Mr. Tom Hofstedter reports

H&R REIT REPORTS STRONG FIRST QUARTER 2023 RESULTS

H & R Real Estate Investment Trust has released its financial results for the three months ended March 31, 2023.

"Our portfolio transformational plan is producing strong financial results across all property classes," said Tom Hofstedter, executive chair and chief executive officer. "Subsequent to the end of the first quarter, we completed an important property disposition with the sale of 160 Elgin, continued to unlock value through the rezoning of select office properties, and enhanced our balance sheet with reduced leverage and increased liquidity, moving H & R closer to achieving our portfolio simplification strategy goals. We will continue to act on our transformational strategic repositioning plan, as we have been doing since its announcement on Oct. 27, 2021, with discipline, transacting when we can to surface value for our unitholders. Given the line of sight we have into our current disposition pipeline, and the demand we are seeing for our properties, we expect to sell an additional $300-million of non-core assets during the balance of 2023, including the retail sale we are announcing today."

Mr. Hofstedter added: "As we approach our annual general meeting in June, on behalf of H & R unitholders, I'd like to thank Ronald Rutman for his years of service as a trustee on H & R's board, including eight years as chair, and most recently as vice-chair and lead independent trustee. We are delighted to have welcomed Donald Clow, lead independent trustee, to the board where his expertise and guidance will be invaluable as we seek to accelerate the REIT's transformation strategy. We have also nominated two experienced trustees, who are standing for election at the AGM, Lindsay Brand and Leonard Abramsky. Upon their appointments, the board will be comprised of 40 per cent women. With the unwavering support of this distinguished board, the H & R team continues to have clear direction as we execute our repositioning strategy."

Highlights:

• Net operating income increased by 5.3 per cent for the three months ended March 31, 2023, compared with the respective 2022 period.
• Same-property net operating income (cash basis) increased by 10.5 per cent for the three months ended March 31, 2023, compared with the respective period in 2022, driven by healthy gains across H & R's operating segments:
  • Residential -- up 21.3 per cent, driven by strong rent growth and the strengthening of the U.S. dollar;
  • Industrial -- up10.2 per cent, driven by strong rent growth and higher occupancy;
  • Retail -- up 6.2 per cent, driven by the strengthening of the U.S. dollar;
  • Office -- up 5.4 per cent, driven by the strengthening of the U.S. dollar and lease terminations.
• Funds from operations (FFO) per unit grew 11.1 per cent to 31 cents per unit for the three months ended March 31, 2023, compared with 27.9 cents per unit for the respective period in 2022. The REIT distributed 48.4 per cent of FFO to unitholders for the three months ended March 31, 2023.
• Cash distributions per unit increased by 15 per cent for the three months ended March 31, 2023, compared with the respective 2022 period.
• Unitholders' equity per unit was $20.72 and net asset value (NAV) per unit was $21.95 at March 31, 2023. The following weighted average capitalization rates were used to value the REIT's investment properties:
  • Residential -- 4.31 per cent;
  • Office (general) -- 6.99 per cent;
  • Industrial -- 5.20 per cent;
  • Office (rezoning) -- 4.52 per cent;
  • Retail -- 6.40 per cent.

Senior leadership changes

As previously announced on May 10, 2023, Philippe Lapointe stepped down as president of H & R and as an officer of H & R's subsidiary, Lantower Residential. Effective immediately, Emily Watson, Lantower's chief operating officer, has assumed leadership and the strategic direction of Lantower Residential.

Subsequent property dispositions

In April, 2023, H & R sold 160 Elgin St., a 973,661-square-foot office property in Ottawa, Ont., for $277-million, which was classified as held for sale as at March 31, 2023. H & R provided two vendor takeback mortgages to the purchaser upon closing: (i) $180-million secured by a first mortgage on the property, bearing interest at 6.5 per cent per annum for 90 days, maturing July 20, 2023, and (ii) $30-million which will be subordinate to the first mortgage on the property, bearing interest at 4.5 per cent per annum for a five-year term, maturing April 20, 2028. The remaining proceeds of $67-million were primarily used to repay debt and finance closing costs. Approximately $33-million of the $67-million will be used to repurchase units under the REIT's normal course issuer bid, which are currently trading at a significant discount to the REIT's NAV per unit.

In May, 2023, H & R entered into an agreement to sell four Canadian retail properties for aggregate gross proceeds of $68-million. Closing of the sale remains subject to certain customary conditions being satisfied and is expected to occur in July, 2023.

2023 distribution increase

H & R increased its monthly distributions to five cents per unit commencing January, 2023. This amounts to 60 cents per unit annually, an 11.1-per-cent increase from the 2022 distribution of 54 cents per unit, excluding the 2022 special cash distribution.

The 2022 special distribution of 40 cents per unit comprised five cents per unit in cash and 35 cents per unit in additional units, which were immediately consolidated such that there was no change in the number of outstanding units. As a result of the recently announced property sales, H & R expects to make a special distribution in 2023. The amount and nature of such distribution will be determined in Q4 2023.

For the three months ended March 31, 2023, H & R's payout ratio as a percentage of AFFO (adjusted funds from operations) was 57.7 per cent.

Major leasing transactions

In Q1 2023, H & R completed a five-year lease renewal on a 132,735-square-foot industrial property in Mississauga, Ont., at H & R's ownership interest. The original lease expired in February, 2023, and rent increased by 269 per cent commencing in March, 2023, with annual contractual rent escalations. The tenant had a free rent period for March and April, 2023.

In Q1 2023, H & R completed a five-year lease renewal on a 37,600-square-foot industrial property in Mississauga, Ont., at H & R's ownership interest. The original lease will expire in July, 2023, and rent will increase by 232 per cent commencing in August, 2023, with contractual rent escalations. The tenant has a free rent period for the months of August, 2023, August, 2024, and August, 2025.

In Q1 2023, H & R entered into a lease amendment with its tenant at 6900 Maritz Dr. in Mississauga, Ont., to terminate its lease in December, 2023. The terms of the rental payments to December, 2023, have not changed. The previous lease term would have ended in May, 2031. H & R received a lease termination fee of approximately $900,000 in Q1 2023 and will receive an additional $2.5-million in Q3 2023. IFRS (international financial reporting standards) 16 -- Leases requires revenue from leases to be recognized on a straight-line basis over the contractual term of the lease. As a result of this lease amendment, a non-cash adjustment to straight-lining of contractual rent of nil was recorded in Q1 2023 and $800,000, negative $1.8-million and $800,000 will be recorded in Q2 2023, Q3 2023 and Q4 2023, respectively. H & R is preparing a site plan application for submission to the City of Mississauga for a new single-storey 122,400-square-foot industrial building, which would replace the existing 104,689-square-foot office building. Site plan approval is expected by Q4 2023.

Development update

Canadian properties under development

The REIT currently has two industrial properties under development located at 1965 Meadowvale Blvd. and 1925 Meadowvale Blvd. in Mississauga, Ont., totalling 336,800 square feet, which are expected to be completed in Q4 2023 and Q1 2024, respectively. The total development budget to complete these two properties is approximately $40.2-million. In October, 2022, H & R entered into a binding agreement with Armour Transport Inc. to fully lease 1965 Meadowvale Blvd., totalling 187,290 square feet, for a term of 10 years at current market rents with annual contractual rental escalations. The lease was completed in February, 2023. In March, 2023, H & R entered into a lease agreement with UAP Inc. to fully lease 1925 Meadowvale Blvd., totalling 149,510 square feet, for a term of 12.5 years at current market rents with annual contractual rental escalations.

U.S. properties under development

The REIT commenced construction on two U.S. residential development properties in 2022. The total development budget to complete these two properties is approximately $150.5-million (U.S.). The REIT expects its construction costs for these two properties under development to be approximately $101.2-million (U.S.) for the remainder of 2023 and $49.2-million (U.S.) in 2024.

Future intensification

On Feb. 27, 2023, H & R attended a settlement hearing with the Ontario Land Tribunal (OLT) for 53 and 55 Yonge St. in Toronto, Ont., where H & R received a settlement decision from the OLT for a 66-storey mixed use tower representing approximately 550,000 square feet, including approximately 510 residential units with approximately 170,000 square feet of replacement office area and approximately 10,000 square feet of retail area. H & R is now working on a resubmission to reflect minor tweaks negotiated with the City of Toronto and H & R's neighbours as a part of the settlement, and is targeting finalized rezoning in Q2 2023.

On March 10, 2023, H & R reached a verbal agreement with the City of Toronto for 310 Front St. in Toronto, Ont., for a 65-storey mixed use tower representing approximately 550,000 square feet, including approximately 575 residential units with approximately 117,000 square feet of replacement office area and approximately 2,000 square feet of retail area. H & R has made a resubmission reflecting minor tweaks negotiated with the City of Toronto, and a positive staff report is slated to head to council in Q2 2023.

Debt and liquidity highlights

In January, 2023, H & R redeemed all of its $250-million Series O senior debentures, which bore interest at 3.416 per cent per annum.

In March, 2023, H & R and its co-owner obtained a new $275-million non-revolving secured credit facility, at H & R's ownership interest, secured by 42 industrial properties. Upon closing, the REIT and its co-owner repaid $12.5-million outstanding on its secured revolving $25-million line of credit facility which matured as a part of closing this new facility, each at H & R's ownership interest.

During the three months ended March 31, 2023, H & R repaid two mortgages totalling $13.3-million at a weighted average interest rate of 4.7 per cent.

As at March 31, 2023, debt to total assets per the REIT's financial statements was 34.4 per cent, unchanged from 34.4 per cent as at Dec. 31, 2022. As at March 31, 2023, debt to total assets at the REIT's proportionate share (a non-GAAP (generally accepted accounting principles) ratio) was 43.9 per cent compared with 44 per cent as at Dec. 31, 2022. The weighted average interest rate of H & R's debt as at March 31, 2023, was 4 per cent with an average term to maturity of 3.1 years. The weighted average interest rate of H & R's debt as at Dec. 31, 2022, was 3.8 per cent with an average term to maturity of 3.2 years.

As at March 31, 2023, H & R had cash and cash equivalents of $68.4-million, $879.7-million available under its unused lines of credit and an unencumbered property pool of approximately $4.5-billion.

Environmental, social, governance update

On March 13, 2023, H & R REIT announced the appointment of Mr. Clow to the REIT's board of trustees. Mr. Clow fills the vacancy left by Mr. Rutman, who resigned from the board following a successful term as vice-chair and independent lead trustee. Subsequent to his appointment, the trustees appointed Mr. Clow as independent lead trustee of the REIT's board of trustees.

On April 25, 2023, H & R announced the nominations of two trustees to the board, Ms. Brand and Mr. Abramsky. Upon their appointments, the H & R board of trustee will comprise 40 per cent women.

Monthly distributions declared

H & R today declared distributions for the months of May and June, scheduled as noted herein.

Conference call and webcast

Management will host a conference call to discuss the financial results of the REIT on Friday, May 12, 2023, at 3 p.m. Eastern Time. Participants can join the call by dialling 1-888-886-7786 or 1-416-764-8658. For those unable to participate in the conference call at the scheduled time, a replay will be available approximately one hour following completion of the call. To access the archived conference call by telephone, dial 1-416-764-8692 or 1-877-674-7070 and enter the passcode 779694 followed by the pound key. The telephone replay will be available until Friday, May 19, 2023, at midnight.

A live audio webcast will be available through H & R's website. Please connect at least 15 minutes prior to the conference call to ensure adequate time for any software download that may be required to join the webcast. The webcast will be archived on H & R's website following the call date.

The investor presentation is available on H & R's website.

2023 annual unitholders meeting

H & R will host its annual unitholders meeting on Thursday, June 15, 2023, at 10:30 a.m. Eastern Time (by virtual meeting only via live audio webcast).

About H & R Real Estate Investment Trust

H & R is one of Canada's largest real estate investment trusts with total assets of approximately $11.4-billion as at March 31, 2023. H & R has ownership interests in a North American portfolio comprising high-quality residential, industrial, office and retail properties comprising over 28.7 million square feet. H & R's strategy is to create a simplified, growth-oriented business focused on residential and industrial properties in order to create sustainable long-term value for unitholders. H & R plans to sell its office and retail properties as market conditions permit. H & R's target is to be a leading owner, operator and developer of residential and industrial properties, creating value through redevelopment and greenfield development in prime locations within Toronto, Montreal, Vancouver, and high-growth U.S. Sun Belt and gateway cities.

We seek Safe Harbor.