Sunbelt Multifamily Supply Easing And Asset Recycling Will Support Long Term Earnings Stability

Catalysts

About H&R Real Estate Investment Trust

H&R Real Estate Investment Trust is a diversified real estate investment trust with exposure to residential, office, industrial and select retail properties in Canada and the U.S.

What are the underlying business or industry changes driving this perspective?

• Multifamily supply in key Sunbelt markets is expected to ease, with forecasts indicating a 36% reduction in new competitive supply in 2026 compared with 2025. This can support firmer rent levels over time and feed into same property NOI, FFO and earnings.
• Long term population and employment growth, business friendly environments and durable migration patterns in H&R's Sunbelt markets underpin demand for Lantower assets. This can help occupancy and rental revenue as new projects stabilize.
• The transition of Lantower to a third party property management model with Greystar is expected to improve operating leverage and reduce fixed overhead. This can lower property level operating costs and support net margins and AFFO.
• New developments such as Lantower West Love, Lantower Midtown, Bayside and Sunrise, along with 9 Sunbelt developments totaling about 2,900 suites, are progressing on time and on budget. This can add incremental rental income and NOI as they lease up.
• Asset recycling, including planned sales of selected office, retail and land assets and the use of proceeds to repay debt, is expected to reduce leverage from an already stated pro forma debt to total assets level of 41.8% and debt to EBITDA of 8.7x. This can support interest expense coverage and future earnings stability.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming H&R Real Estate Investment Trust's revenue will decrease by 7.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -90.0% today to 83.4% in 3 years time.
• Analysts expect earnings to reach CA$586.9 million (and earnings per share of CA$2.09) by about May 2029, up from -CA$791.6 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 6.7x on those 2029 earnings, up from -3.5x today. This future PE is lower than the current PE for the CA REITs industry at 12.4x.
• Analysts expect the number of shares outstanding to grow by 0.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.46%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Multifamily supply in key Sunbelt markets has recently been elevated and has already pressured new lease pricing, so if new construction remains high for longer than expected or demand softens, rent growth and occupancy at Lantower could stay under pressure and weigh on residential segment revenue and same property NOI.
• Industrial same property net operating income decreased 9% in Q4 2025 year over year and 3.7% for 2025 over 2024, while occupancy moved from 98.9% to 90.7%, and if this weaker trend persists or proves structural rather than temporary, it could drag on consolidated NOI, FFO and overall earnings.
• The office portfolio faces a material vacancy risk with RBC’s 189,000 square foot lease at 330 Front Street ending on December 31, 2025, and if management is unable to re-lease this large, contiguous space at comparable terms in what they describe as a weak office market, office segment NOI and FFO could be pressured.
• H&R is relying heavily on asset recycling, with sizeable planned and potential sales across office, retail, land and certain multifamily geographies, and if transaction timing slips, valuations come in below expectations or buyers are limited, the REIT may be constrained in reducing its 41.8% debt to total assets and 8.7x debt to EBITDA ratios, which could affect interest expense coverage and earnings stability.
• The transition of Lantower to a third party management model with Greystar is intended to reduce costs, but if execution issues arise or expected purchasing benefits and efficiencies do not fully materialize, the anticipated improvement in operating leverage may not show up in lower property operating expenses, which would limit upside to net margins, NOI and AFFO.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of CA$11.79 for H&R Real Estate Investment Trust based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$13.0, and the most bearish reporting a price target of just CA$10.5.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be CA$703.7 million, earnings will come to CA$586.9 million, and it would be trading on a PE ratio of 6.7x, assuming you use a discount rate of 7.5%.
• Given the current share price of CA$10.58, the analyst price target of CA$11.79 is 10.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.