Good morning and welcome to H&R Real Estate Investment Trust 2025 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, and the remarks that follow may contain forward-looking information which reflect 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 risks 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 the 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 these additional measures so that investors can do the same. Additional information about the material factors, assumptions, risks, 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 detail 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, Mr. Hofstedter.
Good morning, everyone. [Audio distortion] Thanks for joining. I'll pass it on to Larry Froom, our CFO, to give the highlights of the quarter. Larry will then pass on to Emily Watson last hour to give the highlights of the semester.
[Audio distortion] Thank you, Tom. Good morning, everyone. In my comments to follow, references to growth and increases in operating results unless stated otherwise are in reference to the three-month standard March 31st, 2025, compared to the three months standard March 31st 2024. In 2024, we sold $ 429 million of real estate assets, and Q1 of 2025, we sold eight retail assets for $ 60 million. 70% of our real estate assets are valued or now in the United States.
[Audio Distortion] Overall, given the year-end we face with multifamily supply concerns, weak office markets, inflation, as well as a terrible war creating general market uncertainty, we are very keen to see our results and, in particular, the 4.4% growth in property net operating income on a cash basis. Breaking this down between our segments, where the cash flow segment and property net operating income on a cash basis decreased by 0.8% in U.S. dollars. The new supply added in the residential markets is being absorbed. The positive immigration trend has continued, and our trends are also staying longer. Emily will provide more details shortly. Our office segment, property net operating income on a cash basis, increased 1.2%, primarily due to the strengthening of the U.S. dollar.
[Audio Distortion] There have been a slate of back-to-the-office policies from different companies, and it seems clear that more and more employees are heading back to the office, which is positive for the sector as a whole. Our office portfolio of 60 properties, which includes four properties as residential resorting opportunities, now only comprises 18% of H&R's total portfolio by value. 87.8% of our office revenue comes from investment retainments, a testament to the quality and location of our office properties. Our office occupancy at March 31st 2025, was 96.7%, with an average remaining lease term of 5.8 years. Our Retail portfolio at March 31st, 2025, comprises 15% of H&R's overall portfolio by value. Retail segment same property net operating income increased 8.2% due to occupancy gains at Riverlanding and Flats. The tenants in our retail portfolio predominantly grocers, and the portfolio has been very stable.
[Audio Distortion] Industrial segment same property net operating income increased 4.5%, and the industrial portfolio of 65 properties at March 31st 2025, comprises 18% of H&R's total real estate assets by value and continues to perform well. Since the announcement of H&R's strategic plan, H&R's average Canadian industrial rents increased from 7.17 per sq ft as of June 30, 2021, to C
AD 9.42 per sq ft as of March 31st 2025. In addition, industrial properties located in GTA made up 69% of H&R's industrial portfolio as of June 30, 2021, compared to 69% of H&R's industrial portfolio as of March 31st 2025. Headline FFO per unit for Q1 2025 was $0.297, the same as Q1 2024. We are pleased to see the result, as we have sold $ 489 million of real estate assets since January 1, 2021. Our balance sheet remained strong.
[Audio Distortion] Debt to total assets of the REIT's proportion of shares on March 31st 2025, was 44.1%, and debt to average was a healthy 9.3x . Liquidity at March 31st 2025, was in excess of $870 million, with an unencumbered equity pool of approximately $ 4.5 billion. The unencumbered assets unsecured debt coverage ratio was 2.3x at March 31st 2025. I will turn the call over to Emily.
Thanks, Larry. Good morning, everyone. Today, I'm happy to share our first quarter performance for our multifamily platform and some operational highlights. Our first quarter results have aligned with our expectations. Our multifamily platform continues to benefit from strong demand, as evidenced by stable resident retention and a delta to homeownership. Additionally, continued job and wage growth further demonstrate strengthening drivers for our industry. Rather than opining on headlines, we remain focused on the fundamentals of our business and continue to create NOI expansion through our repositioning opportunities and other innovative value-add strategies that add to our bottom line. Given the declining levels of new supply ahead and growing demand in our markets, we are well positioned for substantial growth and value creation in coming years.
Same property net operating income from residential properties in U.S .dollars decreased by 82 basis points for the three months ending March 31st 2025, compared to the respective 2024 period, primarily due to a decrease in average rental rates and higher property operating costs from H&R Sunbelt properties. This was partially offset by rental growth from H&R's Gateway City properties. Same asset occupancy ended the quarter at 94.4%, a 60 basis points decrease over the fourth quarter and no change from Q1 of 2024. Same asset occupancy in Sunbelt decreased 70 basis points in Q1 to 93.7% over the fourth quarter. Jackson Park was 98.9% occupied with 75% retention. The Sunbelt continues to show strong demand metrics as supply deliveries have passed their peak. Our Sunbelt resident retention was 57% in Q1 and achieved a 60% resident retention in April.
Blended lease trade-offs for the Sunbelt markets were - 2.1% in the first quarter, an improvement of 380 basis points over fourth quarter, and Q2 blended trade-offs are + 10 basis points to date. These results demonstrate the worst is behind us, and we will continue to see improvement as supply decreases throughout the year. Based on a third-party appraisal and a handful of Sunbelt sales comps, we have maintained our fair market value Sunbelt cap rates at 4.96% and believe the rate is appropriate and supported. Cap rates are expected to remain low, relatively speaking, for institutional quality assets in the Sunbelt, with capital flows interested and focused on long-term heavy Sunbelt multifamily allocation. On the development front, Land Tower West Love in Dallas, Texas, continues to lease well despite the record-level deliveries in Dallas. The community is currently 65.4% occupied and 70% leased.
The property was completed on time and on budget. Also in Dallas, Texas, Land Tower Midtown is currently 58.6% occupied and 62.6% leased. Both properties are leasing well with an average monthly velocity of 24 leases per month, which is above industry reports for our market and a testament to the superior product and unparalleled amenities our development team has delivered. Midtown was also completed on time and on budget. Reddit properties are progressing well and remain on budget with completion expected mid-2026. Land Tower currently has an additional nine development projects in the Sunbelt pipeline, totaling over 2,900 suites at H&R's ownership interest, with multiple sites ready and prepared for construction. We are progressing through different phases of design, drawing, and permitting on the remainder of our Sunbelt development pipeline and currently have four projects fully permitted.
In summary, Land Tower's platform has demonstrated remarkable resilience and performance relative to our peers. Our teams have navigated supply challenges and remained laser-focused on innovative practices, including centralization, property-wide Wi-Fi opportunities, and AI applications that enhance NOI margins and continue to yield positive results. I want to extend my gratitude to our incredible teams whose dedication to excellence and innovation has been pivotal in achieving these outcomes. I pass along the conversation to Tom.
Operator.
Thank you. Are we ready for questions at this time?
Yes, we are.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. 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 the two. If you are using a speakerphone, please lift the handset before pressing any keys. The first question comes from Mario Saric at Scotiabank. Please go ahead.
Hi, good morning. Just maybe starting off with Emily at Land Tower, can you just, I may have missed the numbers, but can you just go through what the blended lease spreads were in Q1, where they kind of stand so far in Q2, and what the expectation is in terms of them becoming sustainably positive timing-wise going forward?
Good morning, Mario. That's a great, great question. Our same store blended trade-offs were - 1.4%, with the new lease - 7.3%, and renewals were 3.3%. For the Sunbelt specifically, the new lease trade-offs were - 5.6%, which was an improvement. It was 13.8% in the fourth quarter. Renewals were 3.3%, which is an increase from 2.2% in the fourth quarter. The blend in Sunbelt alone were -2.1% compared to -5.9%. We are + 10 basis points in the Sunbelt as of yesterday. We still have some headwinds ahead of us on the supply. Supply is expected to be about 75,000 units in 2024 and 2025, with pretty heavily in Q1 and Q2, and then drops off in Q3 and Q4.
I still maintain that I think we'll still maybe come in a little bit negative in Q2, and that we'll start seeing positive in Q3 and Q4.
Got it. Okay. No real change from the view three months ago.
I do not. Our renewals are a little bit better than what I had anticipated, and retention is better. I am real pleased with the 60% retention in April. We have already closed out April above a 3% renewal, and we have four, and it is still really early for our May, I mean, for our June renewals, but they are coming in around 5%. I definitely see momentum picking up, but still in the same cadence that I had originally anticipated that Q3 and Q4 are going to be really where we have seen some pickup.
Got it. Okay. My second question is maybe just for Tom on capital recycling, specifically asset sales. I think on the press release, it kind of highlighted perhaps the desire to do more transaction volume, but Larry kind of listed up a myriad of factors that may be preventing that in the short term. Can you just give us an update in terms of what your thoughts are and whether anything's changed with respect to the timing on ECCO, like Hess, and some of the other initiatives that you have in the pipeline?
There's no news on Hess as far as the Chevron Hess issue goes. We expect it to go to the courts in June with a resolution sometime in September. We're looking to put that behind us. I think what the market doesn't like about that is the uncertainty. Once there's certainty, we can actually then go forward with something. We can sell it at that point in time. Until that point in time, we really can't do anything. Nothing new on there. Nothing new on ECCO. ECCO, we're still planning to go forward as it was previously discussed. We're not going to push sales into this illiquid world right now. I think the summer is going to be very, very sleepy overall, and we'll look to September to see if there's a little more vitality, a little more wakeness to the market, and then resume some sales.
In your view, what are kind of the one or two top macro factors that are kind of driving the liquidity in the market, and what do you look like?
The illiquidity in the market, there's no debt or equity, so let's start there. In order to have a sale, you need both of them, and you can't have equity without debt, and you can't have debt without equity. Both of them have to wake up. I think that Trump created with his tariffs a co-pile of uncertainty in the marketplace that's primarily, obviously, industrial and office. Until that's a little bit settled down, I think there's going to be people going to be reluctant to go ahead and jump into industrial or office. I think you need a little bit more visibility to what's going on in the United States and geopolitical as well.
Therefore, I expect, as I said, to the summer, not a whole lot to happen, and hopefully we look to September where people will want to start doing business again, and hopefully there'll be more of a positive momentum. Overall, the situation, not only in Canada, everywhere, is very, very lethargic right now. It's a wait-and-see game to see what happens to geopolitical and tariffs and recession and interest rates and everything else that's out there.
Okay. All makes sense. Thanks, Tom.
Thank you.
Thank you. The next question comes from Sumayya Syed at CIBC Capital Markets. Please go ahead.
Thanks. Good morning. Firstly, on Land Tower, it sounds like there was, actually, there was improvement there. I saw some reference in addition to the lower rent commentary around some higher operating costs. I am just wondering, what is the outlook there and were the costs just higher on seasonality or something else there?
Great question. Not really. In Q1 of 2024, we had, I should say in Q4 of 2023, we overestimated the bad debt, and a lot more people paid in Q1 than what we had anticipated, or Q4 than what we anticipated. It was really a reversal. Our bad debt, it shows an increase in bad debt, but our bad debt in Q1 was 53 basis points, which we were really pleased with. That was part of it. We also had a little bit higher payroll costs due to a couple of things. One, we usually run about 7% open positions, and we have been running about 4%.
That is kind of good news that we are more fully staffed than what we have had in the past, as well as bonus attainment was a little higher in Q1 than what it was in Q1 of last year. Nothing that I think will be that concerns me at all. Our NOI margins are still 59-60%. I think what we are doing is working, but not anything that I am concerned with. Rental rates are supply-driven, so we are seeing more concessions in the market that will burn off, which kind of pleases. People are seeing the optimism in what is coming ahead in Q3 and Q4. Nothing I am concerned about and kind of aligned with our expectations.
Okay. Got it. Just moving on to the retail exit strategy, maybe a question for Tom. Besides ECCO, you have about $ 600 million of other retail, and putting aside Riverlanding, the remaining assets, I guess, appear to be more liquid and in demand. What will be the outlook for disposing of that bucket, and could that be more near-term than resolving ECCO?
If we do not look to sell that on bulk, if we look to do the same program we did with our oil facilities in the United States, we have been selling them gradually over the past few years, one at a time, and achieving solid pricing. Those assets are worth more on a one-off basis, so we could look to start the program of selling them, but it is not going to be $ 300 million or $ 400 million of sales at one time. I do not think that is the right way to go with that portfolio.
Okay. Got it. Thank you. I'll turn it back.
Thank you.
Thank you. The next question comes from Matt Kornack at National Bank Financial. Please go ahead.
Good morning, guys. We've talked a lot about the supply picture in the U.S. multifamily space, but just interested in your view on demand and just the drivers. I know, obviously, there's been a lot of interstate migration to the Sunbelt, but how should we think? I mean, interest rates are high, so presumably homeownership's not necessarily an alternative, but are you fully expecting that the demand will be stable as the supply comes off to drive kind of that inflection?
Good morning, Matt. I do. In fact, Q1 set a record for Q1 demand nationally. In our respective markets, we absorbed 28,000 units and projected 86,000 for the year. To put some perspective around that, all of our Sunbelt markets in 2024 absorbed 98,000. For 28,000 in Q1, we were really encouraged by that, and we see the momentum picking up in different areas. We still have people that are relocating headquarters to Dallas, Austin. We are not subjected really to the port, anything that happens with the tariffs in Houston. I definitely anticipate the demand to, and so do the economists. You probably read the same headlines that I do, but yeah, we are seeing things that are supporting the forecasted demand in all of our Sunbelt markets. It is still a 60% discount to if you owned your own home in our market.
That's a pretty big delta, but you still see delay in marriage and having babies, and kind of all of those fundamentals are ringing true. I don't see anything that would suggest otherwise that the demand's not going to be sustainable. Are you still there?
What portion of that would be destined for redevelopment versus the stuff that you'd be trying to kind of renew tenants? Or if it is destined for redevelopment, would you try to renew on a short-term basis at this point?
Matt, I'm sorry. I missed half your question because the phone cut out. Do you mind repeating it?
Oh, it was on office. Emily, you're good.
Oh, okay. Okay. Good.
Oh, I think, Matt, we all missed the question. What was that?
Oh, okay. I was looking at your lease maturity profile, and you do have about 1 million sq ft of office maturities over the next two years in Canada. I am just wondering how much of that would be destined for redevelopment versus releasing. If it is destined for redevelopment, at this point, are you kind of trying to renew people on a short-term basis as opposed to letting those go vacant?
There is no residential market to speak of. We are looking to renew them on a short-term basis or with a sale or demo clause. That will be applicable to the leases that are rolling in Front Street, the leases that are rolling in the United States, and the Hess. That is where we are negotiating right now with tenants. We have completed some of those leases. That is going to be released. That is not service redevelopment. Bouchard, which is 2026, is not for redevelopment. That will not be released. That may be extended by bail if they need to stay on a little bit longer, but we are not looking to release that building.
Okay. You would not expect a material increase in vacancy in the office portfolio in the near term at this point?
No. For what I just mentioned, you have one for each. Sorry. You have Front Street, which, again, that'll be till it's released, it's vacant. You have Bouchard, which is 2026, which will stay vacant. You have 145 Wellington, which is slated for ultimate redevelopment. That's 10 years plus down the road. That's not going to be released. There's nothing there anyhow, though. I'm just mentioning it as a footnote to the fact that it's a residential redevelopment. And Hess, as I mentioned, is 2026. That'll be released. There's downside. There's leasing up, and then CI is in remission, so it takes time.
Okay. Fair enough. Makes sense.
Thank you. The next question comes from Jimmy Shan at RBC Capital Markets. Please go ahead.
Thanks. Just first on the HBC industrial lease, it looks like there's a decent amount of upside here. What's the sequence of events from here, and what's the prospect of leasing that space when you get the space back?
I think within a matter of weeks, subject to the courts and releasing, we're already talking to potentials that the releasing is strong, and the rental rate, my guess is, will be $14-ish, something like that.
Okay.
We're already in negotiations with potential tenants. That's not going to be a problem, child. That'll lease.
A little bit of a downtime and then probably some time in the back half of the year.
Yeah. That's realistic. Yes.
Okay. On ECCO, I noticed in Q1, the NOI dropped a decent amount from Q4 2024. I was wondering, is there some seasonality there, or would it account for that drop?
Morning, Jimmy. I'll have to get back to you on that one. There wasn't anything substantial that we saw from there. I think if you're looking at it, just be careful when you're looking at it to back out the IFRIC 21 because we'd have had to accrue royalty taxes for the whole year in the ECCO portfolio. Maybe looking at it, what's better? Can you back that out?
Yeah. That might be it. Yeah. Okay. Okay. Still on ECCO, Tom, I think you mentioned you're not going to push a sale. Have you tried to push a sale in the last few months? When you're thinking about potentially putting it in the market, September, are you looking to sell just your LP interests, or could the entire portfolio be also considered for sale?
We have not put it on the market. We have not awarded yet to an investment banker to proceed with. We are having discussions with the potential candidates in that regard. We do not know, really. We are going to put it out there, and you will see where you land. You will see if there is an interest for our interest or there is interest in somebody coming and taking our interest in Treasury. It could be anywhere where the best deal lies. So 100%, everything is on the table.
Okay. Again, timing-wise, you're thinking probably the fall?
I don't really know. It's not market conditions-driven. It's just getting all of the—again, there's many, many investors. You can look at it as a public company. So it's not H&R definitely saying, "Let's go," and it's not necessarily the board saying, "Go." You have to appreciate the fact there's, I would say, close to 500 investors, multiple family investors. This is a company that's probably 130 years old. There's many, many layers of family. Till they get all their votes and all their ducks in a row, I can't really control the timing. I don't want to say fall. It's hard to predict that level of surety, but in the near future, in the foreseeable future, I expect it to happen. I'm not thinking I'm not as anxious for it to happen as you may be. It's a solid company.
It'll have no debt on when Bouchard finally closed that transaction, it'll have zero debt. Its sales are very, very strong. We have total visibility into each store, how it's doing. It's primarily grocery anchored. There's no risk over here whatsoever. It's not a burning issue for me to sell it. The only reason I'm selling it is, excuse me, guys, keep on asking the question. When am I selling it? If I had my choice, I wouldn't sell it. Stop asking, and I won't sell it.
Okay. Just last question. Remind me again, I know you talked about it, you got a $400 million debenture coming up. What was the plan again on the debenture?
Jimmy, we plan to use our bank loans to pay it off. We're just trying to buy that time to see what sales will come down the pipe.
What we have not mentioned, Jimmy, is we have the Caledon lands for the future highway extension, and that is going to happen, has to happen. They have to build a highway. That is not really market-driven. It is not dictated by us. It is dictated by the government. My guess is it will happen sooner rather than later, and that is a significant amount of money that can come in, and that would answer this question. When we have more visibility on this decision, we are talking to the government in that regard. That is why we are procrastinating on that debenture issue. I expect that we are going to have to make a decision sooner rather than later, but again, we are in discussions, and we will have better visibility. If we do not, then obviously we will just roll into a new unsecured.
Okay. What would be rough quantum? Would it be half of the debenture amount?
You're talking about a minimum of $150 million proceeds, a minimum.
Okay. Okay. Thanks.
Thank you.
Thank you. We have no further questions. I will turn the call back over to Tom Hofstedter for closing comments.
Thank you, everybody, for joining us. Have a great day.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.