TORONTO, Feb. 14, 2019 /CNW/ - H&R Real Estate
Investment Trust ("H&R" or "the REIT") (TSX: HR.UN) is pleased
to announce its financial results for the year ended December 31, 2018.
During 2018, H&R actively pursued its capital reallocation
program through property dispositions, acquisitions, developments
and the repurchase and cancellation of REIT units ("Units").
The objectives of this program include 1) simplifying H&R
by focusing on fewer property types and increasing the
contributions from its core portfolio; 2) making H&R easier for
investors to understand, analyze and value; and 3) enhancing the
REIT's internal growth profile. The following 2018 transactions
highlight H&R's progress in achieving the 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
residential assets in the U.S. for U.S. $340.6 million;
- Further advanced and expanded the development pipeline to
$1.5 billion of properties under
development;
- Purchased and cancelled 6.6 million Units at an average price
of $20.62 per Unit for a total cost
of $136.3 million; and
- Eliminated H&R Finance Trust ("Finance Trust") and the
Stapled Unit structure to return H&R to a single trust in line
with industry peers.
While 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, net asset value ("NAV") per Unit has increased by
2.9%. H&R looks forward to benefitting from the capital
reallocation program, which is expected to result in an enhanced
growth profile going forward.
FINANCIAL HIGHLIGHTS
|
3 months ended
December 31, 2018
|
Year ended December
31, 2018
|
|
2018
|
2017
|
%
Change
|
2018
|
2017
|
%
Change
|
Rentals from
investment properties (millions)
|
$297.4
|
$298.0
|
-0.2%
|
$1,176.6
|
$1,168.5
|
+0.7%
|
Property operating
income (millions)
|
$192.0
|
$199.4
|
-3.7%
|
$733.9
|
$741.4
|
-1.0%
|
Same-Asset property
operating income (cash
basis) - Canada(1) (millions)
|
$137.5
|
$134.5
|
+2.2%
|
$535.6
|
$528.3
|
+1.4%
|
Same-Asset property
operating income (cash
basis) - U.S. in U.S. dollars(1) (millions)
|
$37.2
|
$36.3
|
+2.4%
|
$150.2
|
$149.1
|
+0.7%
|
Same-Asset property
operating income (cash
basis) total in Canadian dollars(1)
(millions)
|
$187.0
|
$180.6
|
+3.5%
|
$730.8
|
$722.1
|
+1.2%
|
Net income before
income taxes
|
$98.5
|
$262.5
|
-62.5%
|
$378.1
|
$629.6
|
-39.9%
|
Net income
(millions)
|
$61.1
|
$325.2
|
-81.2%
|
$337.9
|
$667.9
|
-49.4%
|
FFO
(millions)(1)
|
$130.5
|
$137.4
|
-5.1%
|
$525.7
|
$560.1
|
-6.1%
|
FFO per Unit
(basic)(1)
|
$0.433
|
$0.448
|
-3.3%
|
$1.737
|
$1.840
|
-5.6%
|
Distributions per
Unit
|
$0.345
|
$0.345
|
0.0%
|
$1.380
|
$1.380
|
0.0%
|
Payout ratio per Unit
(as a % of FFO)(1)
|
79.7%
|
77.0%
|
+2.7%
|
79.4%
|
75.0%
|
+4.4%
|
NAV per Unit as at
December 31(1)
|
$26.30
|
$25.57
|
+2.9%
|
$26.30
|
$25.57
|
+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 year ended December 31, 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.
|
Net income before income taxes decreased by $164.1 million and $251.5
million for the three months and year ended December 31, 2018 compared to the respective 2017
periods, primarily due to non-cash items including fair value
adjustments, gain (loss) on sale of real estate assets and foreign
exchange. Excluding these items, net income before income
taxes increased by $21.1 million from
$246.8 million in Q4 2017 to
$267.9 million in Q4 2018 and by
$0.2 million from $626.4 million for the year ended December 31, 2017 to $626.6 million for the year ended December 31, 2018. The increase of
$21.1 million was primarily due to
net income from equity accounted investments increasing by
$29.8 million for Q4 2018 compared to
the respective 2017 period.
SUMMARY OF SIGNIFICANT Q4 2018
ACTIVITY
Developments
Jackson Park, the 1,871
unit luxury residential rental development in Long Island City, NY, in which H&R has a
50% ownership interest, is nearing completion and expected to be
transferred to investment properties in Q1 2019. H&R's
trophy project is on budget and slightly ahead of the development
lease-up schedule. As at December 31,
2018, 1,274 leases had been entered into and 1,231 units
were occupied. The remaining lease-up is expected to occur
during the balance of 2019 with stabilized occupancy expected to be
achieved during Q3 2019. Upon stabilization, the first full
year's property operating income at H&R's ownership interest is
projected to be U.S. $35.9 million,
equating to a 6.2% yield on budgeted cost of U.S. $580.7 million. Jackson
Park, at the 100% level, has been valued at approximately
U.S. $1.6 billion as at December 31, 2018 compared to costs to date of
approximately U.S. $1.1 billion,
resulting in a fair value increase of U.S. $522.6 million since the start of the
project.
The following table presents net income and FFO for Jackson Park for the three months and year ended
December 31, 2018 as well as
projections through 2020:
(H&R's
ownership interest)
|
Q4
2018
(Actual)
|
YTD
Dec 31, 2018
(Actual)
|
Annual
2019
(Projected)
|
Annual
2020
(Projected)
|
(in thousands of
U.S. dollars)
|
|
|
|
|
Property operating
income
|
$2,554
|
$1,988
|
$27,004
|
$35,921
|
Finance cost -
operations
|
(2,999)
|
(5,475)
|
(13,191)
|
(13,600)
|
Fair value adjustment
on financial instruments
|
(1,699)
|
1,549
|
-
|
-
|
Fair value adjustment
on real estate assets
|
107,718
|
107,718
|
-
|
-
|
Net
income
|
105,574
|
105,780
|
13,813
|
22,321
|
Fair value adjustment
on financial instruments
|
1,699
|
(1,549)
|
-
|
-
|
Fair value adjustment
on real estate assets
|
(107,718)
|
(107,718)
|
-
|
-
|
Notional interest
capitalization
|
601
|
5,777
|
232
|
-
|
FFO
|
$156
|
$2,290
|
$14,045
|
$22,321
|
For Q4 2018, net income from Jackson
Park exceeded the projection as at September 30, 2018 primarily due to a fair value
increase to the property of U.S. $107.7
million at H&R's ownership interest which was supported
by an independent third party appraisal. FFO for Q4 2018 was
lower than projected as at September 30,
2018 by $0.4 million primarily
due to higher initial operating expenses.
In April 2018, H&R acquired a
33.3% non-managing ownership interest in a residential development
site zoned for 263 residential units for U.S. $8.7 million at the 100% level located in
Seattle, WA. This
development, known as "Esterra Park", is part of a larger
master planned community and is adjacent to Microsoft, Inc.'s
headquarters, bus transit and future light rail which is expected
to be completed in 2021. Construction commenced in November 2018 and the total budget is
approximately U.S. $95.7 million at
the 100% level. As at December 31,
2018, H&R's investment was approximately U.S
$6.2 million.
In June 2018, H&R converted
its mortgage receivable secured against the urban in-fill
development site in Miami, FL,
known as "River Landing" into a wholly-owned property
under development. River Landing,
with approximately 1,000 feet of waterfront on the Miami
River, is adjacent to the Health District and is two miles from
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
residential rental 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 with occupancy
scheduled to commence in Q2 2020. The total cost of the
project is expected to be U.S. $424.8
million, and as at December 31,
2018, approximately U.S. $196.0
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 June 2018, H&R purchased a
100% ownership interest in 20.3 acres of land in Prosper, TX, a suburb of Dallas ("Prosper") for U.S.
$14.6 million. The location along
Dallas North Tollway enables quick access to the acclaimed Legacy
West Development, home to major corporate employers including the
regional headquarters of Toyota North America, Federal Express,
Inc., Liberty Mutual Regional and JP Morgan Chase. The site is
expected to consist of 1,000 residential rental
units.
In July 2018, H&R acquired a
30.9% non-managing ownership interest in the development of a 315
unit luxury residential rental tower, with 6,450 square feet of
retail space for a total of U.S. $15.0
million, at the 100% level. Located in Long Beach, CA "Shoreline Gateway" will
become the tallest residential tower in Long Beach with 35 floors enjoying views
overlooking the Pacific Ocean. Construction commenced in
November 2018 and the total budget is
approximately U.S. $227.1 million at
the 100% level. As at December 31,
2018, H&R's investment was approximately U.S.
$6.4 million.
In December 2018, H&R acquired
a 100% interest in approximately 3.3 acres of land in downtown
Dallas, TX ("2214 Bryan
St.") for approximately U.S. $23.5
million. The site was purchased for the future
development of luxury residential rental units. The location
benefits from great connectivity as the Pearl/Arts District DART
(public rail) station is adjacent to the site.
Retail
In June 2018, H&R sold 63
lower-growth U.S. retail properties, totaling 4,235,943 square feet
for U.S. $633.0 million and realized
a loss on sale of U.S. $19.6 million
which was primarily due to mortgage prepayment penalties and
closing costs. H&R used the proceeds from the disposition to
repay 48 mortgages totaling U.S. $205.3
million, repay bank debt of approximately U.S. $152.4 million and fund Lantower Residential
acquisitions of U.S. $255.7
million. The sale of H&R's 63 U.S. retail assets
reduced net income and FFO during the remainder of
2018.
Office
Property operating income and Same-Asset property operating
income (cash basis) from the Office segment increased by 0.2% and
1.8%, respectively, for the year ended December 31, 2018 compared to the respective 2017
period, 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 81.2% of Office
revenue from tenants with investment grade ratings.
In April 2018, H&R sold its
50% ownership interest in F1RST Tower in Calgary, AB for gross proceeds of $53.5 million and repaid the associated mortgage
of $40.0 million at H&R's
ownership interest. As at December 31,
2018, H&R's Alberta
Office portfolio consists of four single tenant properties,
all of which are fully leased to investment grade tenants, with a
weighted average remaining lease term to maturity of 17.4
years.
Primaris
Property operating income and Same-Asset property operating
income (cash basis) from the Primaris segment grew by 0.9% and
0.8%, respectively, for the year ended December 31, 2018 compared to the respective 2017
period, despite the decline in occupancy from 92.6% at December 31, 2017 to 84.9% at December 31, 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 continue to
be classified as investment properties. During the three
months and year ended December 31,
2018, H&R capitalized $0.5
million and $1.1 million,
respectively, of property operating costs and $1.0 million and $2.8
million, respectively, of finance costs attributable to the
former Target and Sears space. Management expects positive
rental growth from Primaris as the lease-up of the former Target
and Sears space is expected to generate approximately $1.0 million, $5.4
million and $3.0 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
Property operating income and Same-Asset property operating
income (cash basis) from Lantower Residential, now H&R's third
largest segment, grew by 60.2% and 4.4%, respectively, for the year
ended December 31, 2018 compared to
the respective 2017 period. The growth in property operating
income was primarily due to 11 property acquisitions during 2017
and 2018. Growth in Same-Asset property operating income (cash
basis) was primarily due to rental growth.
During 2018, Lantower Residential acquired five properties
totalling 1,638 residential units for an aggregate purchase price
of U.S. $340.6 million. As at
December 31, 2018, Lantower
Residential has a portfolio of 22 properties comprising 7,271
residential units. Eleven properties are in Texas, seven are in Florida and four are in North Carolina.
In December 2018, Apple Inc.
announced it will be building a new 133-acre campus in Austin, TX to accommodate an additional 5,000
jobs with the capacity to grow to 15,000 jobs. This campus is
located within a six-mile radius of Lantower Residential's four
properties in Austin, TX.
As at December 31, 2018, Lantower
Residential had four properties in lease-up with a weighted average
occupancy rate of 67.5%. During the three months and year
ended December 31, 2018, these
properties contributed U.S. $1.2
million and U.S. $2.0 million,
respectively, to property operating income. All four
properties are targeted for stabilization by Q4 2019 and are
expected to contribute an additional U.S. $7.8 million to property operating income in
2019.
Industrial
During 2018, H&R acquired ownership interests in two
Canadian industrial properties for a total purchase price of
$17.3 million at H&R's ownership
interest and H&R sold interests in five Canadian industrial
properties for total proceeds of $51.3
million at H&R's ownership interest.
Debt Highlights and Liquidity
As at December 31, 2018, debt to
total assets was 44.6% unchanged from December 31, 2017.
As at December 31, 2018, H&R
had $768.2 million of unused
borrowing capacity available under its lines of credit
and $3.4 billion of unencumbered assets.
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 only holding H&R Units, thereby returning H&R to a
single trust in line with industry peers.
Normal Course Issuer Bid ("NCIB")
With an increased focus on recycling capital into investments
with higher risk-adjusted returns and the availability of excess
capital generated from asset dispositions, H&R has taken
advantage of the opportunity to acquire Units through its NCIB at
what management believes to be significantly discounted trading
prices. During the year ended December 31,
2018, the Trusts purchased and cancelled 6,609,420 Units at
a weighted average price of $20.62
per Unit, for a total amount of $136.3
million.
Taxation of Distributions
33.3% of 2018 distributions (including those from Finance Trust)
will be treated as a return of capital and 1.7% will be designated
as taxable capital gains. For taxable Canadian unitholders, 35.0%
(2017 – 39.7%) of the distributions will not be subject to current
income taxes.
Monthly Distribution Declared
H&R previously declared a distribution for the month of
February and today declared a distribution for the month of March
scheduled as follows:
|
Distribution/Unit
|
Annualized
|
Record
date
|
Distribution
date
|
March 2019
|
$0.115
|
$1.380
|
March 15,
2019
|
March 29,
2019
|
Conference Call and Webcast
Management will host a conference call to discuss the financial
results for the REIT on Thursday, February
14, 2019 at 4:30 p.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 4382309
followed by the pound key. The telephone replay will be
available until Thursday, February 21,
2019 at midnight.
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.
The investor presentation is available on H&R's website at
www.hr-reit.com/Investor-Relations/Investorinformation.aspx.
About H&R REIT
H&R REIT is one of Canada's
largest real estate investment trusts with total assets of
approximately $14.7 billion at
December 31, 2018. H&R REIT has
ownership interests in a North American portfolio of high quality
office, retail, industrial and residential properties comprising
over 42 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 heading "Summary of
Significant Q4 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 and FFO growth in 2019 and beyond,
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 2019-2020 resulting from
Jackson Park, the total cost of
Esterra Park and Shoreline Gateway, the expected total cost and
stabilized property operating income from River Landing, 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 February 14, 2019 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 as at and for the year ended December 31, 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