure. You know, we're pretty stable. We had about 60 basis points improvement over Q4, which is really seasonality. And Q2 is off to a much better start. Actually, we're seeing flat. So Q1 was down around 2% of our lease spreads, but flat for Q2. So we're getting a little bit closer into our leasing peak season and moving into kind of where we see the height of our traffic. So I expect that to really be about the same in Q2, Q3. About the same deliveries every single quarter. There's some volatility to there, but it's pretty stable across the four quarters. So, you know, come back down in maybe Q4, but Q2 and Q3, I expect them to be pretty flat.
Okay, it makes sense. Thank you for this. My last question is related to the residential portfolio, too, and also the whole portfolio. So we just wanted to know if it's possible to give us your expectations on same-property NOI growth for this year?
Hi, Romel, it's Larry. We haven't given any guidance, and we wanna kind of stay away from giving guidance. We know some other issuers have been caught giving guidance and them in all sorts of trouble, and we just don't want to go there. Sorry.
All right, no worries. Thanks, Larry. Appreciate it. So that's it for me. I'll turn it over, I'll turn it back.
Thank you.
There are no questions at this time. Mr. Tom Hofstedter, please go ahead.
Thanks, everybody, for joining us. Have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.