TORONTO, Nov. 14, 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 nine months ended September 30,
2016.
Financial Highlights
|
3 months ended
September 30
|
9 months ended
September 30
|
2016
|
2015
|
2016
|
2015
|
Rentals from investment
properties (millions)
|
$297.3
|
$297.1
|
$890.5
|
$892.1
|
Property operating
income (millions)
|
$198.7
|
$200.8
|
$562.4
|
$571.4
|
Same-Asset property
operating income (cash basis) (millions)(1)
|
$196.7
|
$196.1
|
$592.2
|
$586.0
|
Net income before
income taxes (millions)
|
$157.2
|
$178.4
|
$407.7
|
$411.0
|
Funds from Operations
("FFO") (millions)(2)
|
$136.9
|
$144.3
|
$441.4
|
$427.1
|
FFO per Stapled Unit
(basic)
|
$0.46
|
$0.49
|
$1.48
|
$1.46
|
FFO per Stapled Unit
(diluted)
|
$0.45
|
$0.49
|
$1.46
|
$1.44
|
Cash provided by
operations (millions)
|
$226.1
|
$184.2
|
$535.2
|
$537.4
|
Distributions per
Stapled Unit
|
$0.33
|
$0.33
|
$1.01
|
$1.01
|
Payout ratio per
Stapled Unit (as a % of FFO)
|
71.7%
|
67.3%
|
68.2%
|
69.2%
|
|
|
(1)
|
Per the Trusts'
interests.
|
(2)
|
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.
|
Financial results have been effected by net asset dispositions
of $431.7 million during the 21
months ended September 30, 2016 and
the reduction of debt from 46.2% of total assets at December 31, 2015 to 44.8% at September 30, 2016. The decrease in net
income before income taxes for the three and nine months ended
September 30, 2016 as compared to the
respective periods in 2015 is primarily due to the net asset
dispositions, fair value adjustments on financial instruments and
the gain on foreign exchange, partially offset by the fair value
adjustment on real estate assets. FFO was $0.46 and $1.48 per
Stapled Unit for the three and nine months ended September 30, 2016, respectively, compared to
$0.49 and $1.46 per Stapled Unit for the three and nine
months ended September 30, 2015,
respectively. Excluding the income from lease termination
settlements and other non-recurring items, FFO would have been
$0.46 and $1.41 per Stapled Unit for the three and nine
months ended September 30, 2016,
respectively, compared to $0.47 and
$1.44 per Stapled Unit for the three
and nine months ended September 30,
2015, respectively.
Operating Highlights
Occupancy as at September 30, 2016
was 95.9% compared to 96.0% as at September 30, 2015. Leases representing only 5.0%
of total rentable area will expire during the remainder of 2016 and
2017, excluding leases in Lantower Residential. H&R's
average remaining lease term to maturity as at September 30, 2016 was 9.8 years.
Development Highlights
Construction is progressing on the development of 1,871 luxury
residential rental units in Long Island
City, NY ("LIC Project"), in which H&R has a 50%
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. As at September 30,
2016, H&R's total equity investment in the LIC Project
was U.S. $260.7 million. The
remaining costs to complete the LIC Project are U.S. $593.2 million which will be funded through a
U.S. $640.0 million construction
financing facility. Approximately 99.3% of total hard costs and
88.1% of total project costs have been fixed. Upon completion and
stabilized occupancy, the first year's contribution to FFO from the
LIC Project at H&R's interest is expected to be U.S.
$23.0 million which equates to an
8.8% return on investment.
In Q1 2016, H&R entered into two separate 15-year
build-to-suit leases for industrial properties to be developed in
the Airport Road Business Park in Brampton, ON 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. Upon completion, the
contribution to FFO from these two projects is expected to be
$1.7 million.
In August 2016, H&R acquired a
31.7% non-managing interest in 38.4 acres of land, adjacent to the
San Pablo Bay, in the northeast part of San Francisco, CA ("Hercules Project") for the
future development of multi-family residential units. The initial
investment to purchase the land was approximately U.S. $10.0 million (at H&R's interest).
Office Segment Highlights
Subsequent to September 30, 2016,
H&R entered into an agreement to sell a non-managing 50%
interest in the Transcanada Tower in Calgary, AB for gross proceeds of
approximately $257.4 million.
As at September 30, 2016, the IFRS
property value was $500.0 million and
the mortgage payable was $82.1
million. On closing, which is expected to be in
November 2016, H&R will prepay
the entire mortgage on the property. The prepayment penalty
is expected to be $13.6
million. On closing of this transaction, H&R's
unencumbered asset pool (excluding ECHO) is expected to be
$2.6 billion.
Alberta Office Exposure:
The weighted average lease
term remaining in H&R's Alberta office portfolio is 17.2 years.
The leases expiring between October 1,
2016 and December 31, 2018 in
H&R's Alberta office portfolio
total 18,515 square feet. As at September 30, 2016, H&R's Alberta office portfolio had approximately
184,000 square feet of vacant space, at H&R's ownership share,
all of which is in F1rst Tower (formerly Telus Tower). Of
this vacant space, 12,667 square feet has been leased for a
six-year term commencing January 1,
2017.
Target Update
Redevelopment of the former Target stores has commenced,
however, the space has not been transferred to properties under
development. For the three and nine months ended September 30, 2016, H&R has capitalized
$0.8 million and $1.5 million, respectively, of the property
operating and finance costs attributable to this space. The
following table is a summary of our leasing progress on the former
Target space:
|
Square Feet
at
100%
|
Square Feet
at
H&R's
Interest
|
Annual Base
Rent
at H&R's
interest
($
Millions)
|
Former Target Canada
space
|
1,062,676
|
831,688
|
$4.4
|
Backfill
progress:
|
|
|
|
Committed
space
|
383,376
|
248,090
|
3.8
|
Conditional
agreements
|
356,985
|
327,608
|
3.7
|
Advanced
discussions
|
65,922
|
65,922
|
1.5
|
Total backfill
progress
|
806,283
|
641,620
|
9.0
|
Space currently being
marketed
|
65,756
|
52,062
|
1.1
|
Total gross
leasable area ("GLA") upon completion of
redevelopment
|
872,039
|
693,684
|
$10.1
|
Potential GLA
converted for landlord uses (common area
etc.)(1)
|
132,796
|
109,084
|
N/A
|
Space for
demolition/potential redevelopment
|
57,841
|
28,920
|
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 $10.1 million annually or 230% 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 middle of
2018. The cost of subdividing and re-leasing the premises is
expected to be approximately $109.0
million at H&R's ownership interest. A partial
lease settlement from Target of $18.9
million was recognized in the Trust's Financial Statements
as Other Income in Q2 2016. In October
2016, a second distribution in respect of the settlement
proceeds of $1.5 million was received
from Target.
Lantower Residential Highlights
H&R is continuing its expansion into the multi-family rental
market in the United States. In Q3
2016, Lantower Residential acquired a multi-family property in
Dallas, TX, built in 2012.
The property comprises 312 units and was purchased for U.S.
$46.4 million at a capitalization
rate of 5.3%.
Subsequent to September 30, 2016,
Lantower Residential acquired a multi-family property in
Tampa, FL, built in 2014.
The property comprises 300 units and was purchased for U.S.
$69.0 million at a capitalization
rate of 5.2%.
Lantower Residential now has a portfolio of 3,520 units across
11 properties earning an average monthly rent of U.S. $1,088 per unit and having an average age of 13
years.
Debt and Liquidity Highlights
In July 2016, H&R repaid the
Series D Senior Debentures of $180.0
million.
In Q3 2016, H&R (excluding ECHO) secured three new mortgages
and secured an increase to an existing mortgage adding a total of
$88.0 million of debt at a weighted
average interest rate of 2.7% for an average term of 4.7 years and
repaid 11 mortgages upon maturity totalling $93.0 million which had a weighted average
interest rate of 5.3%. The current weighted average interest
rate on outstanding debt is 4.4% with an average term to maturity
of 5.0 years.
As at September 30, 2016, the debt
to total asset ratio, per the Trusts' Financial Statements was
44.8% compared to 46.2% at December 31,
2015 and cash on hand plus undrawn credit facilities
amounted to $413.6 million. As
at September 30, 2016, unencumbered
assets were approximately $2.3
billion and unsecured debt was approximately $1.4 billion, resulting in a coverage ratio of
1.6x.
Subsequent to September 30, 2016,
H&R issued $200.0 million
principal amount of 2.923% Series L unsecured senior debentures
maturing May 6, 2022.
Governance
In keeping with H&R's ongoing review of its corporate
governance matters and in order to best serve unitholders, the
trustees are seeking independent professional advice with respect
to compensation matters. In addition, H&R is expected to
introduce a say on pay vote at the next annual general meeting.
Distribution Increase
The trustees have approved an increase in the current monthly
distribution per Stapled Unit resulting in a $0.03 annual increase to a total of $1.38 per annum. Thomas Hofstedter, H&R's Chief Executive
Officer said, "Based on our projected cash flow increases resulting
from completion of projects currently under development, from
contractual rental increases, interest rate savings and from lower
capital expenditures, we are pleased to announce this distribution
increase. Our strategy of investing in high quality
properties, leased long-term to creditworthy tenants, together with
30% of our portfolio in the United
States, have combined to produce consistent and stable
results. We expect continued growth in our cash flow over the
next few years, allowing us to further increase distributions while
maintaining our conservative payout ratio."
Monthly Distribution Declared
The Trusts declared distribution for the month of December is
scheduled as follows:
|
Distribution/Stapled
Unit
|
Annualized
|
Record
date
|
Distribution
date
|
December
2016
|
$0.11500
|
$1.38
|
December 15,
2016
|
December 30,
2016
|
Conference Call and Webcast Details
Management of H&R will hold a conference call to discuss the
financial results for the Trusts on Tuesday,
November 15, 2016 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 83945700
followed by the pound key. The telephone replay will be available
until Tuesday, November 22, 2016 at
midnight.
A live audio webcast will be available through
http://hr-reit.com/Investor-Relations/InvestorEvents.aspx or
http://event.on24.com/r.htm?e=1269141&s=1&k=094B1B6F5F360867CB2C19F0B5C22C36.
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
September 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. $220.5 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 Disclaimer
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, including
future increases to distributions, 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, expected cash flow to H&R from the LIC Project,
the expected net leasable area, occupancy date and expected cash
flow from the industrial properties at Airport Road Business Park,
the expected 50% non-managing interest sale of Transcanada Tower in
Calgary, AB, the increases in cash
flow, the maintenance of a conservative payout ratio and the
expected unencumbered asset pool. 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. 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 following
measures, The Trusts' Interests, Property Operating Income,
Property operating income (cash basis), Same-Asset Property
Operating Income and Same-Asset Property Operating Income (cash
basis), Funds from Operations ("FFO") and Debt to Total Assets
Ratios, as well as other 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 for the third quarter of 2016, 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