TORONTO, Aug. 9, 2016 /CNW/ - H&R Real Estate
Investment Trust ("H&R") and H&R Finance Trust
(collectively, "the Trusts") (TSX: HR.UN; HR.DB.D; HR.DB.E and
HR.DB.H) today announced their combined financial results for the
three and six months ended June 30,
2016.
Financial Highlights
|
3 months ended June
30
|
6 months ended June
30
|
2016
|
2015
|
2016
|
2015
|
Rentals from investment
properties (millions)
|
$289.8
|
$295.7
|
$593.3
|
$595.0
|
Property operating income
(millions)
|
$195.8
|
$200.4
|
$363.6
|
$370.6
|
Funds from Operations
("FFO")
(millions)(1)
|
$156.9
|
$142.8
|
$304.5
|
$282.7
|
FFO per Stapled Unit
(basic)
|
$0.53
|
$0.49
|
$1.03
|
$0.97
|
FFO per Stapled Unit
(diluted)
|
$0.52
|
$0.48
|
$1.01
|
$0.96
|
Cash provided by operations
(millions)
|
$156.9
|
$173.3
|
$309.1
|
$353.2
|
Distributions per Stapled
Unit
|
$0.34
|
$0.34
|
$0.68
|
$0.68
|
Payout ratio per Stapled
Unit (as a % of FFO)
|
64.2%
|
69.4%
|
66.0%
|
70.1%
|
|
(1) The Trusts' combined MD&A
includes a reconciliation of FFO to net income. Readers are
encouraged to review the reconciliation in the combined
MD&A.
|
Operating Highlights
Adjusted same-asset property operating income (cash basis) was
$196.4 million and $395.7 million for the three and six months ended
June 30, 2016, respectively, compared
to $195.2 million and $390.0 million for the three and six months ended
June 30, 2015, respectively.
FFO was $0.53 per Stapled Unit for
the three months ended June 30, 2016,
an increase of 8.2% compared to the same period in 2015 primarily
due to lease termination settlements, including Target's partial
settlement of $18.9 million.
Excluding the income from the lease termination settlements and
other non-recurring items, FFO would have been $0.47 per Stapled Unit for the three months ended
June 30, 2016 compared to
$0.48 per Stapled Unit for the three
months ended June 30, 2015 and would
have been $0.95 per Stapled Unit for
the six months ended June 30, 2016
compared to $0.96 per Stapled Unit
for the six months ended June 30,
2015.
Occupancy at June 30, 2016 was
95.6% compared to 95.9% at June
30, 2015. Leases representing only 5.6% of total
rentable area will expire during the remainder of 2016 and
2017. H&R's average remaining lease term to maturity at
June 30, 2016 was 9.9
years.
Sale of Scotia Plaza
On June 30, 2016, H&R sold its
33.3% freehold and leasehold interests in Scotia Plaza and 100
Yonge Street (collectively, "Scotia Plaza") for approximately
$438.3 million. The purchaser
assumed H&R's share of the existing financing on the
properties. H&R recorded a gain on sale of $15.0 million. Proceeds to H&R amounted to
$227.0 million which was used to
repay debt including the $180.0
million of outstanding Series D Senior Debentures that
matured in July 2016.
Fair Value Adjustments on Real Estate Assets
The Trusts recorded a fair value adjustment on real estate
assets at the Trusts' interest of $73.5
million and $77.1 million for
the three and six months ended June 30,
2016, respectively. This was primarily due to increases in
the fair value of Two Gotham Center in Long Island City, NY and Hess Tower in
Houston, TX. Both properties
are state-of-the-art office properties fully leased on a long-term
basis with future contractual rental escalations to investment
grade tenants. These properties were both purchased in Q4
2011. In Q2 2016, H&R obtained appraisals from nationally
recognized appraisal firms, which evidenced a substantial increase
in value for these properties. Partially offsetting these
increases were decreases to H&R's Alberta portfolio. H&R's
Alberta portfolio had an IFRS
value of $3.8 billion at June 30, 2016, a decrease of $340.0 million and $136.0
million from December 31, 2014
and December 31, 2015, respectively,
primarily attributable to H&R's Calgary office portfolio.
Target Update
Redevelopment of the former Target stores has commenced,
however, the space has not been transferred to properties under
development. During Q2 2016, H&R capitalized $0.7 million of the property operating and
finance costs attributable to this space. The following table
is a summary of our leasing progress on the former Target
space:
|
Square Feet at
100%
|
Square Feet at H&R's
Interest
|
Annual Base Rent
at H&R's interest
($ Millions)
|
Former Target Canada
space
|
1,062,676
|
831,688
|
$4.4
|
Backfill
progress:
|
|
|
|
Committed
space
|
215,734
|
118,595
|
1.7
|
Conditional
agreements
|
466,866
|
424,989
|
5.2
|
Advanced
discussions
|
142,588
|
109,088
|
2.4
|
Total backfill
progress
|
825,188
|
652,672
|
9.3
|
Space currently being
marketed
|
49,610
|
44,239
|
1.0
|
Total gross leasable
area ("GLA") upon completion of
redevelopment
|
874,798
|
696,911
|
$10.3
|
Potential GLA converted for
landlord uses (common area
etc.)(1)
|
130,280
|
105,978
|
N/A
|
Space for
demolition/potential
redevelopment
|
57,598
|
28,799
|
N/A
|
Total
|
1,062,676
|
831,688
|
|
|
(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 $10.3 million annually or 234% of the total base
rental revenue lost through Target's departure. H&R
expects that 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 H&R's ownership interest. At
June 30, 2016, a partial lease
settlement from Target of $18.9
million was received in July
2016 and has been recognized in the Trusts' Financial
Statements as Other Income.
Development Highlights
Construction is progressing on the development of 1,871 luxury
residential units in Long Island City,
NY ("LIC Project"), in which H&R has a 50% ownership
interest. The total budget at the 100% ownership level is
expected to be approximately U.S. $1.2
billion with occupancy in the first tower scheduled to begin
in late 2017. Construction financing for up to U.S.
$640.0 million has been secured
through a syndicate of lenders. As a condition to the
financing, H&R will have to contribute a further U.S.
$18.3 million to the project which
will increase its total investment to U.S. $260.7 million. Approximately 99.3% of
total hard costs and 86.9% of total project costs have been
fixed.
In Q1 2016, H&R 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 will be approximately
341,775 square feet with occupancy of both projects expected to
occur in Q2 2017.
Alberta Office Exposure
The weighted average lease term remaining in H&R's
Alberta office portfolio is 17.4
years. The leases expiring between July 1, 2016 and December
31, 2018 in H&R's Alberta office portfolio total 31,568 square
feet. At June 30, 2016,
H&R's Alberta office portfolio
had approximately 171,000 square feet of vacant space at H&R's
ownership share, all of which is located at 411-1st St., S.E.
Calgary. Of this vacant space, 12,667 square feet has been
leased for a six-year term commencing September 1, 2016.
Debt and Liquidity Highlights
Debt to total assets, per the Trusts' Financial Statements at
June 30, 2016 was 45.8% compared to
46.2% at December 31, 2015.
After the repayment of debt from the proceeds received from the
sale of Scotia Plaza, the Trusts' debt to total assets, per the
Trusts' Financial Statements, was 44.9%. Cash on hand plus
undrawn credit facilities amounted to $724.2
million at June 30, 2016,
excluding ECHO. Subsequent to June 30,
2016, H&R secured a $70.0
million increase to a first mortgage at an interest rate of
2.7% per annum for a term of 4.7 years.
Monthly Distribution Declared
The Trusts declared distribution for the month of June is
scheduled as follows:
|
Distribution/Stapled
Unit
|
Annualized
|
Record
date
|
Distribution
date
|
September
2016
|
$0.11250
|
$1.35
|
September 16,
2016
|
September 30,
2016
|
Conference Call and Webcast Details
Management of H&R will hold a conference call to discuss the
financial results for H&R on Wednesday,
August 10, 2016 at 8.30 a.m. Eastern
Time.
Participants can join the call by dialing 1-888-231-8191 or
647-427-7450. 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 54509267
followed by the pound key. The telephone replay will be
available until Wednesday, August 17,
2016 at midnight.
A live audio webcast will be available through
http://hr-reit.com/Investor-Relations/InvestorEvents.aspx
or http://bit.ly/29S8hQP. 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 the Company'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 $14.5 billion at
June 30, 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 46
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, H&R'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 H&R
to the LIC Project, the expected net leasable area and occupancy
date for the industrial properties at Airport Road Business Park
and the expected pro-forma debt to total asset ratio.
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 the Trusts, 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
The Trusts' 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, 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' Interests
The Trusts apply the equity method of accounting to investments
in joint ventures and associates in the Trusts' Financial
Statements as prescribed under IFRS. Throughout this press
release, any references to the "Trusts' Financial Statements" refer
to amounts as reported under IFRS and any references to "The
Trusts' interests" are non-GAAP measures which include amounts per
the Trusts' Financial Statements plus the Trusts' proportionate
share of equity accounted investments.
Property Operating Income
Property operating income is the rental revenue generated from
H&R'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 H&R'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 and Adjusted Property
Operating Income (Cash Basis)
Adjusted property operating income is also a non-GAAP
measure. Effective January 1,
2014, H&R adopted IFRS Interpretations Committee 21,
Levies ("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. Adjusted
property operating income (cash basis) excludes straight-lining of
contractual rent. Management believes this non-GAAP financial
measure is useful for investors as it adjusts adjusted property
operating income to exclude straight-lining of contractual rent
which is a non-cash item.
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
H&R which management believes are useful for investors as it
reports period-over-period performance for properties owned by
H&R 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. The Trusts
present their 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. Please refer to the Trusts' combined MD&A.
Debt to Total Assets Ratios
H&R's Declaration of Trust limits the indebtedness of
H&R (subject to certain exceptions) to a maximum of 65% of the
total assets of H&R, based on the Trusts' Financial Statements.
Debt includes mortgages payable, the face value of debentures
payable, bank indebtedness and loan payable. Management uses this
ratio to determine its flexibility to incur additional debt and
ensure it is in compliance with H&R's Declaration of Trust.
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