TORONTO, Feb. 14, 2018 /CNW/ - H&R Real Estate
Investment Trust ("H&R") and H&R Finance Trust
(collectively, the "Trusts") (TSX: HR.UN and HR.DB.D) today
announced their combined financial results for the year ended
December 31, 2017.
STRATEGY UPDATE
H&R is pleased to report that it continued to make progress
on its strategic initiatives, improving on three areas of focus: 1)
governance, 2) assets, and 3) its investment profile. These
improvements add to the significant changes made over the past
several years, and are discussed in greater detail in the letter to
unitholders accompanying H&R's financial statements and
management's discussion and analysis.
Among the more notable conclusions reached in 2017 was a
strategic decision to work towards streamlining H&R's property
portfolio by narrowing its focus to fewer property types, which led
to the plans to sell H&R's U.S. industrial and retail property
portfolios. Management expects that narrowing H&R's focus will
streamline operations, while also making it easier for investors to
understand and appreciate the business, strategy, and opportunity
management and the board of trustees see in H&R's units.
In November 2017, H&R
announced plans to sell all 79 of its wholly-owned U.S.
retail properties and, together with its partners,
12 remaining U.S. industrial properties.
During Q4 2017, six U.S. industrial properties were sold for U.S.
$106.1 million, at H&R's
ownership interest. The net proceeds from these sales, after
mortgage repayments, amounted to approximately U.S. $79.4 million, which were used to fund Lantower
Residential acquisitions.
At December 31, 2017, H&R
valued its U.S. retail assets (exclusive of its investment in ECHO)
under International Financial Reporting Standards ("IFRS") at U.S.
$752.7 million and its ownership
interest of the six remaining U.S. industrial properties at
approximately U.S. $45.2
million. H&R expects to achieve aggregate sales
proceeds approximating these values.
Management and the board of trustees of H&R will continue to
evaluate all aspects of the business on an ongoing basis, looking
for ways to create unitholder value, best position the REIT for
long-term success and enhance the profile of H&R among
investors. In the pursuit of these objectives, H&R will
continue to be guided by its core goal of building a high quality
portfolio of real estate in order to deliver strong per unit
performance over the long-term.
FINANCIAL AND OPERATING HIGHLIGHTS 2017
Financial Highlights
|
3 months ended
December 31
|
Year ended December
31
|
2017
|
2016
|
2017
|
2016
|
Rentals from
investment properties (millions)
|
$298.0
|
$305.5
|
$1,168.5
|
$1,196.0
|
Property operating
income (millions)
|
$199.4
|
$202.4
|
$741.4
|
$764.7
|
Same-Asset property
operating income (cash basis)(1)
|
$180.7
|
$182.3
|
$720.6
|
$716.9
|
Net income
|
$325.2
|
$140.6
|
$667.9
|
$388.7
|
Funds from Operations
("FFO") (millions)(1)
|
$137.4
|
$142.9
|
$560.1
|
$584.3
|
FFO per Stapled Unit
(basic)(1)
|
$0.45
|
$0.48
|
$1.84
|
$1.96
|
FFO per Stapled Unit
(diluted)(1)
|
$0.45
|
$0.47
|
$1.82
|
$1.93
|
Distributions per
Stapled Unit
|
$0.35
|
$0.34
|
$1.38
|
$1.35
|
Payout ratio per
Stapled Unit (as a % of FFO)(1)
|
77.8%
|
70.8%
|
75.0%
|
68.9%
|
Interest coverage
ratio(1)
|
2.99
|
2.90
|
3.00
|
2.81
|
|
|
(1)
|
These are non-GAAP
measures. See "Non-GAAP Financial Measures" in this press
release. The Trusts' combined MD&A includes a
reconciliation of property operating income to Same-Asset property
operating income and net income to FFO. Readers are
encouraged to review the reconciliation in the combined
MD&A.
|
H&R continued to recycle capital by selling certain
investment properties and equity accounted investments between
January 1, 2016 and December 31, 2017 for total proceeds of
$1.2 billion and acquiring
$915.1 million in new properties
during such period. These acquisitions were primarily in the
multi-family segment in the U.S.
- Property operating income decreased by $23.3 million for the year ended December 31, 2017 compared to the respective 2016
period, primarily due to net property dispositions discussed
above.
- Same-Asset property operating income (cash basis) increased by
$3.7 million for the year ended
December 31, 2017 compared to the
respective 2016 period.
- Net income increased by $279.1
million for the year ended December
31, 2017 compared to the respective 2016 period primarily
due to lower deferred income taxes, an increase in net income from
equity accounted investments and fair value adjustments on
financial instruments partially offset by a decrease in fair value
adjustments on real estate assets.
- FFO was $1.84 per Stapled Unit
for the year ended December 31, 2017
compared to $1.96 per Stapled Unit
for the year ended December 31,
2016. The decrease is primarily due to $1.0 million received in lease settlement
payments from Target in 2017 compared to $20.4 million received in 2016 and the net
property dispositions discussed above, partially offset by an
$8.9 million realized gain on sale of
investment in Q2 2017.
Although the net property dispositions have reduced overall
rent, property operating income, net income before income taxes and
FFO, the net proceeds were used to repay debt and has strengthened
H&R's balance sheet. As at December 31, 2017, the debt to total asset ratio
per the Trusts' Financial Statements was 44.6% compared to 46.2% as
at December 31, 2015. The
interest coverage ratio was 3.00 for the year ended December 31, 2017 compared to 2.81 for the year
ended December 31, 2016. As at
December 31, 2017, the Trusts had
$42.3 million of cash on hand,
$313.4 million available under its
bank credit facilities and an unencumbered property pool of
approximately $3.6 billion. In
January 2018, H&R obtained an
additional $200.0 million unsecured
revolving operating facility maturing in January 2023.
Taxation of Distributions
The 2017 distributions by the Trusts were partly comprised of
taxable capital gains (10.5%) and tax deferred return of capital
(29.2%). For Canadian resident unitholders, 39.7% (2016 - 32.3%) of
the distributions on a Stapled Unit were not subject to tax.
Operating Highlights
Occupancy as at December 31, 2017
was 95.6% compared to 95.7% as at December 31, 2016. Commercial leases representing
only 6.7% of total rentable area will expire during 2018. H&R's
average remaining lease term to maturity as at December 31, 2017 was 9.1 years.
SUMMARY OF SIGNIFICANT 2017
ACTIVITY
Developments
H&R continues to make significant progress with its value
creating development program.
The development of the 1,871 luxury residential rental units
known as "Jackson Park" in Long Island
City, NY, in which H&R has a 50% ownership interest, is
nearing completion. The project is on budget with
approximately $197.8 million of costs
remaining to complete of which will be funded from the construction
facility. To date, the first tower has obtained certificates
of occupancy for 333 units. The leasing office for
Jackson Park opened in November 2017 and lease-up is expected to occur
throughout 2018 and 2019. To date, 125 leases have been
entered into and 80 units are currently occupied. Part of the
amenity space is expected to open in April 2018. First
occupancies in the second and third towers are expected to start
during Q2 2018. The property was appraised as of December 31, 2017 by a nationally recognized
independent firm of appraisers for a value of U.S. $1.27 billion as compared to total project costs
at December 31, 2017 of U.S.
$963.5 million resulting in a 2017
fair value increase of U.S. $197.4
million (December 31, 2016 -
U.S. $109.7 million). As
H&R's investment in Jackson Park is accounted for as an equity
investment, this increase in fair value has been recorded as part
of net income from equity accounted investments and not as a fair
value adjustment on real estate assets. Upon stabilized
occupancy of all three towers, the first year's property operating
income at H&R's ownership interest is projected to be U.S.
$36.9 million.
In January 2017, H&R acquired
a mortgage receivable for U.S. $34.0
million secured against nine acres of land in Miami, FL. The urban in-fill development
site, known as "River Landing", fronts immediately on the Miami
River, adjacent to the Health District and in close proximity to
downtown Miami, and is zoned for a
mixed-use development including approximately 480,000 square feet
of retail and office space and over 500 multi-family units.
As at December 31, 2017, the mortgage
receivable outstanding was U.S. $67.1
million.
In Q2 2017, the development of two industrial properties in the
Airport Road Business Park in Brampton,
ON reached substantial completion and were transferred from
properties under development to investment properties. Each of
these properties were pre-leased for 15 years to Solutions 2 Go
Inc. and Sleep Country Canada. The net leasable area of the
property leased to Solutions 2 Go Inc. is 215,020 square feet and
the tenant's lease commenced in May
2017. The net leasable area of the property leased to Sleep
Country Canada is 127,040 square feet and the tenant's lease
commenced in September 2017.
H&R has a 31.7% non-managing interest in 38.4 acres of land
located in Hercules, CA, adjacent
to the San Pablo Bay, northeast of San
Francisco, for the future development of multi-family units
("Hercules Project"). This waterfront, multi-phase,
master-planned, in-fill mixed-use development surrounds a future
intermodal transit centre, including train and ferry service, and
is adjacent to an 11 acre waterfront future regional park.
The initial investment to purchase the land was approximately U.S.
$10.0 million (at H&R's ownership
interest). As at December 31,
2017, H&R's investment was U.S. $12.5 million. Phase 1 of the Hercules
Project will consist of 172 multi-family units and construction
will commence in May 2018. The total budget for this phase is
expected to be U.S. $78.1 million at
the 100% level. Construction financing of approximately U.S.
$50.0 million is expected to be
secured in Q1 2018.
In July 2017, H&R acquired a
33.3% non-managing ownership interest in approximately 5.0 acres of
land in Austin, TX ("Koenig
Project") for the future development of 391 multi-family units with
construction expected to commence mid-2018. This
multi-residential development site is close to major technology
employers like Apple, IBM, Oracle, and Samsung, as well as the
University of Texas at Austin and
downtown Austin. As at December 31,
2017, H&R's investment was approximately U.S.
$5.6 million.
As at December 31, 2017, H&R
has a mortgage receivable outstanding of U.S. $42.8 million secured against an office property
currently under construction and against an adjacent 4.8 acres of
land located in Dallas's downtown
core ("2217 Bryan St."). This project includes the
re-development of a 93,000 square foot existing historical building
into state-of-the-art office space. To date, approximately
63.0% has been pre-leased. The 4.8 acres of excess land is
well located in the downtown core, and is expected to be developed
into a multi-family property.
Lantower Residential
During 2017, Lantower Residential acquired six properties
comprised of 2,229 units for U.S. $386.8
million and sold one property comprised of 428 units for
U.S. $28.0 million. Three of the
properties acquired during the year are in Florida and three are in Texas. As at December
31, 2017, Lantower Residential had a portfolio of 17
properties in the U.S. comprised of 5,633 multi-family units, with
an average age of 7.3 years, along with two properties currently
under construction (Jackson Park and
the Hercules Project) which will, when completed, comprise an
additional 990 multi-family units[, at H&R's ownership
interest.
Primaris
The enclosed mall portfolio same store sales productivity
increased to $545 per square foot for
the 12-month period ending December 31,
2017, an increase from the $542 per square foot during the prior year.
Primaris continues to realize strong tenant demand having completed
164 new lease transactions during 2017, which has driven the
occupancy rate to 92.6%, a substantial increase from the 87.4% at
the beginning of the year. Including tenants committed, but
not yet open and adjusting for the closure of eight Sears' stores
in January 2018, the occupancy rate
would be 86.2%.
In January 2017, H&R sold a
50% non-managing interest in two enclosed shopping centres:
Cataraqui Town Centre in Kingston,
ON and Place du Royaume in Chicoutimi, QC for $211.6 million. The purchaser assumed 50% of the
existing financing on the properties of approximately $126.6 million.
Sears:
Total Sears basic rent, at H&R's ownership interest,
amounted to $2.3 million which
equates to an average net rent of $3.47 per square foot. At less than 0.4% of
annualized gross revenue, management expects that Sears' departure
provides an opportunity to increase net operating income through
replacement of an unproductive anchor tenant paying rents well
below market rates with tenants that will generate increased rent
and traffic to the properties. While disruptive in the short
term, management is confident that the replacement of Sears will
enhance the profile of these properties and create value for
unitholders.
The Trusts' Internal Reorganization
On October 19, 2017, the Trusts
announced a proposed internal reorganization (the "Reorganization")
intended to continue the benefits of the existing Stapled Unit
structure that has been in place since 2008. Joint meetings of
Unitholders were held on December 7,
2017 to approve the Reorganization. The Unitholders approved
the proposed Reorganization, with approximately 99.8% of the
Unitholders of each of H&R and Finance Trust, respectively,
voting in favour of the Reorganization.
On December 14, 2017, the Trusts
received a final order from the Court of Queen's Bench of
Alberta approving the
Reorganization. As a result of certain considerations, including
the enactment of the U.S. federal income tax legislation commonly
referred to as the Tax Cuts and Jobs Act of 2017 ("U.S. Tax
Reform"), H&R has decided not to consummate the Reorganization
in its original form as it has concluded that the Stapled Unit
structure with H&R Finance Trust is no longer necessary.
Accordingly, H&R is in the process of seeking the necessary
approvals to implement a modified Reorganization in 2018 with the
effect of unwinding the Stapled Unit structure.
Normal Course Issuer Bid ("NCIB")
During 2017, the Trusts purchased and cancelled 755,420 Stapled
Units at a weighted average price of $21.10 per Stapled Unit. Subsequent to
December 31, 2017, the Trusts
purchased and cancelled 2,945,120 Stapled Units at a weighted
average price of $21.00 per Stapled
Unit.
Monthly Distribution Declared
The Trusts previously declared a distribution for the month of
February and today declared a distribution for the month of March
scheduled as follows:
|
Distribution/Stapled
Unit
|
Annualized
|
Record
date
|
Distribution
date
|
March 2018
|
$0.11500
|
$1.38
|
March 15,
2018
|
March 29,
2018
|
Conference Call
Management will host a conference call to discuss the financial
results for the Trusts on Thursday, February
15, 2018 at 9:30 a.m. Eastern
Time. Participants can join the call by dialing
647-427-7450 or 1-888-231-8191. For those unable to participate in
the conference call at the scheduled time, it will be archived for
replay beginning approximately one hour following completion of the
call. To access the archived conference call by telephone, dial
416-849-0833 or 1-855-859-2056 and enter the passcode 6297527
followed by the pound key. The telephone replay will be
available until Thursday, February 22,
2018 at midnight.
Webcast
A live audio webcast will be available through
http://hr-reit.com/Investor-Relations/InvestorEvents.aspx.
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.
About H&R REIT and H&R Finance
Trust
H&R REIT is Canada's
largest diversified real estate investment trust with total assets
of approximately $14.6 billion at
December 31, 2017. H&R REIT is a
fully internalized real estate investment trust and has ownership
interests in a North American portfolio of high quality office,
retail, industrial and residential properties comprising over 45
million square feet.
H&R Finance Trust is an unincorporated investment trust,
which primarily invests in notes issued by a U.S. corporation which
is a subsidiary of H&R REIT. The current note receivable
balance is U.S. $223.9 million. In
2008, H&R REIT completed an internal reorganization which
resulted in each issued and outstanding H&R REIT unit trading
together with a unit of H&R Finance Trust as a "Stapled Unit"
on the Toronto Stock Exchange.
Forward-Looking Disclaimer
Certain information in this press release contains
forward-looking information within the meaning of applicable
securities laws (also known as forward-looking statements)
including, among others, statements made or implied under the
headings "Strategy Update" and "Summary of Significant 2017
Activity" relating to the Trusts' objectives, strategies to achieve
those objectives, the Trusts' beliefs, plans, estimates,
projections and intentions and similar statements concerning
anticipated future events, results, circumstances, performance or
expectations that are not historical facts including, H&R's
decision to sell its U.S. retail and industrial properties and the
timing and proceeds of any such sales, the expected use of
proceeds from expected asset sales, H&R's expectation with
respect to the activities of H&R's development properties,
including redevelopment of existing properties and building of new
properties, the expected total cost, source of funding and lease-up
of Jackson Park, the first year's property operating income from
Jackson Park, the development,
budget and source of financing of the Hercules Project, the
expected development of 2217 Bryan St. and the Koenig Project,
management's expectation relating to the opportunity to increase
property operating income as a result of Sears's departure, and
that all necessary approvals will be obtained for the
implementation of the modified Reorganization..
Forward-looking statements generally can be identified by words
such as "outlook", "objective", "may", "will", "expect", "intend",
"estimate", "anticipate", "believe", "should", "plans", "project",
"budget" or "continue" or similar expressions suggesting future
outcomes or events. Such forward-looking statements reflect
the Trusts' current beliefs and are based on information currently
available to management. Forward-looking statements are
provided for the purpose of presenting information about
management's current expectations and plans relating to the future
and readers are cautioned that such statements may not be
appropriate for other purposes. These statements are not guarantees
of future performance and are based on the Trusts' estimates and
assumptions that are subject to risks, uncertainties and other
factors including those described below and those discussed in the
Trusts' materials filed with the Canadian securities regulatory
authorities from time to time, which could cause the actual
results, performance or achievements of the Trusts to differ
materially from the forward-looking statements contained in this
press release. Factors that could cause actual results, performance
or achievements to differ materially from those expressed or
implied by forward-looking statements include, but not are limited
to, the general economy is stable; local real estate conditions are
stable; interest rates are relatively stable; and equity and debt
markets continue to provide access to capital. Additional
risks and uncertainties include, among other things, risks related
to: real property ownership, credit risk and tenant concentration;
lease rollover risk, interest and other debt-related risk;
construction risks; currency risk; liquidity risk, financing credit
risk, cyber security risk; environmental risk; co-ownership
interest in properties, joint arrangement risks; unit price risk;
availability of cash for distributions; ability to access capital
markets; dilution; unitholder liability; redemption right risk;
risks relating to debentures, tax risk and tax consequences to U.S.
holders. The Trusts caution that these lists of factors, risks and
uncertainties are not exhaustive. Although the forward-looking
statements contained in this press release are based upon what the
Trusts believe are reasonable assumptions, there can be no
assurance that actual results will be consistent with these
forward-looking statements. Readers are also urged to examine
H&R and Finance Trust's materials filed with the Canadian
securities regulatory authorities from time to time as they may
contain discussions on risks and uncertainties which could cause
the actual results and performance of H&R and Finance Trust to
differ materially from the forward-looking statements contained in
this press release. Neither Finance Trust nor any of its
trustees or officers, assumes any responsibility for the
completeness of the information contained in H&R's materials
filed with the Canadian securities regulatory authorities or for
any failure of H&R or its trustees or officers to disclose
events or facts which may have occurred or which may affect the
significance or accuracy of any such information. Neither
H&R nor any of its trustees or officers, assumes any
responsibility for the completeness of the information contained in
Finance Trust's materials filed with the Canadian securities
regulatory authorities or for any failure of Finance Trust or its
trustees or officers to disclose events or facts which may have
occurred or which may affect the significance or accuracy of any
such information. All forward-looking statements in this
press release are qualified by these cautionary statements.
These forward-looking statements are made as of February 14, 2018 and the Trusts, except as
required by applicable Canadian law, assume no obligation to update
or revise them to reflect new information or the occurrence of
future events or circumstances.
Non-GAAP Financial Measures
The Trusts' annual audited combined Financial Statements are
prepared in accordance with IFRS. The Trusts' management uses a
number of measures which do not have a meaning recognized or
standardized under IFRS or Canadian Generally Accepted Accounting
Principles ("GAAP"). The non-GAAP measures FFO, Interest
Coverage Ratio, Payout Ratio per Stapled Unit, Same-Asset property
operating income (cash basis) and Trusts' proportionate share as
well as other non-GAAP measures discussed elsewhere in this
release, should not be construed as an alternative to financial
measures calculated in accordance with GAAP. Further, the Trusts'
method of calculating these supplemental non-GAAP financial
measures may differ from the methods of other real estate
investment trusts or other issuers, and accordingly may not be
comparable. The Trusts' use these measures to better assess the
Trusts' underlying performance and provide these additional
measures so that investors may do the same. These non-GAAP
financial measures are more fully defined and discussed in the
Trusts' combined MD&A as at and for the year ended December 31, 2017 available at www.hr-reit.com
and on www.sedar.com.
Additional information regarding H&R and H&R Finance
Trust is available at www.hr-reit.com and on www.sedar.com.
SOURCE H&R Real Estate Investment Trust