TORONTO, May 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 three months ended
March 31, 2019.
FINANCIAL HIGHLIGHTS
|
3 months ended March
31
|
|
2019
|
2018
|
% Change
|
Rentals from
investment properties (millions)
|
$298.7
|
$298.6
|
0.0%
|
Property operating
income (millions)
|
$153.8
|
$154.5
|
-0.4%
|
Same-Asset property
operating income (cash basis) - Canada(1)
(millions)
|
$138.1
|
$132.4
|
+4.3%
|
Same-Asset property
operating income (cash basis) - U.S. in U.S. dollars(1)
(millions)
|
$42.8
|
$41.7
|
+2.8%
|
Same-Asset property
operating income (cash basis) total in Canadian
dollars(1) (millions)
|
$195.1
|
$184.9
|
+5.5%
|
Net income before
income taxes (millions)
|
$0.4
|
$64.5
|
-99.4%
|
Net income (loss)
(millions)
|
($2.0)
|
$63.1
|
-103.1%
|
FFO
(millions)(1)
|
$137.0
|
$135.7
|
+0.9%
|
FFO per Unit
(basic)(1)
|
$0.455
|
$0.444
|
+2.5%
|
Distributions per
Unit
|
$0.345
|
$0.345
|
0.0%
|
Payout ratio per Unit
(as a % of FFO)(1)
|
75.8%
|
77.7%
|
-1.9%
|
NAV per Unit as at
March 31(1)
|
$25.89
|
$25.68
|
+0.8%
|
|
|
(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 months ended March 31, 2019 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.
|
H&R has been actively pursuing its capital reallocation
program through property dispositions to fund value-creating
developments, expand its residential portfolio in the United States and strengthen its balance
sheet. Between January 1, 2018
and March 31, 2019, H&R sold
approximately $1.1 billion of assets
while acquiring approximately $460
million of properties. Notwithstanding these
transactions, rentals from investment properties and property
operating income in Q1 2019 were in line with Q1 2018. In
addition, Same-Asset property operating income (cash basis) in each
of Canada and the U.S. has increased over these respective periods,
with a total increase of 5.5%.
Net income before income taxes decreased by $64.0 million for the three months ended
March 31, 2019 compared to the
respective 2018 period, 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 $4.3
million from $89.2 million in
Q1 2018 to $93.5 million in Q1
2019. Included in net income and FFO for the three months
ended March 31, 2019 were lease
termination fees received of $6.0
million compared to $0.8
million received in Q1 2018.
SUMMARY OF SIGNIFICANT Q1 2019
ACTIVITY
Developments
Management believes that H&R's development pipeline is an
important driver of growth in NAV and FFO per Unit. H&R
has a significant platform with scale, financial strength and a
high quality property portfolio which enables the REIT to pursue
large format development opportunities not available to smaller
entities. H&R continues to make progress in advancing its
value-creating development program, with a significant pipeline of
projects.
Jackson Park, the 1,871
luxury residential rental unit development in Long Island City, NY in which H&R has a
50% ownership interest, reached substantial completion and was
transferred from properties under development to investment
properties in Q1 2019. As at March 31,
2019, 1,492 leases were entered into and 1,406 units were
occupied. Average occupancy was 72.1% for Q1 2019 and
occupancy as at March 31, 2019 was
75.1%. 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, property operating income
for the first full year, 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.
The following table presents net income and FFO for Jackson Park for the three months ended
March 31, 2019 as well as projections
through 2020:
|
|
|
|
|
(H&R's
ownership interest)
|
Q1
2019
(Actual)
|
Q2-Q4
2019
(Projected)
|
Annual
2019
(Projected)
|
Annual
2020
(Projected)
|
(in thousands of
U.S. dollars)
|
|
|
|
|
Property operating
income
|
$4,464
|
$22,540
|
$27,004
|
$35,921
|
Bank interest and
charges(1)
|
(2,566)
|
($10,625)
|
(13,191)
|
(13,600)
|
Effective interest
rate accretion
|
(542)
|
($1,625)
|
(2,167)
|
|
Fair value adjustment
on financial instruments
|
(1,118)
|
-
|
(1,118)
|
-
|
Net
income
|
238
|
10,290
|
10,528
|
22,321
|
Fair value adjustment
on financial instruments
|
1,118
|
-
|
1,118
|
-
|
Notional interest
capitalization
|
283
|
89
|
372
|
-
|
FFO
|
$1,639
|
$10,379
|
$12,018
|
$22,321
|
|
|
(1)
|
Estimates are based
on existing financing.
|
The 2019 projections from Jackson
Park have been updated to reflect a change to effective
interest rate accretion. The upfront financing costs previously
paid in connection with the construction facility were originally
budgeted to be capitalized as part of the development costs.
Since the property has now been transferred from properties under
development to investment properties, the unamortized costs will be
expensed over the expected remaining term of the associated credit
facility.
For a complete list of H&R's current development projects,
see page 12 of the MD&A.
Office
H&R extended its leases with Bell
Canada at six office properties in Toronto, Montreal and Ottawa totaling 2,415,515 square feet for an
additional 10 years with effect from January
1, 2019. As at March 31,
2019 the weighted average lease term to maturity for these
leases is 16.3 years with annual contractual rental increases of
1.5% per annum. The cash rent payable in 2019 will decrease by
$7.3 million compared to 2018 while
the straight lining of the contractual rents will add $10.1 million resulting in a net $0.01 positive impact to 2019 annualized FFO per
Unit. H&R will be responsible for certain capital
expenditures at these properties. These lease extensions provide
greater certainty and commitment to these properties. The new
rental arrangement has been reset at current market levels, and the
built-in contractual rental growth will contribute meaningfully to
H&R's organic growth for the next 16 years.
H&R extended two Calgary
office leases with AltaLink, L.P. to 20-year terms with effect from
March 1, 2019. Although the
cash rent did not change as a result of the extended leases, the
leases provide for future contractual rental escalations every
three years. H&R's office portfolio in Calgary has a 100% occupancy rate with an
average lease term to maturity of 17.7 years.
Property operating income and Same-Asset property operating
income (cash basis) from the Office segment increased by 7.5%, and
7.2%, respectively, for the three months ended March 31, 2019 compared to the respective 2018
period, primarily due to lease termination fees of $6.0 million received in Q1 2019 compared to
$0.8 million in Q1 2018 as well as an
increase in occupancy, partially offset by a decrease in current
rent from Bell Canada as part of the
10-year lease extensions described above.
Retail
Property operating income from the Retail segment decreased by
7.7% for the three months ended March 31,
2019 compared to the respective 2018 period primarily due to
the sale of 63 U.S. retail properties in June 2018. Same-Asset property operating income
(cash basis) increased by 3.5% for the three months ended
March 31, 2019 compared to the
respective 2018 period primarily due to an increase in occupancy
and contractual rental escalations from ECHO. Committed
occupancy for the Retail segment was 92.0% as compared to actual
occupancy of 88.8% as at March 31,
2019.
Redevelopment of the former Sears stores is underway. As
each store is part of an existing property, they continue to be
classified as investment properties. During the three months
ended March 31, 2019, H&R
capitalized $0.5 million of property
operating costs and $1.1 million of
finance costs attributable to the former Target and Sears
space. Management expects positive rental growth from the
Retail segment as the lease-up of the former Target and Sears space
is expected to generate approximately $1.0
million, $4.6 million and
$3.8 million of additional annual
base rent in 2019, 2020 and 2021, respectively.
Industrial
Property operating income and Same-Asset property operating
income (cash basis) from the Industrial segment increased by 3.5%
and 3.3%, respectively, for the three months ended March 31, 2019 compared to the respective 2018
period, primarily due to higher rents from the Canadian
portfolio.
Residential
Property operating income from the Residential segment increased
by $6.3 million for the three months
ended March 31, 2019 compared to the
respective 2018 period primarily due to properties acquired during
2018 and the lease-up of Jackson Park. Same-Asset property
operating income (cash basis) from the Residential segment in U.S.
dollars increased 0.1%, for the three months ended March 31, 2019 compared to the respective 2018
period. This growth has been temporarily muted due to the
costs associated with a new strategic incentive plan to secure
tenants for longer than 18 months.
As at March 31, 2019, the
Residential portfolio consisted of 23 properties comprising 8,207
residential rental units at H&R's ownership interest.
Eleven properties are in Texas,
seven are in Florida, four are in
North Carolina and one is in
Long Island City, NY.
As at March 31, 2019, there were
five properties in lease-up with a weighted average occupancy rate
of 77.6%. During the three months ended March 31, 2019, these properties contributed U.S.
$6.0 million to property operating
income. All five properties are targeted for stabilization by
Q4 2019 and are expected to contribute U.S. $36.5 million to property operating income
throughout 2019 compared to U.S. $4.0
million contributed in 2018.
Debt Highlights
As at March 31, 2019, debt to
total assets was 44.7% compared to 44.6% as at December 31, 2018. The weighted average
interest rate of H&R's debt as at March
31, 2019 was 3.8% with an average term to maturity of 4.3
years.
Debentures:
In March 2019, H&R repaid all of
its Series K senior debentures upon maturity for a cash payment of
$200.0 million.
Mortgages:
During Q1 2019, H&R secured three new
mortgages totalling $60.6 million at
a weighted average interest rate of 3.4% for 10-year terms and
repaid two mortgages totaling $75.4
million at a weighted average interest rate of 5.0%.
Unsecured Term Loan:
In March
2019, H&R borrowed $250.0
million by way of a new unsecured term loan maturing in
March 2024. Through an interest rate swap, H&R fixed the
interest rate at 3.3% per annum. This is H&R's third
unsecured term loan which demonstrates H&R's creditworthiness
and access to multiple sources of capital.
Lines of Credit:
As at March
31, 2019, H&R had $775.3
million of unused borrowing capacity available under its
lines of credit.
The Atrium
Subsequent to quarter end, H&R announced that it had entered
into an agreement to sell The Atrium for $640 million, subject to customary closing
conditions. The purchase price equates to a capitalization
rate of 4.56%. Closing is expected to occur on or about
June 6, 2019.
H&R purchased The Atrium for $344.8
million in 2011 and since the acquisition, has increased
annual net operating income by $6.5
million, creating substantial value for unitholders.
The Atrium's IFRS value as at March 31,
2019 was $600 million.
Management expects to record a gain of approximately $40 million, before closing costs, relative to
its IFRS value, and a sale price approximately $295 million higher than its original purchase
price.
The Atrium is currently unencumbered. H&R will provide the
purchaser with a vendor take-back (VTB) mortgage of $256 million, bearing interest at an annual rate
of 4.56% and maturing on January 2,
2020. Assuming the proceeds from the sale were used to repay
debt, H&R's 2019 FFO dilution is expected to be $0.01 per Unit and its debt to total asset ratio
would improve to 42.1% from 44.6% at December 31, 2018.
H&R's president and CEO Thomas
Hofstedter said: "Given the strong investor demand for
Toronto office properties and the
substantial capital this asset will require over the next several
years for redevelopment and intensification, we chose to take
advantage of strong market pricing, and reallocate capital to both
strengthen our balance sheet and to fund our value-creating
developments."
Monthly Distribution Declared
H&R previously declared a distribution for the month of May
and today declared a distribution for the month of June scheduled
as follows:
|
Distribution/Unit
|
Annualized
|
Record
date
|
Distribution
date
|
June 2019
|
$0.115
|
$1.380
|
June 14,
2019
|
June 28,
2019
|
Conference Call and Webcast
Management will host a conference call to discuss the financial
results for the REIT on Wednesday, May 15,
2019 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 4795727
followed by the pound key. The telephone replay will be
available until Wednesday, May 22,
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 $14.5 billion at March 31,
2019. H&R REIT has ownership interests in a North
American portfolio of high quality office, retail, industrial and
residential properties comprising over 43 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, 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 Q1 2019
Activity" including with respect to H&R's future plans,
including significant development projects, H&R's expectation
with respect to the activities of its development properties and
surrounding properties, including redevelopment of existing
properties and building of new properties, the lease-up and timing
for stabilized occupancy 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 impact of the replacement of tenants, the expected
annual base rent from former Sears and Target space, the expected
property operating income generated by the Residential segment's
five properties in lease-up, the expected closing date of the sale
of The Atrium, the use of proceeds from the sale of The Atrium, the
expected FFO dilution per Unit and H&R's pro forma debt to
total asset ratio as a result of the sale of The Atrium and
management's expectations regarding future distributions.
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 below 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 are
not 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 and climate change risk; co-ownership interest in
properties; joint arrangement and investment risks; unit price
risk; availability of cash for distributions; ability to access
capital markets; dilution; unitholder liability; redemption right
risk; risks relating to debentures, the inability of the REIT to
purchase senior debentures on a change of control; tax risk, U.S.
tax reform 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. All forward-looking statements in this news
release are qualified by these cautionary statements. These
forward-looking statements are made as of May 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 for the three months ended March 31, 2019, 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