TORONTO, Feb 15, 2017 /CNW/ - H&R Real Estate
Investment Trust ("H&R") and H&R Finance Trust
(collectively, "the Trusts") (TSX: HR.UN; HR.DB.D; and HR.DB.H)
today announced their combined financial results for the year ended
December 31, 2016.
Financial Highlights
H&R undertook a strategic review of its assets and decided
to sell certain investment properties to take advantage of
the high demand for good quality assets. During
2015 and 2016, H&R sold $1.3
billion of real estate assets and acquired $757.5 million of real estate assets for a net
decrease of $542.5 million, at
H&R's ownership share.
|
3 months ended
December 31
|
Year ended December
31
|
2016
|
2015
|
2016
|
2015
|
Rentals from
investment properties (millions)
|
$305.5
|
$296.2
|
$1,196.0
|
$1,188.3
|
Property operating
income (millions)
|
$202.4
|
$202.1
|
$764.7
|
$773.5
|
Net income (loss)
before income taxes (millions)
|
$182.6
|
($35.9)
|
$590.3
|
$375.1
|
Funds from Operations
("FFO") (millions)(1)
|
$142.9
|
$142.9
|
$584.3
|
$569.9
|
FFO per Stapled Unit
(basic)
|
$0.48
|
$0.48
|
$1.96
|
$1.95
|
FFO per Stapled Unit
(diluted)
|
$0.47
|
$0.48
|
$1.93
|
$1.92
|
Distributions per
Stapled Unit
|
$0.34
|
$0.34
|
$1.35
|
$1.35
|
Payout ratio per
Stapled Unit (as a % of FFO)
|
70.8%
|
70.8%
|
68.9%
|
69.2%
|
(1)
|
FFO is a non-GAAP
measure. See "Non-GAAP Financial Measures" in this press release.
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
Occupancy as at December 31, 2016
was 95.7% compared to 95.9% as at December 31, 2015. Leases representing 3.7% of
total rentable area will expire during 2017 and H&R's average
remaining lease term to maturity as at December 31, 2016 was 9.5 years.
Development Highlights
Construction is progressing on the development of 1,871 luxury
residential rental units for the 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 early 2018. As at December 31,
2016, total costs incurred amounted to $655.3 million. The remaining costs are
expected to be funded through the construction financing
facility. Approximately 99.3% of total hard costs and 89.9%
of total project costs have been fixed. Upon completion and
stabilized occupancy, the contribution to FFO from the LIC Project
at H&R's interest is projected to be U.S. $23.0 million, which equates to an approximate
8.8% year one yield on H&R's cash investment. During the
year, the fair value of the LIC Project increased by U.S.
$54.9 million, at H&R's
interest. An independent third party appraisal was obtained
for this property in 2016.
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 Q3 2017. Upon completion, the
contribution to FFO generated 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 located in
Hercules, California, adjacent to
the San Pablo Bay, northeast of San
Francisco, ("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
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, net of related
costs, of $15.0 million.
Proceeds to H&R amounted to $227.0
million, which were primarily used to repay debt including
the $180.0 million Series D Senior
Debentures that matured in July 2016.
On November 17, 2016, H&R sold
a non-managing 50% interest in the TransCanada Tower in
Calgary, AB for gross proceeds of
approximately $257.4 million. H&R
built this property in 2001 for a total cost of $265.8 million, at the 100% level. H&R
prepaid the entire mortgage on the property of $93.5 million upon closing. H&R
recorded a loss on sale, net of related costs, of $7.4 million. Proceeds to H&R amounted
to $163.9 million, which were
primarily used to repay debt and acquire a multi-family residential
property.
Alberta Office Exposure:
The weighted average lease term remaining in H&R's Alberta office portfolio is 17.2 years.
The leases expiring between January 1,
2017 and December 31, 2018 in
H&R's Alberta office portfolio
total 18,507 square feet. As at December 31, 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.
Lantower Residential Highlights
H&R is continuing its expansion into the multi-family rental
market in the United States.
During 2016, Lantower Residential acquired four multi-family
properties in the United States,
all of which were built between 2012 and 2015. These
properties comprise 1,246 units and were purchased for a total
price of U.S. $232.2
million.
As at December 31, 2016, Lantower
Residential has a portfolio of 12 properties, comprised of an
aggregate of 3,832 units, an average age of 13 years and an average
monthly rent of U.S. $1,081 per
unit.
Industrial Segment Highlights
In February 2016, H&R acquired
a 50% managing interest in a 264,802 square foot newly constructed
industrial property in Calgary, AB
for $15.5 million (at H&R's
interest).
During 2016, H&R sold its 50% ownership interest in a
139,734 square foot industrial property in Montreal, QC for $4.2
million and its 50% ownership interest in a 52,792 square
foot industrial property in Vaughan,
ON for $3.0 million.
Retail Highlights
During 2016, H&R sold its 100% interest in five retail
properties, totaling 490,839 square feet, all of which were located
in the U.S. for U.S. $61.8
million.
Primaris Highlights and Target Update
In November 2016, H&R entered
into a conditional agreement to sell a 50% non-managing interest in
two enclosed shopping centres for $211.6
million which closed in January
2017. The purchaser assumed 50% of the existing financing on
the properties of approximately $126.6
million. The net proceeds of approximately
$81.0 million have been used to repay
debt.
Redevelopment of the former Target stores has commenced,
however, the space has not been transferred to properties under
development because the space is part of an existing, already
developed property. For the year ended December 31, 2016, H&R spent approximately
$31.0 million in redevelopment and,
in addition, capitalized $2.4 million
of the property operating and finance costs attributable to this
space. The following table is a summary of H&R's leasing
progress on the former Target space:
|
Square Feet at
100%
|
Square Feet at
H&R's Interest
|
Annual Base Rent
at H&R's interest
($ Millions)
|
Former Target Canada
space(1)
|
1,062,676
|
774,035
|
$4.0
|
Backfill
progress:
|
|
|
|
Committed
space
|
583,989
|
404,270
|
6.4
|
Conditional
agreements
|
191,364
|
176,364
|
1.5
|
Advanced
discussions
|
44,215
|
25,645
|
0.8
|
Total backfill
progress
|
819,568
|
606,279
|
8.7
|
Space currently being
marketed
|
49,759
|
32,593
|
0.6
|
Total gross
leasable area ("GLA") upon completion of
redevelopment
|
869,327
|
638,872
|
$9.3
|
Potential GLA
converted for landlord uses (common area etc.)
|
135,508
|
106,242
|
N/A
|
Space for
demolition/potential redevelopment
|
57,841
|
28,921
|
N/A
|
Total(2)
|
1,062,676
|
774,035
|
|
(1)
|
The above table is
disclosed as of February 6, 2017 and H&R's interest has been
updated to reflect the 50% sale of two enclosed shopping centres
which closed in January 2017.
|
(2)
|
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 annually or 225% of the total base
rental revenue lost through Target's departure. H&R expects
most of the remaining leases will be entered into by Q2 2017, with
occupancy occurring between 2017 and early 2019. Throughout
2016, committed space tenants occupied 73,736 square feet and
contributed $0.4 million in base rent
at H&R's interest. The total remaining cost of
subdividing and re-leasing the premises is expected to be
approximately $78.0 million at
H&R's ownership interest. A partial lease settlement from
Target of $20.4 million was received
and recognized in the Trusts' Financial Statements as Other Income
for the year ended December 31,
2016.
Debt and Liquidity Highlights
H&R repaid all of the outstanding Series D Senior Debentures
upon maturity for a cash payment of $180.0
million in July 2016 and all
of the outstanding 2016 Convertible Debentures upon maturity for a
cash payment of $75.0 million in
December 2016. In November 2016, H&R issued $200.0 million principal amount of 2.923% Series
L Senior Debentures maturing May 6,
2022.
During 2016, H&R (excluding ECHO) secured 12 new mortgages
and secured an increase to an existing mortgage adding a total of
$191.1 million of debt at a weighted
average interest rate of 2.9% for an average term of 5.1 years and
repaid 48 mortgages, which had a weighted average interest rate of
4.9%, upon maturity totalling $629.2
million. The current weighted average interest rate on
outstanding debt is 4.3% with an average term to maturity of 4.8
years.
As at December 31, 2016, the debt
to total asset ratio per the Trusts' Financial Statements was 44.3%
compared to 46.2% at December 31,
2015 and cash on hand plus undrawn credit facilities
amounted to $400.3 million.
As at December 31, 2016,
unencumbered assets were approximately $3.0
billion and unsecured debt was approximately $1.7 billion, resulting in a coverage ratio of
1.8x (December 31, 2015 - 1.4x).
Distribution Increase
The trustees approved an increase in the current monthly
distribution per Stapled Unit commencing December 2016, resulting in a $0.03 annual increase to a total of $1.38 per annum.
Monthly Distribution Declared
The Trusts declared distribution for the month of March is
scheduled as follows:
|
Distribution/Stapled
Unit
|
Annualized
|
Record
date
|
Distribution
date
|
March 2017
|
$0.11500
|
$1.38
|
March 17,
2017
|
March 31,
2017
|
Conference Call
Management will host a conference call to discuss the financial
results for H&R on Thursday, February
16, 2017 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 21741137
followed by the pound key. The telephone replay will be
available until Thursday, February 23,
2017 at midnight.
Webcast
A live audio webcast will be available through
http://hr-reit.com/Investor-Relations/InvestorEvents.aspx or
http://event.on24.com/r.htm?e=1314650&s=1&k=13C5E1E1C89D3AA97E64CA4C72E1B815.
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 $14.7 billion at
December 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 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, the expected
remaining costs 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
prices; credit risk and tenant concentration; real property
ownership; liquidity; financing credit risk; credit risk and tenant
concentration; interest and other debt-related risk; ability to
access capital markets; lease rollover risk; co-ownership interest
in properties; 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, Funds from Operations ("FFO"), Debt to Total
Assets Ratio and unencumbered asset to unsecured debt coverage
ratio 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 year ended 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