TORONTO, Nov. 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 nine months
ended September 30, 2019.
During 2019, H&R has continued to actively reallocate
capital through net property dispositions to fund value-creating
developments, expand its residential rental platform and strengthen
its balance sheet. The REIT has completed approximately
$1.8 billion of asset sales over the
past 21 months, substantially repositioning its portfolio,
enhancing its internal growth profile and reducing leverage.
FINANCIAL HIGHLIGHTS
|
3 months ended
September 30
|
9 months ended
September 30
|
|
2019
|
2018
|
Change
|
2019
|
2018
|
Change
|
Rentals from
investment properties (millions)
|
$281.6
|
$286.2
|
(1.6%)
|
$867.2
|
$879.1
|
(1.4%)
|
Property operating
income (millions)
|
$185.2
|
$186.4
|
(0.6%)
|
$526.2
|
$541.9
|
(2.9%)
|
Same-Asset property
operating income (cash basis) -
Canada(1) (millions)
|
$121.4
|
$126.9
|
(4.3%)
|
$375.0
|
$377.8
|
(0.7%)
|
Same-Asset property
operating income (cash basis) -
U.S. in U.S. dollars(1) (millions)
|
$40.9
|
$40.1
|
2.1%
|
$122.9
|
$120.4
|
2.0%
|
Same-Asset property
operating income (cash basis)
total in Canadian dollars(1) (millions)
|
$175.8
|
$179.4
|
(2.0%)
|
$538.5
|
$533.2
|
1.0%
|
Net income before
income taxes (millions)
|
$70.9
|
$111.7
|
(36.5%)
|
$201.8
|
$279.7
|
(27.9%)
|
Net income
(millions)
|
$69.3
|
$105.5
|
(34.3%)
|
$176.9
|
$276.8
|
(36.1%)
|
Funds from operations
("FFO") (millions)(1)
|
$130.3
|
$127.6
|
2.1%
|
$395.4
|
$395.2
|
0.1%
|
FFO per Unit
(basic)(1)
|
$0.43
|
$0.42
|
2.4%
|
$1.31
|
$1.30
|
0.8%
|
Distributions per
Unit
|
$0.35
|
$0.35
|
-%
|
$1.04
|
$1.04
|
-%
|
Payout ratio per Unit
(as a % of FFO)(1)
|
79.9%
|
81.4%
|
(1.5%)
|
78.9%
|
79.4%
|
(0.5%)
|
Net Asset Value
("NAV") per Unit as at September 30(1)
|
$25.81
|
$25.73
|
0.3%
|
$25.81
|
$25.73
|
0.3%
|
|
|
(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, 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 as
well as the explanations for the changes
|
FFO per unit has increased by 2.4% for the three months ended
September 30, 2019 and 0.8% for the
nine months ended September 30, 2019
over the respective 2018 periods. Leverage ratios have
decreased due to property dispositions of $889.9 million far exceeding the $184.6 million of property acquisitions during
the nine months ended September 30,
2019. Net income has decreased over the same periods mainly
due to non-cash fair value adjustments. The decrease in
Same-Asset property operating income (cash basis) is primarily due
to temporary vacancies in the portfolio. H&R expects all
of its segments to see occupancy increases as described below.
SUMMARY OF SIGNIFICANT Q3 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 September 30, 2019, the total
development budget was U.S. $607.2
million, of which U.S. $386.3
million was included in properties under development with
U.S. $220.9 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 September 30, 2019 approximately U.S.
$317.6 million had been invested in
the development, including U.S. $40.7
million in Q3 2019.
Proposed Developments
In July 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 two residential buildings of 35
and 39 storeys, and the east block would support two residential
buildings of 14 and 23 storeys. Combined, they would introduce
approximately 1,135 residential units to the site.
In August 2019, H&R submitted
a rezoning application for the redevelopment of 145 Wellington St.
W., in Toronto, ON which is
currently a 13-storey office building. The proposed project would
redevelop the subject site with a full office replacement in a new
modern 13-storey podium, topped with a 52-storey residential tower,
for an overall building height of 65 storeys. A total of 157,581
square feet of office space and 1,722 square feet of grade-related
retail is proposed, along with 476 new residential units comprising
384,971 square feet of residential space. Of these
residences, approximately 57% will be larger, family-oriented two
or three-bedroom units.
In August 2019, H&R acquired a
50% ownership interest in excess lands, held for future
re-development, at 3791 Kingsway in Burnaby, B.C for $6.7
million. This property is located adjacent to the REIT's
3777 Kingsway office tower in which it has a 50% ownership
interest.
In September 2019, H&R
acquired a 100% interest in approximately 8.4 acres of land for the
development of 201 residential rental units in Tampa, FL for U.S. $6.0
million.
Office
H&R has made significant leasing progress in its office
portfolio having achieved a committed occupancy rate of 99.5% as at
September 30, 2019.
Retail
During the three and nine months ended September 30, 2019, $39.2
million and $96.0 million,
respectively, was invested in redevelopment at Primaris enclosed
shopping centre properties primarily relating to redevelopment of
the former Sears stores and one remaining Target store. As
each store is part of an existing property, they continue to be
classified as investment properties. During the three and
nine months ended September 30, 2019,
H&R capitalized $0.3 million and
$1.1 million, respectively, of
property operating costs and $1.6
million and $4.0 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 $4.6 million and $3.8
million of additional annual base rent in 2020 and 2021,
respectively. Committed occupancy for the Retail segment was
93.8% as compared to actual occupancy of 89.4% as at September 30, 2019.
Industrial
In September 2019, H&R sold
its 50% ownership interest in a 139,694 square foot multi-tenanted
industrial property in Kanata, ON
for $24.3 million, at H&R's
ownership interest. As at September
30, 2019, a 363,983 square foot industrial property in
Boucherville, QC was classified as
held for sale for $17.1 million at
H&R's ownership interest, pursuant to the exercise of a tenant
option to purchase at a pre-determined price.
Management expects industrial occupancy to increase from 96.5%
as at September 30, 2019 to 97.2% by
December 31, 2019 and committed
occupancy to be 98.9% by December 31,
2019.
H&R owns approximately 144 acres of land which is being held
for development for up to 2.7 million square feet of industrial
space. In June 2019, construction
commenced on the first three buildings totalling approximately
526,000 square feet, which is expected to be completed in Q2 2020.
The total budget is approximately $73.6
million with an expected yield on cost of 5.8%. As at
September 30, 2019, H&R had
invested $93.8 million in these
lands, of which $23.5 million relates
to the first three buildings.
Residential
In July 2019, H&R acquired 322
residential rental units at 2725 Reseda Place in Charlotte, NC ("Garrison Park") at a purchase
price, before transaction costs, of U.S. $62.8 million which equates to U.S. $195,000 per residential rental unit. The
property was constructed in 2019 and occupancy was 47.2% upon
acquisition. The property is currently in lease-up and is expected
to be fully stabilized by Q3 2020.
In September 2019, H&R sold
12101 Fountainbrook Blvd., in Orlando,
FL ("Mirabella Waterford Lakes") for U.S. $77.0 million, which was acquired in April 2015 for U.S. $53.3
million.
As at September 30, 2019, the
residential portfolio consisted of 24 properties comprising 8,443
residential rental units at H&R's ownership interest. The
portfolio comprises 11 properties in Texas, seven in Florida, five in North Carolina and one in Long Island City, NY.
During the nine months ended September
30, 2019, there were five properties (excluding Jackson Park) in lease-up with a weighted
average occupancy rate of 81.4%. As at September 30, 2019, one property has reached
stabilization, three properties are targeted for stabilization in
Q1 2020 and Garrison Park is
targeted for stabilization in Q3 2020. For the three and nine
months ended September 30, 2019, the
properties in lease-up contributed U.S. $2.5
million and U.S. $5.9 million,
respectively, to property operating income (excluding non-cash
items) and they are expected to contribute U.S. $2.8 million for Q4 2019 and U.S. $13.5 million in 2020.
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. Average occupancy was 91.0% for Q3
2019 and occupancy as at September 30,
2019 was 94.3%. Stabilized occupancy has now been
achieved.
The following table presents net income and FFO for Jackson Park for the nine months ended
September 30, 2019 as well as the
revised projections through 2020:
(H&R's
ownership interest)
|
Q1
2019
(Actual)
|
Q2
2019
(Actual)
|
Q3
2019
(Actual)
|
YTD
2019
(Actual)
|
Annual
2019
(Projected)(1)
|
Annual
2020
(Projected)(1)
|
(in thousands of
U.S. dollars)
|
|
|
|
|
|
|
Property operating
income
|
$4,464
|
$6,519
|
$7,075
|
$18,058
|
$25,131
|
$34,000
|
Bank interest and
charges
|
(2,566)
|
(2,980)
|
(3,206)
|
(8,752)
|
(12,871)
|
(16,476)
|
Effective interest
rate accretion
|
(542)
|
(542)
|
(542)
|
(1,626)
|
(2,167)
|
(1,589)
|
Fair value adjustment
on financial instruments and
real estate assets
|
(1,118)
|
(2,600)
|
(19,105)
|
(22,823)
|
(22,823)
|
-
|
Net income
(loss)
|
238
|
397
|
(15,778)
|
(15,143)
|
(12,730)
|
15,935
|
Fair value adjustment
on financial instruments and
real estate assets
|
1,118
|
2,600
|
19,105
|
22,823
|
22,823
|
-
|
Notional interest
capitalization
|
283
|
72
|
-
|
355
|
355
|
-
|
FFO
|
$1,639
|
$3,069
|
$3,327
|
$8,035
|
$10,448
|
$15,935
|
|
|
(1)
|
Projections have only
been updated for the effect of the permanent financing secured as
described below.
|
In September 2019, H&R,
together with its partners, secured a U.S. $1.0 billion interest-only first mortgage for
Jackson Park (U.S. $500.0 million, at H&R's ownership interest)
at a fixed rate of 3.25% for a 10-year term. Upon closing,
Jackson Park's existing U.S.
$640.0 million construction facility
was discharged and the outstanding balance prior to this
refinancing was repaid. After closing costs, H&R received a
cash distribution of U.S. $194.8
million which was used to repay other debt. As part of
the refinancing, an independent third party appraisal was obtained
and a decrease in fair value of U.S. $18.7 million at H&R's ownership interest was
recorded due to the recent "Housing Stability and Tenant Protection
Act of 2019" passed by New York
State in June 2019 regarding
affordable housing, rent controls and tenant protection.
Jackson Park's annualized
unlevered yield on budgeted cost is expected to be 6.4%, an
increase from the original expectation of 6.1%. The total
cost projected is expected to be approximately U.S. $580.7 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. $49.9 million which will reduce the net budgeted
cost to U.S. $530.8 million.
With the new financing in place, the REIT's levered yield on its
expected net cash contribution of U.S. $30.8
million to Jackson Park is approximately 56.9%.
Debt Highlights
As at September 30, 2019, debt to
total assets was 43.3% compared to 44.6% as at December 31, 2018. The weighted average
interest rate of H&R's debt as at September 30, 2019 was 3.9% with an average term
to maturity of 3.9 years. In November
2019, H&R repaid a U.S. $219.3
million mortgage bearing interest at an annual rate of
4.5%.
Debentures:
In July
2019, H&R repaid all of its Series M senior debentures
upon maturity for a cash payment of $150.0
million.
Lines of Credit:
As at September 30, 2019, H&R had $818.9 million of unused borrowing capacity
available under its lines of credit.
Monthly Distribution Declared
H&R previously declared a distribution for the month of
November and today declared a distribution for the month of
December scheduled as follows:
|
Distribution/Unit
|
Annualized
|
Record
date
|
Distribution
date
|
December
2019
|
$0.115
|
$1.380
|
December 13,
2019
|
December 31,
2019
|
Conference Call and Webcast
Management will host a conference call to discuss the financial
results for the REIT on Thursday, November
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 2744966
followed by the pound key. The telephone replay will be
available until Thursday, November 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 $14.3 billion at September
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 Q3 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 such as Dufferin
Mall and 145 Wellington St. W. and building of new
properties, the expected timing, total budget and yield on
cost of the construction on the REIT's industrial lands, the
expected positive rental growth from the Retail segment and the
additional annual base rent from former Target and Sears space, the
expected Brownfield tax credit to
be received from Jackson Park, the
expected stabilized property operating income and yield on budgeted
cost from Jackson Park, and the
anticipated projected amounts of net income and FFO in 2019-2020
resulting from Jackson Park,
expected occupancy percentage increases from all segments in 2020,
the expected total cost of River
Landing and the expected property operating income generated
by the residential segment's five properties in lease-up.
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 for the three and
nine months ended September 30, 2019
under "Risks and Uncertainties" and those discussed in H&R's
other 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 November 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 nine months ended September 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