TORONTO, Feb. 13, 2020 /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, 2019.
During 2019, H&R continued to actively reallocate capital
through property dispositions to fund value-creating developments,
expand its residential rental platform and strengthen the balance
sheet. The REIT has completed approximately $1.8 billion of asset sales over the past two
years, substantially repositioning the portfolio, enhancing the
internal growth profile and reducing leverage.
FINANCIAL HIGHLIGHTS
|
3 months ended
December 31
|
Year ended December
31
|
|
2019
|
2018
|
Change
|
2019
|
2018
|
Change
|
Rentals from
investment properties (millions)
|
$282.2
|
$297.4
|
(5.1%)
|
$1,149.5
|
$1,176.6
|
(2.3%)
|
Property operating
income (millions)
|
$184.8
|
$192.0
|
(3.8%)
|
$711.0
|
$733.9
|
(3.1%)
|
Net income
(millions)
|
$163.4
|
$61.1
|
167.4%
|
$340.3
|
$337.9
|
0.7%
|
Funds from operations
("FFO") (millions)(1)
|
$133.7
|
$130.5
|
2.5%
|
$529.1
|
$525.7
|
0.7%
|
FFO per Unit
(basic)(1)
|
$0.44
|
$0.43
|
2.3%
|
$1.76
|
$1.74
|
1.1%
|
Distributions per
Unit
|
$0.35
|
$0.35
|
-%
|
$1.38
|
$1.38
|
-%
|
Payout ratio per Unit
(as a % of FFO)(1)
|
77.9%
|
79.7%
|
(1.8%)
|
78.6%
|
79.4%
|
(0.8%)
|
Net Asset Value
("NAV") per Unit as at December 31(1)
|
$25.79
|
$26.30
|
(1.9%)
|
$25.79
|
$26.30
|
(1.9%)
|
|
|
(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, 2019 includes a
reconciliation of net income to FFO as well as the calculation of
NAV per Unit. Readers are encouraged to review the
reconciliations and calculations in H&R's MD&A as well as
the explanations for the changes.
|
Rentals from investment properties and property operating income
have decreased due to approximately $1.8
billion of asset sales over the last two years compared to
$645 million of property acquisitions
during the same period. Notwithstanding these net asset
dispositions, net income and FFO each increased 0.7% year over
year.
SUMMARY OF SIGNIFICANT 2019 ACTIVITY
Developments
H&R's active development pipeline in the United States is currently comprised of
six residential developments and one mixed-used
development. As at December 31,
2019, the total development budget was U.S. $713.1 million, of which U.S. $452.9 million was included in properties under
development with U.S. $260.1
million of budgeted costs remaining to complete, in each
case 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 373,000
square feet of retail space, approximately 118,000 square feet of
office space and 528 residential rental units. Construction is
nearing completion with occupancy scheduled to commence in Q2
2020. The total cost of the project is expected to be
approximately U.S. $467.9 million. As
at December 31, 2019, approximately
U.S. $367.0 million had been invested
in the development.
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 buildings, which will
total approximately 526,000 square feet upon completion. Subsequent
to December 31, 2019, H&R
completed a 10-year lease with Deutsche Post AG to occupy the
largest of the three buildings totalling 342,821 square feet. The
total budget for these three buildings is $83.0 million.
Office
In January 2019, H&R sold a
79,570 square foot single tenanted U.S. office property in
Lithia Springs, GA for gross
proceeds of U.S. $69.8 million, which
was acquired in May 2011 for U.S.
$60.8 million. The mortgage of U.S.
$43.7 million was repaid at
closing.
In June 2019, H&R sold The
Atrium, a 1.1 million square foot office and retail complex in
Toronto, ON for $640.0 million. The Atrium was acquired in
June 2011 for $344.8 million. The sale price equated 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%, which was repaid on January 9, 2020. The net proceeds from the sale
were used to repay debt including the repayment on maturity of
H&R's Series M senior debentures on July
23, 2019.
H&R extended its office leases with Bell Canada at six office properties in
Toronto, Montreal and Ottawa totaling 2,415,515 square feet for an
additional 10 years effective January 1,
2019. As at December 31, 2019
the weighted average lease term to maturity for these leases is
15.6 years with annual contractual rental increases of 1.5% per
annum. The cash rent received in 2019 decreased by $7.3 million compared to 2018 while the straight
lining of the contractual rents added $10.1
million resulting in a net $0.01 positive impact to 2019 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 15 years.
H&R extended two Calgary
office leases with AltaLink, L.P. to 20-year terms effective
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 17.0 years.
H&R has made significant leasing progress in its office
portfolio having achieved a committed occupancy rate of 99.6% as at
December 31, 2019.
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 U.S.
$20.1 million and repaid the two
respective mortgages aggregating U.S. $13.8
million upon closing. In addition, H&R purchased the
remaining 49.5% interest in 510 E. Courtland St., Morton, IL for U.S. $2.2 million. As H&R owns 100% of this
property, it is now consolidated in the REIT's Financial
Statements.
In August 2019, H&R signed a
12-year lease with Amazon.com, Inc. ("Amazon") at 7575 Brewster
Ave., Philadelphia, PA commencing
September 1, 2019 for 82,788 square
feet, at H&R's ownership interest. The previous tenant vacated
the premises in July 2019.
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.
In November 2019, H&R signed a
10-year lease with Amazon at 2121 Cornwall Rd., Oakville, ON commencing January 1, 2020 for 157,083 square feet, at
H&R's ownership interest. The previous tenant had vacated
the premises in April 2019.
As at December 31, 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.
Committed occupancy for the Industrial segment was 98.9%
compared to actual occupancy of 97.2% as at December 31, 2019.
Residential
In Q1 2019, 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. Average occupancy was
85.8% for 2019 and occupancy as at December
31, 2019 was 96.0%. Stabilized occupancy was achieved
in Q3 2019.
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.
Jackson Park's annualized
unlevered yield on budgeted cost is expected to be 6.0%. The
total cost 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 investment of U.S. $30.8
million is approximately 50.4%.
In June 2019, H&R acquired 314
residential rental units at 3512 Grande Reserve Way in Orlando, FL 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.
In July 2019, H&R acquired 322
residential rental units at 2725 Reseda Place in Charlotte, NC 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 for U.S. $77.0 million,
which was acquired in April 2015 for
U.S. $53.3 million. The mortgage of
U.S. $38.3 million was repaid upon
the sale.
As at December 31, 2019, the
residential portfolio consisted of 24 properties comprising 8,443
residential rental units at H&R's ownership interest. The
portfolio is comprised of 11 properties in Texas, seven in Florida, five in North Carolina and one in Long Island City, NY.
During the year ended December 31,
2019, there were five properties (excluding Jackson Park) in lease-up with a weighted
average occupancy rate of 81.9%. As at December 31, 2019, one property has reached
stabilization, one property is targeted for stabilization in Q1
2020, two properties are targeted for stabilization in Q3 2020 and
one property is targeted for stabilization in Q4 2020. For
the three months and year ended December 31,
2019, the properties in lease-up contributed U.S.
$2.8 million and U.S. $8.7 million, respectively, to property operating
income (excluding non-cash items) and they are expected to
contribute U.S. $13.5 million in
2020.
Subsequent to December 31, 2019,
H&R sold two properties which were classified as held for sale
as at December 31, 2019: (i) 12601
South Green Dr. in Houston, TX for
U.S. $23.9 million, which was
acquired in November 2014 for U.S.
$16.7 million; and (ii) 8401 Memorial
Lane in Plano, TX for U.S.
$66.0 million, which was acquired in
February 2015 for U.S. $52.3 million. The mortgage of U.S. $38.0 million was assumed by the purchaser upon
closing.
Retail
During 2019, $123.3 million was
invested in redevelopment at Primaris enclosed shopping centre
properties primarily relating to the 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 months and year ended
December 31, 2019, H&R
capitalized $0.1 million and
$1.2 million, respectively, of
property operating costs and $1.3
million and $5.3 million,
respectively, of finance costs attributable to the former Target
and Sears space.
For the three months and year ended December 31, 2019, the lease-up of the former
Target and Sears space generated net rent of $2.5 million and $8.2
million, respectively, and these tenants are expected to
contribute approximately $12.5
million in 2020 and $16.3
million in 2021.
Committed occupancy for the Retail segment was 94.1% compared to
actual occupancy of 91.5% as at December
31, 2019.
Mortgages Receivable
In December 2019, H&R issued a
mortgage receivable for U.S. $124.1
million secured against 12.4 acres of land in Jersey City, NJ for a two-year term. The loan
is expected to increase up to U.S. $160.0
million and bears interest at 10.0% per annum. The land is
adjacent to Liberty State Park with views of downtown Manhattan and the Hudson River. The project is
zoned for 1.7 million square feet of commercial space and 1,544
residential units, with a full residential development option
encompassing 2,835 units. The location is accessible to multiple
modes of transportation including the Grove Street PATH station 0.7
miles away with direct access to Manhattan (Penn Station and Wall St.) and an
11-minute ferry transit ride to Google's new Manhattan campus as well as access to
Manhattan's lower west side. The
REIT has an option to convert its loan into an 80% equity ownership
interest.
Debt Highlights
As at December 31, 2019, debt to
total assets was 44.4% compared to 44.6% as at December 31, 2018. Subsequent to
December 31, 2019, the $256.0 million mortgage receivable secured by The
Atrium was received, reducing proforma debt to total assets to
43.4%. The weighted average interest rate of H&R's debt
as at December 31, 2019 was 3.8% with
an average term to maturity of 3.9 years.
Mortgages:
During 2019, H&R secured 10 new
mortgages (excluding Jackson Park's
mortgage described above) totalling $229.1
million at a weighted average interest rate of 3.6% for an
average term of 9.4 years and repaid eight mortgages totalling
$499.8 million at an interest rate of
4.4%.
Debentures:
In March
2019, H&R repaid all of its Series K senior debentures
upon maturity for a cash payment of $200.0
million. In July 2019,
H&R repaid all of its Series M senior debentures upon maturity
for a cash payment of $150.0
million.
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:
In December
2019, H&R, through Primaris, extended the maturity date
of its $300.0 million secured
operating facility which was originally due in July 2020 to December
2021.
As at December 31, 2019, H&R
had $290.6 million of unused
borrowing capacity available under its lines of credit.
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 2020
|
$0.115
|
$1.380
|
March 17,
2020
|
March 31,
2020
|
Conference Call and Webcast
Management will host a conference call to discuss the financial
results for the REIT on Friday, February 14,
2020 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 Friday, February 21,
2020 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 December
31, 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, 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 2019 Activity" including with
respect to the annual base rent from former Target and Sears space
in 2020, the expected Brownfield
tax credit to be received from Jackson
Park, the expected total cost, levered yield on the REIT's
expected net cash investment and yield on budgeted cost from
Jackson Park, the expected increase
in H&R's mortgage receivable, the expected contribution of
certain properties to the REIT's property operating income, the
timing of stabilization, the expected total cost of River Landing and the REIT's proforma debt to
total assets. 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 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 February 13, 2020 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
International Financial Reporting Standards ("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,
2019, available at www.hr-reit.com and on
www.sedar.com.
SOURCE H&R Real Estate Investment Trust