TORONTO, May 11, 2016 /CNW/ - H&R Real Estate
Investment Trust ("H&R REIT" or the "REIT") and H&R Finance
Trust (collectively, "H&R") (TSX: HR.UN; HR.DB.D; HR.DB.E and
HR.DB.H) today announced its financial results for the three months
ended March 31, 2016.
Financial Highlights
|
3 months ended March
31
|
2016
|
2015
|
Rentals from
investment properties (millions)
|
$303.4
|
$299.3
|
Property operating
income (millions)
|
$167.9
|
$170.2
|
Funds from Operations
("FFO") (millions)(1)
|
$147.6
|
$139.9
|
FFO per Stapled Unit
(basic)
|
$0.50
|
$0.48
|
FFO per Stapled Unit
(diluted)
|
$0.49
|
$0.47
|
Cash provided by
operations (millions)
|
$152.2
|
$179.9
|
Distributions per
Stapled Unit
|
$0.34
|
$0.34
|
Payout ratio per
Stapled Unit (as a % of FFO)
|
68.0%
|
70.8%
|
(1)
|
H&R's combined
MD&A includes a reconciliation of property operating income to
FFO. Readers are encouraged to review the reconciliation in
the combined MD&A.
|
The REIT's adoption of International Financial Reporting
Standards ("IFRS") Interpretations Committee 21, Levies
("IFRIC 21") has resulted in the entire year's property taxes for
the REIT's U.S. properties all being recorded in Q1 of the related
year. The impact of the adoption of this policy is a reduction in
property operating income of $28.5
million and $25.5 million for
the three months ended March 31, 2016
and March 31, 2015, respectively.
Operating Highlights
Occupancy as at March 31, 2016 was
95.8% compared to 97.6% as at March
31, 2015. The decrease is largely due to lower
occupancy in Primaris malls where Target Canada Co. ("Target")
disclaimed their leases. Despite the drop in occupancy, FFO
per unit increased by 4% primarily due to lease termination
payments of $4.9 million and the
stronger U.S. dollar. Leases representing only 2.3% of total
rentable area will expire during the remainder of 2016.
H&R REIT's average remaining lease term to maturity as at
March 31, 2016 was 10.0
years.
Target Update
As at March 31, 2016, the former
Target stores have not been transferred to properties under
development and H&R has not capitalized any of the property
operating or finance costs attributable to this space. The
following table is a summary of our leasing progress on the former
Target space:
|
Square Feet
at
100%
|
Square Feet
at
H&R's Interest
|
Annual Base
Rent
at H&R's interest
($
Millions)
|
Former Target Canada
space
|
1,062,676
|
831,688
|
$4.4
|
Backfill
progress:
|
|
|
|
Committed space
|
179,001
|
99,851
|
1.3
|
Conditional agreements
|
482,373
|
433,407
|
5.3
|
Advanced
discussions
|
140,713
|
110,213
|
2.7
|
Total backfill
progress
|
802,087
|
643,471
|
$9.3
|
Space currently being
marketed
|
36,713
|
30,029
|
TBD
|
Total gross leasable
area ("GLA") upon completion of redevelopment
|
838,800
|
673,500
|
|
Potential GLA
converted for landlord uses (common area
etc.)(1)
|
143,278
|
117,890
|
N/A
|
Space for
demolition/potential redevelopment
|
80,598
|
40,299
|
N/A
|
Total
|
1,062,676
|
831,689
|
|
(1)
Represents square footage based on current redevelopment plans and
is subject to change based on tenant demand.
|
H&R expects that, once the above leasing is complete, the
new tenants will contribute approximately $9.3 million or 211% of the total base rental
revenue lost through Target's departure. H&R expects most
of these leases will be binding by the end of 2016, subject to
development permits, with occupancy occurring between October 2016 and the end of 2017. The cost
of subdividing and re-leasing the premises is expected to be
approximately $109.0 million at the
REIT's ownership interest. The potential lease settlement
from Target has not been accrued in the Trust's financial
statements.
Development Highlights
Construction is progressing on the development of 1,871 rental
units in Long Island City, NY
("LIC Project"), in which the REIT has a 50% interest and
Tishman Speyer is the operating
partner. The total budget at the 100% ownership level is
expected to be approximately U.S. $1.2
billion with occupancy scheduled to begin in late
2017. Construction financing for up to U.S.
$640 million has been secured through
a syndicate of lenders co-led by two U.S. banks. As a
condition to the financings, the REIT will have to contribute a
further U.S. $18.3 million to the
project which will increase its total investment to U.S.
$260.6 million. Approximately
74.7% of total hard costs and 68.9% of total project costs have
been fixed.
In Q1 2016, the REIT entered into two separate 15-year
build-to-suit leases for industrial properties to be developed at
the Airport Road Business Park in Brampton, ON, adjacent to the Unilever
project, for Sleep Country Canada and Solutions 2 Go Inc. The
total net leasable area for these properties is expected to be
341,775 square feet. Occupancy of both projects is expected
to occur in Q1 2017, which will conclude the development of this
parcel of land.
Alberta Exposure
The REIT's properties in Alberta comprise 27.6% of the REIT's adjusted
same-asset property operating income, which is further discussed by
segment below.
Alberta Office Segment:
The REIT has interests in five
office properties in Alberta. They collectively comprised
17.3% of the REIT's adjusted same-asset property operating income
in Q1 2016. As can be seen from the chart below, these
tenants are some of the strongest companies in the energy sector
and their average remaining lease term is 17.5 years.
Address
|
City
|
Total GLA
(Sq.Ft.)
|
Ownership
Interest
|
GLA at
REIT's
Interest
(Sq.Ft.)
|
% of the
REIT's adjusted
same-asset
property operating
income in Q1 2016
|
Average
Remaining
Lease Term
(years)
|
Major
Tenant
|
S&P Tenant
Credit Rating
|
5th Ave.
at Centre St.
|
Calgary
|
2,024,182
|
100%
|
2,024,182
|
12.4%
|
21.9
|
Encana
Corporation
|
BBB
Negative
|
450-1st St.,
S.W.
|
Calgary
|
931,187
|
100%
|
931,187
|
3.3%
|
15.1
|
TransCanada
PipeLines Limited
|
A-
Negative
|
411-1st St.,
S.E.
|
Calgary
|
707,093
|
50%
|
353,547
|
1.3%
|
1.9
|
Telus
Communications
|
BBB+
Stable
|
2611-3rd
Ave.
|
Calgary
|
95,225
|
50%
|
47,613
|
0.1%
|
10.6
|
Alta Link
LP
|
A Stable
|
2767-2nd
Ave.
|
Calgary
|
69,793
|
100%
|
69,793
|
0.2%
|
5.7
|
Alta Link
LP
|
A Stable
|
Total
|
|
3,827,480
|
|
3,426,322
|
17.3%
|
17.5
|
|
|
On May 1, 2016, Telus
Communications vacated 342,238 square feet at 411-1st
St., S.E. (171,119 square feet at the REIT's 50% ownership
interest). The property has recently completed a $14.6 million renovation including a new lobby
and a connection through Calgary's
Plus 15 Skywalk system to the Bow.
Alberta Industrial Segment:
The REIT has a 50%
ownership interest in 16 industrial properties in Alberta and a 100% ownership interest in one
industrial property in Alberta
which, collectively, comprised 1.5% of the REIT's adjusted
same-asset property operating income in Q1 2016. The REIT owns
1,895,338 square feet of industrial space in Alberta, of which 1,413,866 square feet is
leased to creditworthy tenants such as Canadian Tire Corporation,
Finning International Inc. and Purolator Inc. on a long-term
basis. The weighted average remaining term to lease is 9.1
years and leases representing only 2,309 square feet will expire
during 2016 and 2017.
Alberta Retail Segment:
The retail properties in
Alberta comprise 8.8% of the
REIT's adjusted same-asset property operating income in Q1 2016 and
continue to show strong sales performance in the Primaris Malls
with average store sales (excluding anchor tenants) at $559 per square foot for the rolling 12 months
ended February 29, 2016 compared to
the entire Primaris portfolio average at $534 per square foot. The weighted average
remaining term to lease is 4.7 years.
Fort McMurray Properties:
The REIT has interests in
the following two properties in Fort
McMurray:
Property
|
Property
Type
|
Total GLA
|
Ownership
Interest
|
GLA
at
REIT's Interest
|
Major
Tenants
|
Peter Pond
Mall
|
Retail
|
203,120
|
100%
|
203,120
|
Sport Chek,
Atmosphere
|
118 MacDonald
Cr.
|
Industrial
|
65,169
|
50%
|
32,585
|
Finning International
Inc.
|
Total
|
|
268,289
|
|
235,705
|
|
To date, we are not aware of any wildfire damage to these
properties and will keep our tenants and unitholders informed as
further information becomes available.
H&R Retail Segment Highlights
In March 2016, the REIT sold its
100% interest in two retail properties both located in the U.S.
totaling 252,445 square feet for U.S. $22.9
million. The REIT completed five-year lease extensions at
nine single tenant properties in the U.S. totalling 510,892 square
feet.
Industrial Segment Highlights
In February 2016, (along with its
co-owners, Public Sector Pension Investment Board ("PSP") and
affiliates of Crestpoint Real Estate Investments Ltd.
("Crestpoint") (collectively, "CrestPSP")), the REIT acquired a 50%
interest in a 264,802 square foot newly constructed industrial
property in Calgary, AB for
$31.0 million. The REIT and CrestPSP
also completed three industrial 10-year lease renewals in the U.S.
totaling 2,167,756 square feet.
Financing Highlights
In March 2016, the REIT added a
new senior unsecured credit facility for $200.0 million maturing March 17, 2021. The REIT entered into an
interest rate swap agreement to effectively fix the interest rate
at 2.56% per annum on U.S. $130
million of the U.S. dollar denominated borrowing of this
credit facility. With the addition of this facility, the
REIT's total credit facilities amounted to $1.0 billion. As at March 31, 2016, the unused credit facilities
amounted to $465.4 million and
H&R's ratio of debt to total assets was 46.4%.
Monthly Distribution Declared
H&R's declared distribution for the month of June is
scheduled as follows:
|
Distribution/Stapled
Unit
|
Annualized
|
Record
date
|
Distribution
date
|
June 2016
|
$0.11250
|
$1.35
|
June 16,
2016
|
June 30,
2016
|
2016 Annual Unitholders' Meeting
H&R will host its annual Unitholders' meeting this year on
Friday, June 17, 2016 at 1:00 pm at the TSX Gallery, 130 King Street West,
Toronto, Ontario.
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 as at
March 31, 2016. 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 47
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. $220.4 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 statements in this news release contain 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, intentions, and similar statements
concerning anticipated future events, results, circumstances,
performance or expectations that are not historical facts
including, the amount of distributions to unitholders, the REIT's
expectation with respect to contributions to rental revenue by new
tenants in former Target locations, the timing of completion and
occupancy of any leases relating to such premises and the cost of
subdividing and re-leasing such premises, the expected budget and
occupancy of the LIC Project, the expected contributions by the
REIT to the LIC Project and the expected net leasable area and
occupancy date for the industrial properties at Airport Road
Business Park. 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. 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 and
uncertainties, including those described below under "Risks and
Uncertainties" and those discussed in the Trusts' materials filed
with the Canadian securities regulatory authorities from time to
time, which could cause the actual results and performance of the
Trusts to differ materially from the forward-looking statements
contained in this press release. Those risks and
uncertainties include, among other things, risks related to: unit
price risk; real property ownership; credit risk and tenant
concentration; interest and other debt-related risk; ability to
access capital markets; lease rollover risk; joint arrangements
risk; currency risk; construction risks; availability of cash for
distributions; environmental risk; tax risk; tax consequences to
U.S. holders; dilution; unitholder liability; redemption right risk
and risks relating to debentures. 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 other than in Alberta; local real estate conditions are
stable other than in Alberta;
interest rates are relatively stable; and equity and debt markets
continue to provide access to capital. The Trusts caution that this
list of factors is 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. 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.
Non-GAAP Financial Measures
H&R's financial statements are prepared in accordance with
IFRS. However, in this press release, a number of measures
which do not have a meaning recognized under IFRS or Canadian
Generally Accepted Accounting Principles ("GAAP") are
presented. These measures, as well as the reasons why
management believes these measures are useful to investors, are
described below. None of these non-GAAP financial measures
should be construed as an alternative to financial measures
calculated in accordance with GAAP. Further, H&R's 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.
H&R's Interest
H&R applies the equity method of accounting to investments
in joint ventures and associates in H&R's financial statements
as prescribed under IFRS. Throughout this press release any
references to the "H&R's interest" are non-GAAP measures which
include amounts per H&R's financial statements plus H&R's
proportionate share of equity accounted investments.
Property Operating Income
Property operating income is the rental revenue generated from
the REIT's investment properties, net of the property operating
expenses incurred. Management believes that this is a useful
measure for investors as it provides a snapshot of how the REIT's
properties are performing before financing costs and other sources
of income and expenditures which are not directly related to the
day-to-day operations of a property. Property operating
income should not be construed as an alternative to net income
calculated in accordance with IFRS.
Adjusted Property Operating Income
Adjusted property operating income is also a non-GAAP
measure. Effective January 1,
2014, the REIT adopted IFRIC 21. Adjusted property
operating income excludes the impact of this change in accounting
policy which relates to the timing of the liability recognition for
U.S. realty taxes. Management believes that adjusted property
operating income is an important non-GAAP measure as, by excluding
the impact of IFRIC 21, it evenly matches U.S. realty tax expense
with realty tax recoveries throughout the period.
Same-Asset Property Operating Income and Adjusted Same-Asset
Property Operating Income
Same-asset property operating income and adjusted same-asset
property operating income are non-GAAP financial measures used by
the REIT which management believes is useful for investors as it
reports period-over-period performance for properties owned by the
REIT throughout both periods. This typically excludes acquisitions,
business combinations, dispositions and transfers of properties
under development to investment properties.
Funds from Operations
FFO is a non-GAAP financial measure widely used in the real
estate industry as a measure of operating performance. H&R
presents its combined FFO calculations in accordance with the Real
Property Association of Canada
(REALpac) guidelines however, this method of calculating FFO may
differ when comparing to other issuers. Management believes
this to be a useful measure for investors as it adjusts for items
included in net income that are not recurring including gain (loss)
on sale of real estate assets, as well as non-cash items such as
the fair value adjustments on investment properties. FFO
should not be construed as an alternative to net income or cash
flows provided by operating activities calculated in accordance
with IFRS. H&R's combined management's discussion and
analysis includes a reconciliation of property operating income to
FFO.
Additional information regarding H&R REIT and H&R
Finance Trust is available at www.hr-reit.com and on
www.sedar.com.
SOURCE H&R Real Estate Investment Trust