TORONTO, Nov. 13, 2017 /CNW/ - H&R Real Estate
Investment Trust ("H&R") (TSX: HR.UN and HR.DB.D) is pleased to
provide its unitholders with an update on its strategic vision:
Strategy Update
H&R has been evolving and adapting to a changing business
and regulatory environment while continuing to adopt best practices
and policies. Significant changes that have been implemented by
H&R include:
- fully internalizing management;
- expanding the size of the board and adopting new governance
policies;
- adopting a new executive compensation plan; and
- recycling capital to enhance the quality and return of the
property portfolio.
Over the course of 2017, management has reviewed H&R's
portfolio with the goal of simplifying and concentrating it into
fewer asset categories. A streamlined portfolio of operating
divisions with both scale and quality will enable H&R to have a
sharper focus and is expected to generate enhanced financial
performance in the future.
H&R's office portfolio, which represents approximately 50%
of H&R's assets, is comprised of 36, primarily Class A
properties with highly rated credit tenants on long-term leases,
providing H&R with stability and consistent growth. H&R
believes this portfolio to be among the highest quality office
portfolios in North America. Given
the strength in the global real estate investment market, growth of
H&R's office portfolio through acquisitions is currently not
anticipated.
H&R has made considerable progress in building Lantower's
multi-residential portfolio which is fundamental to H&R's
growth strategy as H&R expects to continue to allocate
additional capital to this segment. This portfolio, including
development projects, is located in the southern U.S. and gateway
cities. Management envisions this portfolio growing over time
from approximately 8% of H&R's assets to 15% or more.
Management believes that high-quality multi-residential properties
in large and growing markets offer attractive stability and
growth.
H&R remains encouraged by the outlook for Primaris as its
Canadian malls have largely withstood the challenges associated
with anchor department store reliance. The closure of Sears,
which accounts for less than 0.4% of H&R's revenue, is
anticipated to offer more profitable upside as the space is
re-leased.
H&R's U.S. $358.2 million
investment in Echo Realty continues to perform well. H&R
does not expect to allocate more capital to Echo Realty.
H&R has decided to sell all 79 of its wholly-owned U.S.
retail properties and, together with its partners, its 12 remaining
U.S. industrial properties. H&R expects to achieve
aggregate sales proceeds of at least the aggregate IFRS values of
these properties. As at September 30,
2017, using an aggregate capitalization rate of 7.38%,
H&R has valued its U.S. retail assets at approximately U.S.
$750 million and using an aggregate
capitalization rate of 6.88%, H&R has valued its U.S.
industrial properties at approximately U.S. $145 million, at H&R's ownership interest.
The first tranche of retail properties, valued at approximately
U.S. $250 million, is expected to be
put on the market during Q1 2018. The selling of certain U.S.
industrial properties has already commenced with the sale of three
properties during Q3 2017. H&R expects that the proceeds
of these sales will be used for future Lantower acquisitions.
H&R expects its current leverage and capital structure to
remain mostly unchanged as a result of this strategy.
The portfolio changes that are expected from the result of this
overall strategic review are significant in terms of achieving the
objective of streamlining and focusing the portfolio on assets that
offer the strongest potential for growth in net operating income
and net asset value.
H&R's President and CEO, Thomas
Hofstedter said: "We continue to be focused on our core
objective: to build the highest quality real estate portfolio that
will provide stability and cash flow growth and deliver strong per
unit performance over the long-term. We are committed to
improving our disclosure in investor relations. Our commencement of
quarterly conference calls, enhancements in disclosures and
commencement of investor and analyst tour events, most recently in
Toronto in October and next week
in New York are testaments to
these efforts."
Third Quarter Financial Results
Financial Highlights
H&R and H&R Finance Trust (collectively, "the Trusts")
are also pleased to announce their combined financial results for
the three and nine months ended September
30, 2017.
H&R is very pleased with the financial results this quarter,
which reflect the high-quality of its portfolio, the underlying
growth in value and cash flow that its portfolio generates, and the
effects of its continued gradual repositioning of its business,
consistent with its recent review of strategic objectives.
H&R continued to recycle capital by selling certain
investment properties and equity accounted investments between
January 1, 2016 and September 30, 2017 for total proceeds of
$1.08 billion and acquiring
$530.4 million in new properties
during such period. These acquisitions were primarily in the
multi-family segment in the U.S.
The net proceeds from these transactions have been used to repay
debt and strengthen H&R's balance sheet while, at the same
time, have reduced overall rent, property operating income, net
income before income taxes and funds from operations. As at
September 30, 2017, the debt to total
asset ratio per the Trusts' Financial Statements was 43.6% compared
to 46.2% at December 31, 2015.
|
3 months ended
September 30
|
9 months ended
September 30
|
2017
|
2016
|
2017
|
2016
|
Rentals from
investment properties (millions)
|
$289.6
|
$297.3
|
$870.4
|
$890.5
|
Property operating
income (millions)
|
$195.3
|
$198.7
|
$542.0
|
$562.4
|
Net income before
income taxes (millions)
|
$76.1
|
$157.2
|
$367.1
|
$407.7
|
Funds from Operations
("FFO") (millions)(1)
|
$141.0
|
$136.9
|
$422.6
|
$441.4
|
FFO per Stapled Unit
(basic)(1)
|
$0.46
|
$0.46
|
$1.39
|
$1.48
|
FFO per Stapled Unit
(diluted)(1)
|
$0.46
|
$0.45
|
$1.38
|
$1.46
|
Distributions per
Stapled Unit
|
$0.35
|
$0.33
|
$1.04
|
$1.01
|
Payout ratio per
Stapled Unit (as a % of FFO)(1)
|
76.1%
|
71.7%
|
74.8%
|
68.2%
|
Interest coverage
ratio(1)
|
3.01
|
2.82
|
3.01
|
2.78
|
(1)
|
These are non-GAAP
measures. See "Non-GAAP Financial Measures" in this press release.
The Trusts' combined MD&A includes a
reconciliation of net income to FFO. Readers are encouraged to
review the reconciliation in the combined MD&A.
|
Operating Highlights
Occupancy as at September 30, 2017
was 96.0% compared to 95.9% as at September 30, 2016. Commercial leases,
representing only 8.3% of total rentable area, will expire during
the remainder of 2017 and 2018. H&R's average remaining
lease term to maturity as at September 30,
2017 was 9.2 years.
Development Pipeline
H&R's current development pipeline is expected to create
significant value and enhance cash flows over the next three
years.
Construction is progressing on the development of 1,871 luxury
residential rental units known as "Jackson Park" in Long Island City, NY, 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 early 2018. The leasing office for
Jackson Park is scheduled to open
later this month. As at September 30,
2017, total project costs incurred amounted to U.S.
$899.6 million, of which U.S.
$78.1 million was incurred during Q3
2017. The remaining costs (of which 73.8% have been
contractually fixed) are expected to be funded through the
construction financing facility. Upon completion and
stabilized occupancy, the first year's property operating income at
H&R's ownership interest is projected to be U.S. $36.9 million.
In Q2 2017, H&R purchased a multi-family property under
development in Austin, TX known as
"Ambrosio". It is expected that this development will be
substantially complete and transferred to investment properties in
Q4 2017. Upon completion, this property will be comprised of 370
multi-family units for a total cost of U.S. $52.8 million. Ambrosio is located adjacent to
H&R's NXNE property, which will provide H&R with a
significant presence in the Tech Ridge submarket of Austin.
In January 2017, H&R acquired
a mortgage receivable for U.S. $34.0
million secured against nine acres of land in Miami, FL. The site, known as "River
Landing", is on the Miami River adjacent to the Health District and
is zoned for approximately 420,000 square feet of retail space and
over 500 multi-family units. As at September 30, 2017, the mortgage receivable
outstanding was U.S. $54.3
million.
As at September 30, 2017, H&R
has a mortgage receivable outstanding of U.S. $41.8 million secured against an office property
currently under construction and an adjacent 4.8 acres of land
located in downtown Dallas, TX
("2217 Bryan St."). This project includes the re-development
of a 93,000 square foot existing historical building into
state-of-the-art office space. To date, approximately 63.0%
has been pre-leased. The 4.8 acres of excess land is expected
to be developed into a multi-family residential property.
H&R has an option to purchase both properties at cost.
H&R has a 31.7% interest in 38.4 acres of land in
Hercules, CA adjacent to the San
Pablo Bay, northeast of San Francisco. Phase 1 will consist
of 172 multi-family units and construction is expected to commence
in Q1 2018. The total budget for this phase is expected to be
U.S. $71.1 million, at the 100%
level. As at September 30,
2017, H&R's investment was U.S. $11.5 million.
In July 2017, H&R acquired a
33.3% non-managing interest in approximately 5.0 acres of land in
Austin, TX ("Koenig Project") for
the future development of 391 multi-family units with construction
expected to commence mid-2018. As at September 30, 2017, H&R's investment was
approximately U.S. $5.3
million.
Lantower Residential
In September 2017, Lantower
Residential sold 12510 South Green Drive in Houston, TX for U.S. $32.2 million which it had purchased in
November 2014 for U.S. $28.0 million. The internal rate of return
of 26.8% per annum on equity invested was a result of growth in net
operating income and the improved capitalization rate.
Subsequent to September 30, 2017,
Lantower Residential acquired 451 multi-family units at 1810
Sweetbroom Circle in Tampa, FL at
a purchase price, excluding transaction costs, of approximately
U.S. $78.9 million, representing a
going-in capitalization rate of 5.4%, or approximately U.S.
$174,867 per unit.
As at November 12, 2017, Lantower
Residential had a portfolio of 13 properties in the U.S. comprised
of an aggregate of 4,230 multi-family units, with an average age of
10 years and two properties currently under construction
(Jackson Park and Ambrosio) which
will comprise an additional 1,305 multi-family units, at H&R's
ownership interest, when completed.
Primaris
The enclosed mall portfolio same store sales productivity
increased to $546 per square foot for
the 12-month period ending August 30,
2017 an increase from the $541
per square foot compared to the year
prior. Primaris owns and manages market dominant
shopping centres and continues to realize strong tenant demand
having completed 144 new lease transactions during the first three
quarters of the year which has driven the occupancy rate to 91.8%,
a substantial increase from the 87.4% at the beginning of the
year. Including tenants committed, but not yet open, the
occupancy rate rises to 94.5%.
Management expects the full completion of re-tenanting former
Target space and the recent return to economic growth in
Alberta to act as positives for
the near-term performance of Primaris, more than offsetting the
impact of Sears closures. With average Sears net rents of
only $3.47 per square foot,
accounting for less than 0.4 percent of annualized gross revenue,
management consider Sears' departure as an opportunity to
materially increase net operating income through replacement of an
unproductive anchor tenant paying rents well below market rates
with tenants that will generate increased rent and traffic to the
properties.
Debt and Liquidity Highlights
In August 2017, H&R issued
$125.0 million principal amount of
2.923% Series L Senior Debentures maturing May 6, 2022 which is in addition to the
$200.0 million principal amount
issued in November 2016, bringing the
total principal amount of Series L Senior Debentures to
$325.0 million.
The weighted average interest rate on mortgages and debentures
payable as at September 30, 2017 was
4.0% with an average term to maturity of 4.7 years.
As at September 30, 2017, the
Trusts had $51.7 million of cash on
hand, $694.5 million available under
its general operating facilities and an unencumbered property pool
of approximately $3.2 billion.
The Trusts' Internal Reorganization
On October 19, 2017, the Trusts
announced that they are proposing to complete an internal
reorganization (the "Reorganization") which is intended to continue
and enhance the benefits of the existing Stapled Unit structure
that has been in place since 2008. The result of the
Reorganization will be to effectively replace H&R Finance Trust
in H&R's Stapled Unit structure with a newly-formed entity
called H&R Finance (2017) Trust ("H&R F17 Trust"), which
will have substantively the same characteristics as H&R Finance
Trust. The Reorganization will be effected by way of a plan
of arrangement resulting in, among other things, holders of Stapled
Units, through a series of steps, disposing of their H&R
Finance Trust units and acquiring units of H&R F17 Trust.
Following completion of the Reorganization, units of H&R REIT
and H&R F17 Trust will trade together as Stapled Units on the
Toronto Stock Exchange under the ticker symbol "HR.UN".
H&R F17 Trust will be expected to hold notes of H&R REIT
(U.S.) Inc. ("U.S. Holdco"), a subsidiary of H&R, evidencing a
debt obligation in the principal amount of approximately U.S.
$1 billion issued by U.S. Holdco (an
increase from the approximately U.S. $223.9
million principal amount of notes currently held by H&R
Finance Trust, which increase is reflective of the growth in
H&R's U.S. investment portfolio). Joint meetings of
unitholders will be held on December 7,
2017 and if the Reorganization is approved by the
unitholders at the meetings and assuming timely satisfaction of all
other closing conditions, including receipt of a final order of the
Court of Queen's Bench of Alberta
and an advance income tax ruling from the Canada Revenue Agency, it
is anticipated that the Reorganization will be completed by the end
of December 2017. For more information on the Reorganization,
please see the management information circular of the Trusts dated
October 31, 2017 which is available
at www.sedar.com.
Monthly Distribution Declared
The Trusts have previously declared a distribution for the month
of November and today declared a distribution for the month of
December scheduled as follows:
|
Distribution/Stapled
Unit
|
Annualized
|
Record
date
|
Distribution
date
|
December
2017
|
$0.11500
|
$1.38
|
December 13,
2017
|
December 29,
2017
|
Conference Call
Management will host a conference call to discuss the financial
results for the Trusts on Tuesday, November
14, 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 95558240
followed by the pound key. The telephone replay will be
available until Tuesday, November 21,
2017 at midnight.
Webcast
A live audio webcast will be available through
http://hr-reit.com/Investor-Relations/InvestorEvents.aspx.
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 $14.0 billion at
September 30, 2017. 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. $223.9 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 information in this press release contains
forward-looking information within the meaning of applicable
securities laws (also known as forward-looking statements)
including, among others, statements made or implied under the
headings "Strategy Update" and "Third Quarter Financial Results"
relating to the Trusts' objectives, strategies to achieve those
objectives, the Trusts' beliefs, plans, estimates, projections and
intentions and similar statements concerning anticipated future
events, results, circumstances, performance or expectations that
are not historical facts including, expectations regarding
H&R's leverage and capital structure, H&R's goal of
simplifying and concentrating its portfolio, the stability and
consistent growth of H&R's office portfolio, the continued
allocation of capital to, and the growth of, the Lantower
Residential segment, H&R's decision to sell its U.S. retail and
industrial properties and the timing and proceeds of any such
sales, H&R's capital allocation to Echo Realty, the potential
for growth in net operating income and net asset value, the
expected use of proceeds from expected asset sales, the impact on
H&R's operating and financial performance of its proposed
changes, the amount of distributions to unitholders, H&R's
expectation with respect to the activities of H&R's development
properties, including redevelopment of existing properties and
building of new properties, the expected budget, financing and
occupancy of, and the opening of the leasing office for,
Jackson Park, the first year's
property operating income from Jackson
Park, the timing of completion and total cost of Ambrosio,
the total cost of Hercules, the
expected development of 2217 Bryan St. and the Koenig Project, the
completion of re-tenanting former Target space and the return to
economic growth in Alberta,
expectations regarding more profitable upside from the closure of
Sears, the ability to obtain the final order and the Canada Revenue
Agency Ruling on the terms and timing contemplated by the parties,
to complete the Reorganization on the terms and on the timing
contemplated by management, the assumption that all necessary
conditions will be met for the completion of the Reorganization,
the amount of the increase expected in the principal amount of U.S.
Holdco Notes, management's belief that H&R has sufficient funds
for future commitments and management's expectation to be able to
meet all of the Trusts' ongoing obligations and to finance
short-term development commitments through the Trusts' general
operating facilities and the adoption of new accounting
policies. 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 the Trusts' current beliefs and are based on
information currently available to management.
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,
uncertainties and other factors 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,
performance or achievements of the Trusts to differ materially from
the forward-looking statements contained in this press release.
Factors that could cause actual results, performance or
achievements to differ materially from those expressed or implied
by forward-looking statements include, but not are limited to, 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. Additional risks and
uncertainties include, among other things, risks related to: real
property ownership, credit risk and tenant concentration; lease
rollover risk, interest and other debt-related risk; construction
risks; currency risk; liquidity risk, financing credit risk,
environmental risk; co-ownership interest in properties, joint
arrangement risks; unit price risk; availability of cash for
distributions; ability to access capital markets; dilution;
unitholder liability; redemption right risk; risks relating to
debentures, tax risk and tax consequences to U.S. holders. The
Trusts caution that these lists of factors, risks and uncertainties
are 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. Readers are also urged to examine H&R and
Finance Trust's materials filed with the Canadian securities
regulatory authorities from time to time as they may contain
discussions on risks and uncertainties which could cause the actual
results and performance of H&R and Finance Trust to differ
materially from the forward-looking statements contained in this
press release. Neither Finance Trust nor any of its trustees
or officers, assumes any responsibility for the completeness of the
information contained in H&R's materials filed with the
Canadian securities regulatory authorities or for any failure of
H&R or its trustees or officers to disclose events or facts
which may have occurred or which may affect the significance or
accuracy of any such information. Neither H&R nor any of
its trustees or officers, assumes any responsibility for the
completeness of the information contained in Finance Trust's
materials filed with the Canadian securities regulatory authorities
or for any failure of Finance Trust or its trustees or officers to
disclose events or facts which may have occurred or which may
affect the significance or accuracy of any such information.
All forward-looking statements in this press release are qualified
by these cautionary statements. These forward-looking
statements are made as of November 13,
2017 and the Trusts, except as required by applicable
Canadian law, assume 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' interim condensed combined Financial Statements are
prepared in accordance with IAS 34. 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 non-GAAP measures FFO, Interest
Coverage Ratio, Payout Ratio per Stapled Unit and Trusts'
proportionate share as well as other non-GAAP 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 as at and for the three and nine months
ended September 30, 2017, 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