TORONTO, Aug. 13, 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 and six months
ended June 30, 2019.
Q2 2019 highlights included the sale of The Atrium, the
advancement of several development projects, a reduction in
leverage and significant leasing progress. Notably, committed
occupancy in the retail segment rose from 92.0% as at March 31, 2019 to 93.2% as at June 30, 2019, and in the residential segment,
occupancy rose from 88.3% as at March 31,
2019 to 92.5% as at June 30,
2019. H&R also acquired a 314-unit residential rental
property in Orlando, Florida for
U.S. $74.7 million.
As H&R has executed on its capital reallocation strategy,
financial results have reflected the impact of $1.7 billion of asset sales over the past 18
months. Q2 2019 Funds From Operations ("FFO") was
approximately $8.8 million lower than
Q1 2019 primarily due to lower lease termination income of
$0.2 million in Q2 2019 compared to
$6.0 million in Q1 2019. In Q3
2019, management expects FFO to be in line with Q2
levels. Management expects new lease commencements in the
retail and residential segments and the full impact of recent
property acquisitions to contribute to positive growth in FFO
commencing in Q4 2019.
FINANCIAL HIGHLIGHTS
|
3 months ended June
30
|
6 months ended June
30
|
|
2019
|
2018
|
%
Change
|
2019
|
2018
|
%
Change
|
Rentals from
investment properties (millions)
|
$287.0
|
$294.3
|
(2.5%)
|
$585.7
|
$592.9
|
(1.2%)
|
Property operating
income (millions)
|
$187.1
|
$201.1
|
(6.9%)
|
$341.0
|
$355.5
|
(4.1%)
|
Same-asset property
operating income (cash basis) -
Canada(1) (millions)
|
$123.6
|
$125.9
|
(1.8%)
|
$254.3
|
$251.6
|
1.1%
|
Same-asset property
operating income (cash basis) -
U.S. in U.S. dollars(1) (millions)
|
$41.7
|
$41.2
|
1.2%
|
$84.2
|
$82.3
|
2.3%
|
Same-asset property
operating income (cash basis)
total in Canadian dollars(1) (millions)
|
$179.0
|
$179.4
|
(0.2%)
|
$366.3
|
$357.0
|
2.6%
|
Net income before
income taxes (millions)
|
$130.4
|
$103.5
|
26.0%
|
$130.8
|
$168.0
|
(22.1%)
|
Net income
(millions)
|
$109.6
|
$108.2
|
1.3%
|
$107.6
|
$171.3
|
(37.2%)
|
FFO
(millions)(1)
|
$128.2
|
$131.9
|
(2.9%)
|
$265.1
|
$267.6
|
(0.9%)
|
FFO per Unit
(basic)(1)
|
$0.43
|
$0.44
|
(2.3%)
|
$0.88
|
$0.88
|
-%
|
Distributions per
Unit
|
$0.35
|
$0.35
|
-%
|
$0.69
|
$0.69
|
-%
|
Payout ratio per Unit
(as a % of FFO)(1)
|
81.2%
|
79.1%
|
2.1%
|
78.4%
|
78.4%
|
-%
|
Net Asset Value
("NAV") per Unit as at June 30(1)
|
$25.81
|
$25.83
|
(0.1%)
|
$25.81
|
$25.83
|
(0.1%)
|
|
|
(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 six months ended June 30, 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.
|
Net income before income taxes decreased by $37.2 million for the six months ended
June 30, 2019 compared to the
respective 2018 period, primarily due to fair value adjustments on
financial instruments, higher trust expenses, a decrease in
property operating income resulting from the net property
dispositions and a gain on foreign exchange in 2018, partially
offset by fair value adjustments on real estate assets and the gain
(loss) on sale of real estate assets. Included in trust expenses
for the six months ended June 30,
2019 is a fair value adjustment to unit-based compensation
of $15.3 million, which increased
trust expenses due to H&R's Unit price increasing from
$20.65 as at December 31, 2018 to $22.84 as at June 30,
2019.
SUMMARY OF SIGNIFICANT Q2 2019 ACTIVITY
Developments
H&R's active development pipeline in the United States is currently comprised of
five residential developments and one mixed-used development. As at
June 30, 2019, the total development
budget was U.S. $607.2 million, of
which U.S. $329.5 million was
included in properties under development and U.S. $277.7 million of budgeted costs remaining to
complete, at the REIT's proportionate share.
The largest current development project is River Landing, an urban in-fill mixed use
development site in Miami, FL,
which is adjacent to the Health District with approximately 1,000
feet of waterfront on the Miami River, two miles from downtown
Miami. River Landing includes approximately 346,000
square feet of retail space, approximately 136,000 square feet of
office space and 528 residential rental units. Construction is
underway with occupancy scheduled to commence in Q2 2020. The total
cost of the project remains on budget at U.S. $424.8 million and as at June 30, 2019, approximately U.S. $276.9 million had been invested in the
development of which U.S. $37.8
million was spent in Q2 2019.
In June 2019, construction
commenced on the first phase of a 2.7 million square foot
industrial development in Caledon,
ON. The first phase consists of three industrial buildings
which will total approximately 526,000 square feet upon completion.
The total budget for these three buildings is $73.6 million.
In June 2019, H&R acquired a
100% leasehold interest to develop up to 670 residential rental
units in Orlando, FL, known as
"Sunrise". Sunrise is located within the heart of the I-4 Tourism
Corridor in Orlando and is a
seven-minute drive from Walt Disney
World. Construction on Phase 1 is expected to commence in Q4
2019 with completion expected by Q2 2021 and will consist of 321
residential rental units. The total budget for Phase 1 is expected
to be U.S. $57.9 million with an
expected going-in yield on cost of 6.1%.
Subsequent to June 30, 2019,
H&R submitted a combined application for rezoning and Official
Plan Amendment for the redevelopment of the surface parking lots,
drive‐through restaurants and strip plaza that currently occupy the
north end of Dufferin Mall in Toronto,
ON to create "Dufferin Grove Village." The proposed
project would replace surface parking with four residential
buildings over two blocks. Divided by a new road, the blocks would
form the backdrop for Dufferin
Commons, a new public park. The west block would support
residential buildings of 35 and 39 storeys, and the east block
would support residential buildings of 14 and 23 storeys. Together,
they will introduce approximately 1,135 residential units to the
site.
Office
In 2011, H&R purchased The Atrium, a 1.1 million square foot
office and retail complex in Toronto,
ON for $344.8
million. Since the acquisition, H&R 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 $600.0
million and in June 2019,
H&R sold The Atrium for $640.0
million. H&R recorded a gain on sale of approximately
$34.4 million, after deducting
closing costs. The sale price equates to a capitalization rate
of 4.56%. The property was unencumbered and H&R provided
the purchaser with a vendor take-back mortgage of $256.0 million, bearing interest at an annual
rate of 4.56% and maturing on January 2,
2020. The proceeds received have been used to repay debt
including the repayment on maturity of H&R's Series M senior
debentures on July 23, 2019.
Retail
Redevelopment of the last former Target store is substantially
complete and redevelopment of the former Sears stores is
underway. During the three and six months ended June 30, 2019, $36.1
million and $56.8 million,
respectively, was spent on redevelopment at the Primaris
properties. Committed occupancy for the retail segment was
93.2% as compared to actual occupancy of 88.7% as at June 30, 2019. As each store is part of an
existing property, they continue to be classified as investment
properties. During the three and six months ended June 30, 2019, H&R capitalized $0.3 million and $0.8
million, respectively, of property operating costs and
$1.3 million and $2.4 million, respectively, 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.
In April 2019, H&R sold a
40,480 square foot multi-tenanted retail property in Calgary, AB for gross proceeds of $10.8 million.
Industrial
In June 2019, H&R sold its
50.5% ownership interests in two U.S. industrial properties
(previously held through an equity accounted investment) for
$26.9 million and repaid the two
respective mortgages aggregating $18.4
million upon closing. In addition, H&R purchased
the remaining 49.5% interest in 510. E. Courtland St., Morton, IL for $2.9
million. As H&R owns 100% of this property, it is
now being consolidated in the REIT's financial statements.
As at June 30, 2019, H&R had
classified a 363,983 square foot industrial property in
Boucherville, QC as held for sale
for $17.1 million at H&R's
ownership interest.
Residential
In June 2019, H&R acquired 314
residential rental units at 3512 Grande Reserve Way in Orlando, FL ("Grande Flats") at a purchase
price, before transaction costs, of U.S. $74.7 million which equates to U.S. $238,000 per residential rental unit. The
property was built in 2018 and occupancy was 94.3% as at
June 30, 2019.
As at June 30, 2019, the
residential portfolio consisted of 24 properties comprising 8,521
residential rental units at H&R's ownership interest. The
portfolio comprises 11 properties in Texas, eight in Florida, four in North Carolina and one in Long Island City, NY.
During the six months ended June 30,
2019, there were five properties (including Jackson Park) in lease-up with a weighted
average occupancy rate of 86.6%. As at June 30, 2019, one property had reached
stabilization and the remaining four properties are targeted for
stabilization in Q4 2019. All five properties are expected to
contribute U.S. $19.5 million to
property operating income (excluding non-cash items) for the
remainder of 2019 compared to U.S. $13.5
million contributed for the six months ended June 30, 2019 and to U.S $4.0 million for the year ended December 31, 2018.
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 June 30,
2019, 1,770 leases were entered into and 1,634 units were
occupied. Average occupancy was 83.8% for Q2 2019 and
occupancy as at June 30, 2019 was
87.3%. Stabilized occupancy is expected to be achieved during
Q3 2019.
Jackson Park's yield on budgeted
cost is expected to be 6.4%, an increase from the original proforma
of 6.1%. The project is expected to be completed for a cost of
approximately U.S. $580 million (at
H&R's ownership interest). As part of the New York City
Brownfield Cleanup Program, H&R expects to receive
approximately U.S. $50.0 million
which will reduce the net budgeted cost to $530 million. In addition, H&R has
adjusted its forecast for the remainder of 2019 and 2020 due to
New York State legislation passed
in June 2019, the "Housing Stability
and Tenant Protection Act of 2019" regarding affordable housing,
rent controls and tenant protection. The revised stabilized
property operating income of U.S. $34.0
million equates to a 6.4% yield on budgeted cost.
The following table presents net income and FFO for Jackson Park for the six months ended
June 30, 2019 as well as the revised
projections through 2020:
(H&R's
ownership interest)
|
Q1
2019
(Actual)
|
Q2
2019
(Actual)
|
Q3-Q4
2019
(Projected)
|
Annual
2019
(Projected)
|
Annual
2020
(Projected)
|
(in thousands of
U.S. dollars)
|
|
|
|
|
|
Property operating
income
|
$4,464
|
$6,519
|
$14,148
|
$25,131
|
$34,000
|
Bank interest and
charges(1)
|
(2,566)
|
(2,980)
|
(6,800)
|
(12,346)
|
(13,600)
|
Effective interest
rate accretion
|
(542)
|
(542)
|
(1,083)
|
(2,167)
|
-
|
Fair value adjustment
on financial instruments and real estate assets
|
(1,118)
|
(2,600)
|
-
|
(3,718)
|
-
|
Net
income
|
238
|
397
|
6,265
|
6,900
|
20,400
|
Fair value adjustment
on financial instruments and real estate assets
|
1,118
|
2,600
|
-
|
3,718
|
-
|
Notional interest
capitalization
|
283
|
72
|
-
|
355
|
-
|
FFO
|
$1,639
|
$3,069
|
$6,265
|
$10,973
|
$20,400
|
|
|
(1)
|
Estimates are based
on existing financing.
|
Debt Highlights
As at June 30, 2019, debt to total
assets was 44.0% compared to 44.6% as at December 31, 2018. The weighted average
interest rate of H&R's debt as at June
30, 2019 was 3.9% with an average term to maturity of 4.1
years. Subsequent to June 30, 2019,
H&R repaid on maturity its $150.0
million Series M senior debentures primarily from cash on
hand, reducing pro-forma debt to total assets to 43.5%.
Lines of Credit:
As at June 30,
2019, H&R had $826.2
million of unused borrowing capacity available under its
lines of credit.
Monthly Distribution Declared
H&R previously declared a distribution for the month of
August and today declared a distribution for the month of September
scheduled as follows:
|
Distribution/Unit
|
Annualized
|
Record date
|
Distribution
date
|
September
2019
|
$0.115
|
$1.380
|
September 16,
2019
|
September 30,
2019
|
Conference Call and Webcast
Management will host a conference call to discuss the financial
results for the REIT on Wednesday, August
14, 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 2077583
followed by the pound key. The telephone replay will be
available until Wednesday, August 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 $14.4 billion at
June 30, 2019. 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, 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 Q2 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,
including redevelopment of existing properties and building of new
properties, management's expectations regarding FFO in Q3 2019, the
impact of lease commencements and recent property acquisitions on
FFO growth, the lease-up and timing for stabilized occupancy of
Jackson Park, the expected Brownfield tax credit to be received from
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 timing of the
construction on the REIT's industrial lands, the expected yield on
cost from the REIT's development properties, the timing of
occupancy, the expected total cost and stabilized property
operating income from River Landing,
the impact of the replacement of tenants, expected capital and
tenant expenditures, 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,
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. 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 August 13, 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 and six months ended June 30, 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