TORONTO, Nov. 12, 2018 /CNW/ - H&R Real Estate
Investment Trust ("H&R" or "the REIT") (TSX: HR.UN) is pleased
to announce its financial results for the three and nine months
ended September 30, 2018.
H&R has been reallocating capital by way of property
dispositions, acquisitions, developments and the repurchase and
cancellation of REIT units ("Units"). The objectives of these
capital recycling transactions are to simplify H&R's businesses
and enhance the REIT's internal growth profile by increasing the
contributions from its core portfolio and making H&R easier for
investors to understand, analyze and value. The following 2018
transactions highlight H&R's progress in achieving its
strategic objectives identified in its letter to unitholders
included in H&R's 2017 Annual Report:
- Sold 63 lower growth U.S. retail assets for U.S. $633.0 million;
- Sold H&R's ownership interest in F1RST Tower in
Calgary, AB for $53.5 million;
- Sold H&R's ownership interest in five non-core Canadian
industrial assets and two non-core Canadian retail assets for
$72.1 million;
- Reinvested sales proceeds in higher growth assets by acquiring
multi-family properties in the U.S. for U.S. $182.3 million and an additional investment of
U.S. $73.9 million which closed in
October 2018;
- Further advanced and expanded the development pipeline to
$1.2 billion of properties under
development;
- Purchased and cancelled 6.6 million Units for $136.3 million; and
- Eliminated H&R Finance Trust ("Finance Trust") and the
Stapled Unit structure to return H&R to a single trust
structure in line with industry peers.
The above noted transactions have reduced Property operating
income and Funds from Operations ("FFO") in 2018, due to the lag
between property sales and the reinvestment of proceeds as well as
the lower initial yields on acquisitions relative to sold
properties. H&R looks forward to benefitting from the full
reinvestment of the sale proceeds and the enhanced growth profile,
resulting in positive Property operating income, FFO and Net Asset
Value ("NAV") growth in 2019 and beyond.
FINANCIAL HIGHLIGHTS
|
3 months ended
September 30, 2018
|
9 months ended
September 30, 2018
|
|
2018
|
2017
|
%
Change
|
2018
|
2017
|
%
Change
|
Rentals from
investment properties (millions)
|
$286.2
|
$289.6
|
(1.2%)
|
$879.1
|
$870.4
|
1.0%
|
Property operating
income (millions)
|
$186.4
|
$195.3
|
(4.6%)
|
541.9
|
$542.0
|
-%
|
Same-Asset property
operating income (cash
basis) - Canada(1) (millions)
|
$134.1
|
$131.5
|
2.0%
|
$398.0
|
$393.8
|
1.1%
|
Same-Asset property
operating income (cash
basis) - U.S. in U.S. dollars(1) (millions)
|
$37.6
|
$40.6
|
(7.4%)
|
$113.0
|
$114.5
|
(1.3%)
|
Same-Asset property
operating income (cash
basis) total in Canadian dollars(1)
(millions)
|
$183.4
|
$183.2
|
0.1%
|
$543.7
|
$543.8
|
-%
|
Net income before
income taxes
|
$111.7
|
$76.1
|
46.8%
|
$279.7
|
$367.1
|
(23.8%)
|
Net income
(millions)
|
$105.5
|
$78.8
|
33.9%
|
$276.8
|
$342.7
|
(19.2%)
|
FFO
(millions)(1)
|
$127.6
|
$141.0
|
(9.5%)
|
$395.2
|
$422.6
|
(6.5%)
|
FFO per Unit (basic
and diluted)(1)
|
$0.42
|
$0.46
|
(9.1%)
|
$1.30
|
$1.39
|
(6.6%)
|
Distributions per
Unit
|
$0.35
|
$0.35
|
-%
|
$1.04
|
$1.04
|
-%
|
Payout ratio per Unit
(as a % of FFO)(1)
|
81.4%
|
74.7%
|
6.7%
|
79.4%
|
74.4%
|
5.0%
|
NAV per Unit as at
September 30(1)
|
$25.73
|
$25.01
|
2.9%
|
$25.73
|
$25.01
|
2.9%
|
|
|
(1)
|
These are non-GAAP
measures. See "Non-GAAP Financial Measures" in this press
release. H&R's management discussion and analysis ("MD&A")
for the three and nine months ended September 30, 2018 includes a
reconciliation of property operating income to Same-Asset property
operating income (cash basis) and net income to FFO as well as the
calculation of NAV per Unit. Readers are encouraged to review
the reconciliations and calculation in H&R's
MD&A.
|
Property operating income decreased by $8.9 million and $0.1
million, respectively, for the three and nine months ended
September 30, 2018 compared to the
respective 2017 periods primarily due to the sale of 63 U.S. retail
properties in June 2018, partially
offset by Lantower Residential property acquisitions. The nine
months ended September 30, 2017 were
impacted by a $5.6 million non-cash
write-off of straight-line rent that reduced property operating
income in 2017.
Same-Asset property operating income (cash basis) from
Canada increased by 2.0% and 1.1%,
respectively, for the three and nine months ended September 30, 2018 compared to the respective
2017 periods, primarily due to an increase in occupancy,
contractual rental escalations and renewed leases at higher rents
from H&R's Ontario Office properties.
Same-Asset property operating income (cash basis) from the U.S.
in U.S. dollars decreased by 7.4% and 1.3%, respectively, for the
three and nine months ended September 30,
2018 compared to the respective 2017 periods, primarily due
to ECHO receiving lease termination fees of U.S. $4.0 million at H&R's ownership interest in
Q3 2017. Excluding these lease termination fees, Same-Asset
property operating income (cash basis) from the U.S. would have
increased 2.8% in Q3 2018 compared to Q3 2017 and 2.2% for the nine
months ended September 30, 2018
compared to the respective 2017 period.
Total Same-Asset property operating income (cash basis)
increased by 0.1% and 0%, respectively, for the three and nine
months ended September 30, 2018
compared to the respective 2017 periods. Excluding the lease
termination fees received, total Same-Asset property operating
income (cash basis) would have increased 2.9% in Q3 2018 compared
to Q2 2017 and 0.8% for the nine months ended September 30, 2018 compared to the respective
2017 period.
Net income before income taxes increased (decreased) by
$35.6 million and ($87.4 million), respectively, for the three and
nine months ended September 30, 2018
compared to the respective 2017 periods, primarily due to non-cash
items. Excluding non-cash items, which consist of fair value
adjustments, gain (loss) on sale of real estate assets and foreign
exchange, net income before income taxes net income decreased by
$1.0 million from $129.3 million in Q3 2017 to $128.3 million in Q3 2018 and by $20.9 million from $379.6
million for the nine months ended September 30, 2017 to $358.7 million for the nine months ended
September 30, 2018. The decrease of
$20.9 million was primarily due to
net income from equity accounted investments decreasing by
$27.8 million for the nine months
ended September 30, 2018 compared to
the respective 2017 period, primarily as a result of the change in
fair value adjustments on real estate assets and the sale of nine
U.S. industrial properties in 2017.
Included in FFO at the REIT's proportionate share(1)
are the following items which can be a source of variances between
periods:
|
Three months ended
September 30
|
Nine months ended
September 30
|
(in thousands of
Canadian dollars)
|
2018
|
2017
|
Change
|
2018
|
2017
|
Change
|
Lease termination
fees
|
$444
|
$5,538
|
($5,094)
|
$1,926
|
$5,985
|
($4,059)
|
Jackson Park
FFO
|
186
|
3,363
|
(3,177)
|
2,751
|
10,457
|
(7,706)
|
Other(2)
|
-
|
(548)
|
548
|
-
|
2,747
|
(2,747)
|
|
$630
|
$8,353
|
($7,723)
|
$4,677
|
$19,189
|
($14,512)
|
|
|
(1)
|
This is a non-GAAP
measure. See "Non-GAAP Financial Measures" in this press
release.
|
(2)
|
For complete details
please see page 31 of H&R's MD&A for the three and nine
months ended September 30, 2018, available under H&R's profile
on SEDAR (www.sedar.com) and posted on H&R's website at
www.hr-reit.com.
|
Excluding the above items, FFO would have been $127.0 million for the three months ended
September 30, 2018 (Q3 2017 -
$132.6 million) and $0.42 per basic Unit (Q3 2017 - $0.43 per basic Unit). For the nine months ended
September 30, 2018, FFO would have
been $390.6 million (Q3 2017 -
$403.5 million) and $1.29 per basic Unit (Q3 2017 - $1.33 per basic Unit).
SUMMARY OF SIGNIFICANT Q3 2018
ACTIVITY
Developments
Management believes that H&R's development pipeline is a key
element to delivering growth in NAV and FFO per Unit over time.
H&R's large scale, low leverage and high-credit-quality tenant
base allows H&R to pursue large format development
opportunities not available to smaller entities, while managing
risk exposures. H&R continues to make significant progress with
its value-creating development program, consisting of a
well-staggered pipeline of projects.
Jackson Park, the 1,871 luxury
unit residential development in Long
Island City, NY, in which H&R has a 50% ownership
interest, is nearing completion. This trophy project is on budget
and slightly ahead of the development lease-up schedule. As at
September 30, 2018, 1,112 leases had
been entered into and 1,037 units were occupied. The remaining
lease-up is expected to occur during the balance of 2018 and 2019
with stabilized occupancy expected to be achieved during Q4 2019.
Upon stabilization, the first full year's property operating income
at H&R's ownership interest is projected to be U.S.
$35.4 million, equating to a 6.1%
yield on budgeted cost of U.S. $580.7
million.
The following table presents net income and FFO generated by
Jackson Park for the three months
ended September 30, 2018 as well as
projections through 2020:
|
|
|
|
|
|
(H&R's
ownership interest)
|
|
Q3
2018
(Actual)
|
Q4
2018
(Projected)
|
Annual
2019
(Projected)
|
Annual
2020
(Projected)
|
(in thousands of
U.S. dollars)
|
|
|
|
|
|
Property operating
income
|
|
$588
|
$3,023
|
$28,890
|
$35,400
|
Finance cost -
operations
|
|
(1,511)
|
(3,051)
|
(15,777)
|
(15,983)
|
Fair value adjustment
on financial instruments
|
|
276
|
-
|
-
|
-
|
Net income
(loss)
|
|
(647)
|
(28)
|
13,113
|
19,417
|
Fair value adjustment
on financial instruments
|
|
(276)
|
-
|
-
|
-
|
Notional interest
capitalization
|
|
1,052
|
548
|
130
|
-
|
FFO
|
|
$129
|
$520
|
$13,243
|
$19,417
|
Management expects Jackson Park
to deliver NAV growth through the completion of this development,
and once stabilized to contribute to higher net income and FFO
growth over time. For Q3 2018, net income and FFO contributions
from Jackson Park were better than
projected primarily due to stronger leasing momentum. During Q3
2018, 466 leases were entered into and 602 units became
occupied.
River Landing, the urban in-fill
development in Miami, FL, in which
H&R has a 100% ownership interest, fronts directly on the Miami
River, is adjacent to the Health District and is in close proximity
to downtown Miami. River
Landing is a mixed-use development including approximately
346,000 square feet of retail space, approximately 136,000 square
feet of office space and 529 multi-family units. To date, 66.0% of
the retail space has been leased, with a further 10.1% under
executed non-binding letters of intent. Construction is
underway and is expected to be completed in Q2 2020. The total cost
of the project is expected to be U.S. $424.8
million and as at September 30,
2018, approximately U.S. $153.4
million had been invested in the development. Upon
stabilized occupancy, the first full year's property operating
income is projected to be U.S. $24.4
million, equating to a 5.7% yield on budgeted cost.
In July 2018, H&R acquired a
30.9% non-managing ownership interest in the development of a
35-story residential tower consisting of 315 multi-family units and
6,450 square feet of retail for a total of U.S. $15.0 million at the 100% level. Located in
Long Beach, CA, "Shoreline
Gateway" will become the largest residential tower in Long Beach with views overlooking the Pacific
Ocean. Construction is expected to commence in November 2018 and the total budget is
approximately U.S. $227.1 million at
the 100% level. As at September 30,
2018, H&R's investment was approximately U.S.
$6.4 million.
For a complete list of H&R's current development projects,
please see page 13 of H&R's MD&A.
Office
Property operating income and Same-Asset property operating
income (cash basis) from the Office segment increased by 1.5% and
3.4%, respectively, in Q3 2018 compared to Q3 2017, primarily due
to an increase in occupancy, contractual rental escalations and
renewed leases at higher rents from H&R's Ontario Office
properties. The Office portfolio is leased on a long-term basis to
creditworthy tenants, with 82.6% of Office revenue from tenants
with investment grade ratings.
Primaris
Property operating income and Same-Asset property operating
income (cash basis) from the Primaris segment grew by 0.4% and
0.8%, respectively, in Q3 2018 compared to Q3 2017, despite the
decline in occupancy from 91.8% at September
30, 2017 to 84.2% at September 30,
2018. This reflects the relative low rents Sears had been
paying on the vacated space in 2017, the commencement of new leases
on the previous Target space as well as the strength of the
remainder of the tenant base.
Redevelopment of the former Sears stores has commenced, however,
since each store is part of an existing property, they have not
been transferred to properties under development. During the
three and nine months ended September 30,
2018, H&R capitalized $0.3
million and $0.7 million,
respectively, of property operating costs and $0.9 million and $1.8
million, respectively, of finance costs attributable to this
space. Management expects positive rental growth from Primaris as
the lease-up of the former Target and Sears space is expected to
generate approximately $1.1 million,
$5.8 million and $3.1 million of additional annual base rent in
2019, 2020 and 2021, respectively.
In August 2018, Primaris sold a
44,158 square foot multi-tenant retail property known as
Sherwood Park Plaza in Sherwood Park, AB for $13.3 million.
Lantower Residential
H&R's growing Lantower Residential portfolio, now the third
largest segment, generated $22.0
million of property operating income in Q3 2018, up 65.2%
from Q3 2017 primarily due to acquisitions. In U.S. dollars,
Lantower Residential's Same-Asset property operating income (cash
basis) increased by 7.3% and 5.6%, respectively, for the three and
nine months ended September 30, 2018
compared to the respective 2017 periods.
As at September 30, 2018, Lantower
Residential had three properties in lease-up with a weighted
average occupancy rate of 65.8%. For Q3 2018, these properties
contributed U.S. $0.6 million to
property operating income. All three properties are targeted for
stabilization during Q4 2019 and are expected to contribute a total
of approximately U.S. $9.5 million to
property operating income on an annualized basis
thereafter.
In September 2018, Lantower
Residential acquired 328 multi-family units at 14201 N. Interstate,
35 Frontage Rd., Austin, TX
("Edgewater") at a purchase price, before transaction costs, of
approximately U.S. $48.4 million or
approximately U.S. $147,500 per
multi-family unit. Edgewater is
located adjacent to Lantower Residential's NXNE and Ambrosio
properties providing Lantower Residential with a significant
presence in the Tech Ridge submarket of Austin. Edgewater was built in 2018 and occupancy was
44.8% upon acquisition and 47.9% as at September 30, 2018. Stabilized occupancy is
expected to be achieved by September
2019.
Industrial
In July 2018, H&R sold
interests in two industrial assets located in Ontario for total proceeds of $9.4 million.
Debt Highlights
In September 2018, H&R
replaced its $500.0 million unsecured
credit facility scheduled to mature on December 18, 2018 with a new $150.0 million unsecured credit facility maturing
September 20, 2022 and a $350.0 million unsecured credit facility maturing
September 20, 2023.
During Q3 2018, H&R secured four new mortgages totalling
$127.5 million at a weighted average
interest rate of 4.2% for an average term of 9.7 years and repaid
two mortgages totaling $3.3 million
which had a weighted average interest rate of 4.4%. The weighted
average interest rate on mortgages and debentures payable as at
September 30, 2018 was 3.9% with an
average term to maturity of 4.5 years.
As at September 30, 2018, the Debt
to Total Asset ratio was 44.0% compared to 44.6% at December 31, 2017.
Unwinding of H&R's Stapled Unit Structure
On August 31, 2018, the REIT and
Finance Trust effected a Reorganization by way of plan of
arrangement involving the REIT, Finance Trust and certain of the
REIT's subsidiaries resulting in, among other things, the
termination of Finance Trust. Accordingly, H&R's Units are no
longer stapled to units of Finance Trust with unitholders now
holding only H&R Units, thereby returning H&R to single
trust structure in line with industry peers.
Monthly Distribution Declared
H&R today declared a distribution for the month of December
scheduled as follows:
|
|
|
|
|
|
Distribution/Unit
|
Annualized
|
Record
date
|
Distribution
date
|
December
2018
|
$0.11500
|
$1.38
|
December 13,
2018
|
December 31,
2018
|
Conference Call
Management will host a conference call to discuss the financial
results for H&R on Tuesday, November 13,
2018 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 2685153
followed by the pound key. The telephone replay will be
available until Tuesday, November 20,
2018 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
H&R REIT is one of Canada's
largest fully internalized real estate investment trusts with total
assets of approximately $14.2 billion
at September 30, 2018. H&R REIT
has ownership interests in a North American portfolio of high
quality office, retail, industrial and residential properties
comprising over 41 million square feet.
Forward-Looking Disclaimer
Certain information in this news 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 relating to
H&R's objectives, strategies to achieve those objectives,
H&R's beliefs, plans, estimates, projections and intentions and
similar statements concerning anticipated future events, results,
circumstances, performance or expectations that are not historical
facts, including the statements made under the headings "Strategy
Update" and "Summary of Significant Q3 2018 Activity", including
with respect to the streamlining of H&R's operations, H&R's
future plans, including significant development projects,
dispositions, acquisitions and the repurchase and cancellation of
Units, and management's expectations that the reinvestment of sale
proceeds and H&R's enhanced growth profile will result in
positive Property operating income, FFO and NAV growth in 2019 and
beyond, management's belief that H&R's development pipeline is
key to delivering growth in NAV and FFO per Unit over time,
expectations for property operating income or rental growth from
Lantower Residential and Primaris, H&R's expectation with
respect to the activities of its development properties, including
redevelopment of existing properties and building of new
properties, the expected total cost and lease-up of Jackson Park,
the expected stabilized property operating income from Jackson Park, and the anticipated projected
amounts of net income and FFO in 2018-2020 resulting from
Jackson Park, expected future NAV
growth from Jackson Park, the total
cost and timing of Shoreline, the expected total cost and
stabilized property operating income from River Landing, management's expectation relating
to the opportunity to increase property operating income as a
result of Sears' departure and the enhanced profile and value for
unitholders from the replacement of former Sears space, the
expected annual base rent from former Sears and Target space,
management's expectations regarding future distributions,
management's belief that H&R has sufficient funds for future
commitments and management's expectation to be able to meet all of
its ongoing obligations and to finance short-term development
commitments through its general operating facilities.
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
H&R's 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 H&R's estimates and assumptions that are
subject to risks, uncertainties and other factors including those
risks and uncertainties described in H&R's MD&A under
"Risks and Uncertainties" and those discussed in H&R's
materials filed with the Canadian securities regulatory authorities
from time to time, which could cause the actual results,
performance or achievements of H&R to differ materially from
the forward-looking statements contained in this news 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; local real estate conditions are stable;
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, cyber
security 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. H&R cautions that these lists of factors, risks and
uncertainties are not exhaustive. Although the forward-looking
statements contained in this news release are based upon what
H&R believes 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'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 to differ materially from the
forward-looking statements contained in this news
release. None of the former trustees or officers of Finance
Trust, 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 former trustees or
officers to disclose events or facts which may have occurred or
which may have affected the significance or accuracy of any such
information. All forward-looking statements in this news release
are qualified by these cautionary statements. These forward-looking
statements are made as of November 12,
2018 and the REIT, except as required by applicable Canadian
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 REIT's Financial Statements are prepared in accordance with
IFRS. H&R's 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 NAV, FFO, Payout Ratio per Unit, Same-Asset property
operating income (cash basis) and the REIT's 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, 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 use these measures to better assess H&R's
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 H&R's MD&A for the
three and nine months ended September 30,
2018, available at www.hr-reit.com and on www.sedar.com.
Additional information regarding H&R is available at
www.hr-reit.com and on www.sedar.com.
SOURCE H&R Real Estate Investment Trust