TORONTO,
Nov. 14, 2012 /CNW/ - H&R Real
Estate Investment Trust ("H&R REIT") and H&R Finance Trust
(collectively, "H&R") (TSX: HR.UN; HR.DB.C; HR.DB.D; HR.DB.E)
announced their financial results for the third quarter ended
September 30, 2012.
Operating Highlights
H&R REIT's operating strategy is to
stabilize annual earnings and minimize market risk by leasing and
financing its properties on a long-term basis. As a result, the
average remaining term to maturity as at September 30, 2012 was 11.4 years for leases and
7.9 years for outstanding mortgages. Occupancy at
September 30, 2012 was 98.5%, down
slightly from 98.9% at September 30,
2011. Leases representing only 4.4% of total rentable
area will expire during the remainder of 2012 and 2013. As at
September 30, 2012, the ratio of
H&R's debt to fair market value was 53.1% compared to 53.6% as
at December 31, 2011. H&R's
debt excluding convertible debentures to fair market value ratio
was 49.7% compared to 47.0% as at December
31, 2011.
Capital Transaction Highlights
During the third quarter of 2012, H&R
REIT:
- redeemed all of its remaining outstanding 6.65% 2013
Convertible Debentures for a total cash payment of $29.8 million;
- redeemed all of its remaining outstanding 6.75% 2014
Convertible Debentures for a total cash payment of $1.3 million;
- sold two industrial properties, one in Ontario and one in the United States for gross proceeds of
$65.5 million;
- incurred a $1.3 million
prepayment penalty to refinance a $129.6
million mortgage bearing interest at a rate of 6.93%, with a
new $200.0 million mortgage bearing
interest at a rate of 4.0% for a 10-year term; and
- purchased 6 grocery anchored retail properties totaling 416,782
square feet in Florida for an
aggregate purchase price of U.S. $71.5
million at an average capitalization rate of 6.8% and
subsequently closed a U.S. $46.5
million mortgage for these properties at an interest rate of
3.35% for a 7-year term. This resulted in a 13.2% levered
return on this portfolio which consists of the following
properties:
Property Address |
Anchor |
Square Feet |
Occupancy |
840 A1A North, Ponte Vedra Beach, FL |
The Fresh Market |
52,959 |
89.5% |
11406 San Jose Boulevard, Jacksonville, FL |
Publix |
56,700 |
97.2% |
125 Merritt Island Causeway, Merritt Island,
FL |
Publix |
88,316 |
91.0% |
1850 Ridgewood Avenue, Holly Hill, FL |
Publix |
57,870 |
97.8% |
17445 U.S. Highway 192, Clermont, FL |
Publix |
77,770 |
93.8% |
8145 & 8195 Vineland Ave., Orlando, FL |
Publix |
83,167 |
95.0% |
Total |
|
416,782 |
|
Development Highlights
H&R REIT is currently developing the Bow in
Calgary, AB. The Bow is a
2-million square foot head office complex, pre-leased on a triple
net basis, to Encana Corporation for a term of 25 years. The
North Block budget is currently $1.67
billion leaving approximately $58.5
million remaining to be spent. Floors 3 to 22, floors
29 to 40 and floors 23-28 were delivered to Encana Corporation on
May 2, 2012, October 4, 2012 and November 8, 2012, respectively. Delivery of
further floors will occur in December
2012 and January 2013 after
which time the 25-year lease will commence. Encana
Corporation is entitled to a 60-day rent free fixturing period and
a rent credit equal to the delay penalty estimated to be
$33.0 million in respect of all the
floors. This rent free period combined with the interest
expense that will no longer be capitalized, as floors of the
project become available for their intended use, will result in an
estimated funds from operations ("FFO")(1) gain of
$0.8 million and an adjusted funds
from operations ("AFFO")(1) loss of $28.9 million in 2012 as shown in the table
below.
|
Actual |
Estimate(2) |
In Millions |
Q2 2012 |
Q3 2012 |
Q4 2012 |
Total 2012
|
Q1 2013 |
Q2 2013 |
Basic rent |
$ -
|
$ - |
$ -
|
$ - |
$ - |
$23.2 |
Straight-lining of contractual rent |
5.7 |
8.6 |
15.4 |
29.7 |
24.6 |
2.0 |
Interest no longer capitalized |
(3.6) |
(8.6) |
(11.1) |
(23.3) |
(14.4) |
(15.5) |
Mortgage interest |
(0.5) |
(2.0) |
(3.1) |
(5.6) |
(4.2) |
(4.6) |
Depreciation |
(1.6) |
(4.7) |
(6.9) |
(13.2) |
(9.2) |
(10.2) |
Expected Bow FFO(1) |
1.6 |
(2.0) |
1.2 |
0.8 |
6.0 |
5.1 |
Expected Bow AFFO(1) |
(4.1) |
(10.6) |
(14.2) |
(28.9) |
(18.6) |
3.1 |
(1) |
H&R's combined Management
Discussion and Analysis ("MD&A") includes reconciliations of:
net income to FFO; FFO to AFFO; and AFFO to cash provided by
operations. Readers are encouraged to review such
reconciliations in the combined MD&A. |
(2) |
This information is being provided
so that investors are able to understand the expected impact of the
Bow to H&R REIT's operations. This information may not be
appropriate for any other purposes
|
Upon full occupancy and following the expiration of the free rent
period, the Bow is expected to generate approximately $93.5 million of net operating income on an
annualized basis and H&R REIT will have additional annual
interest expense, due to interest expense no longer being
capitalized to the project, of approximately $62.0 million and interest of $18.5 million on the Bow bonds. Rent
escalations will be at 0.75% per annum on the office space and 1.5%
per annum on the parking income for the full 25-year term.
Financial Highlights
The following table includes non-Generally
Accepted Accounting Principles ("GAAP") information that should not
be construed as an alternative to comprehensive income (loss) or
cash provided by operations and may not be comparable to similar
measures presented by other issuers as there is no standardized
meaning of FFO and AFFO under GAAP. Management believes that
these are meaningful measures of operating performance.
Readers are encouraged to refer to H&R's combined MD&A for
further discussion of non-GAAP information presented.
|
3 months ended September 30 |
9 months ended September 30 |
2012 |
2011 |
2012 |
2011 |
Rentals from investment properties (millions) |
$213.9 |
$169.6 |
$604.8 |
$478.7 |
Net income (millions) |
$5.3 |
$58.3 |
$35.9 |
$36.1 |
FFO (millions) (1) |
$78.8 |
$70.2 |
$244.1 |
$204.1 |
FFO per Stapled Unit (basic) |
$0.41 |
$0.43 |
$1.31 |
$1.30 |
AFFO (millions) (1)(2) |
$62.6 |
$62.9 |
$202.4 |
$177.3 |
AFFO per Stapled Unit (basic)(2) |
$0.33 |
$0.39 |
$1.08 |
$1.13 |
Cash provided by operations (millions) |
$140.5 |
$104.1 |
$397.6 |
$300.5 |
Cash distributions paid (millions)
(3) |
$42.0 |
$31.1 |
$118.6 |
$87.8 |
Distributions per Stapled Unit |
$0.30 |
$0.25 |
$0.86 |
$0.71 |
(1) |
H&R's combined MD&A
includes reconciliations of: net income to FFO; FFO to AFFO; and
AFFO to cash provided by operations. Readers are encouraged
to review such reconciliations in the combined MD&A. |
(2) |
See below for significant and
non-recurring items included in AFFO. |
(3) |
Cash distributions paid exclude
distributions reinvested in units pursuant to H&R's unitholder
distribution reinvestment plan and include distributions paid to
the Class B Limited Partnership unitholders who can exchange their
units for Stapled Units.
|
Under International Financial Reporting
Standards at each reporting period, H&R REIT fair values its
convertible debentures and exchangeable units using closing market
prices. This is shown as a gain (loss) on change in fair
value. Also included in the gain (loss) on change in fair
value is the net gain (loss) on derivative instruments. The
total gain (loss) on change in fair value was ($7.9 million) for the three months ended
September 30, 2012 (September 30, 2011 - $22.0
million) and ($25.5 million)
for the nine months ended September 30,
2012 (September 30, 2011 -
($39.2 million)). For the three
months ended September 30, 2012,
there was a gain (loss) on extinguishment of debt of ($0.1 million) (September
30, 2011 - $5.0 million) and
for the nine months ended September 30,
2012, there was a gain on extinguishment of debt of
$10.5 million (September 30, 2011 - $19.6
million). Excluding the gain (loss) on change in fair
value and the gain (loss) on extinguishment of debt, net income
would have been $13.3 million for the
three months ended September 30, 2012
(September 30, 2011 - $31.3 million) and $50.9
million for the nine months ended September 30, 2012 (September 30, 2011 - $55.7
million).
Included in AFFO are the following items which
can be a source of significant variances between different
periods:
|
3 months ended September 30 |
9 months ended September 30 |
In Millions |
2012 |
2011 |
2012 |
2011 |
Additional recoveries for capital
expenditures |
$3.8 |
$1.6 |
$8.5 |
$2.6 |
Capital and tenant expenditures |
($8.7) |
($3.7) |
($19.5) |
($11.9) |
One-time non-recurring items* |
($1.3) |
$1.2 |
($1.6) |
$1.9 |
The Bow |
($10.6) |
- |
($14.7) |
- |
|
($16.8) |
($0.9) |
($27.3) |
($7.4) |
* |
One-time non-recurring items may include lease termination
payments, mortgage pre-payment penalties, sundry income,
one-time
occupancy and realty tax adjustments and unusual trust
expenses.
|
Excluding the above items, AFFO would have been
$79.4 million for the three months
ended September 30, 2012
(September 30, 2011 - $63.8 million) and $0.41 per basic Stapled Unit (September 30, 2011 - $0.39 per basic Stapled Unit). For the nine
months ended September 30, 2012, AFFO
would have been $229.7 million
(September 30, 2011 - $184.7 million) and $1.23 per basic Stapled Unit (September 30, 2011 - $1.18 per basic Stapled Unit).
Subsequent to September 30, 2012, H&R REIT:
- sold four retail properties in Georgia, United
States for gross proceeds of approximately U.S. $51.4 million, including a gain on sale of
approximately $5.4 million.
Distribution Increases:
Consistent with H&R's positive outlook and
Encana and Cenovus's occupancy of the Bow, the trustees have
adopted an updated distribution policy to replace the distribution
policy previously announced in February
2011. Under the updated policy, it is intended that
distributions will increase by 8% in January
2013 to $1.35 per Stapled Unit
on an annualized basis (consistent with the previous policy).
About H&R REIT and H&R Finance
Trust
H&R REIT is an open-ended real estate
investment trust, which owns a North American portfolio of 41
office, 116 industrial, 135 retail properties comprising over 43
million square feet, and 3 development projects with a fair value
of approximately $10.0 billion. The
foundation of H&R REIT's success since inception in 1996 has
been a disciplined strategy that leads to consistent and profitable
growth. H&R REIT leases its properties long term to
creditworthy tenants and strives to match those leases with
primarily long-term, fixed-rate financing.
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 is U.S. $156.5
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 Statements
Certain information in this news release
contains forward-looking information within the meaning of
applicable securities laws (also known as forward-looking
statements) including, among others, statements relating to the
objectives of H&R REIT and H&R Finance Trust, strategies to
achieve those objectives, H&R's beliefs, plans, estimates, and
intentions, and similar statements concerning anticipated future
events, results, circumstances, performance or expectations that
are not historical facts including, in particular, H&R REIT's
expectation regarding future developments in connection with and
financial impact of The Bow, and the amount of actual
distributions to unitholders notwithstanding the trustees adoption
of a distribution policy. 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 H&R's current
beliefs and are based on information currently available to
management. These statements are not guarantees of future
performance and are based on H&R's estimates and assumptions
that are subject to risk and uncertainties, including those
discussed in H&R's materials filed with the Canadian securities
regulatory authorities from time to time, which could cause the
actual results and performance of H&R to differ materially from
the forward-looking statements contained in this news release.
Those risks and uncertainties include, among other things, risks
related to: prices and market value of securities of H&R
availability of cash for distributions; development and financing
relating to The Bow development; restrictions pursuant to
the terms of indebtedness; liquidity; credit risk and tenant
concentration; interest rate and other debt related risk; tax risk;
ability to access capital markets; dilution; lease rollover risk;
construction risks; currency risk; unitholder liability;
co-ownership interest in properties; competition for real property
investments; environmental matters; reliance on one corporation for
management of substantially all H&R REIT's properties; and
changes in legislation and indebtedness of H&R. Material
factors or assumptions that were applied in drawing a conclusion or
making an estimate set out in the forward-looking statements
include that 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.
H&R cautions that this list of factors is not exhaustive.
Although the forward-looking statements contained in this news
release are based upon what H&R believes are reasonable
assumptions, there can be no assurance that actual results will be
consistent with these forward-looking statements. All
forward-looking statements in this news release are qualified by
these cautionary statements. These forward-looking statements are
made as of today, and H&R, except as required by applicable
law, assumes no obligation to update or revise them to reflect new
information or the occurrence of future events or
circumstances.
SOURCE H&R Real Estate Investment Trust