TORONTO, May 14, 2020 /CNW/ - H&R Real Estate
Investment Trust ("H&R" or "the REIT") (TSX: HR.UN) announces
its financial results for the three months ended March 31, 2020.
FINANCIAL HIGHLIGHTS
|
3 months ended March
31
|
|
2020
|
2019
|
Rentals from
investment properties (millions)
|
$279.7
|
$298.7
|
Property operating
income (millions)
|
$140.6
|
$153.8
|
Same-Asset property
operating income (cash basis) (millions)(1)
|
$193.0
|
$191.3
|
Fair value adjustment
on real estate assets (millions)
|
($1,301.2)
|
($7.7)
|
Net loss
(millions)
|
($1,019.8)
|
($2.0)
|
Funds from operations
("FFO") (millions)(1)
|
$136.1
|
$137.0
|
FFO per Unit
(basic)(1)
|
$0.45
|
$0.46
|
Adjusted Funds from
Operations ("AFFO") per unit
|
$0.40
|
$0.39
|
Distributions per
Unit
|
$0.35
|
$0.35
|
Payout ratio per Unit
(as a % of FFO)(1)
|
76.5%
|
75.8%
|
Net Asset Value
("NAV") per Unit as at March 31(1)
|
$22.26
|
$25.89
|
(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, 2020 includes a
reconciliation of property operating income to Same-Asset property
operating income (cash basis) and net loss 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.
|
H&R continued to actively reallocate capital through
property dispositions to fund value-creating developments, expand
its residential rental platform and strengthen its balance sheet.
The REIT has completed approximately $1.0
billion of asset sales compared to $206.6 million of acquisitions over the past 15
months, substantially repositioning its portfolio, enhancing its
internal growth profile and reducing leverage. These net asset
dispositions are the primary reason for the decrease in rentals
from investment properties and property operating income.
Same-Asset property operating income (cash basis) increased by
0.9% for the three months ended March 31,
2020 compared to the respective 2019 period. Same-Asset
property operating income (cash basis) included lease termination
fees of $0.2 million in Q1 2020
compared to $5.9 million in Q1 2019.
Excluding these lease termination fees, Same-Asset property
operating income (cash basis) increased by 4.0% over the same
period, which is primarily due to growth in property operating
income from the residential segment.
The net loss for the three months ended March 31, 2020 was primarily due to the fair
value adjustment on real estate assets as described in the IFRS
fair value adjustments below.
BUSINESS UPDATE
COVID-19
The COVID-19 pandemic has brought dramatic and unprecedented
challenges to nearly every corner of society and the global
economy. The commercial property industry has been impacted
significantly. Risk management has been and continues to be a core
component of H&R REIT since the time of its IPO, most evident
in a focus on long-term leases, high credit quality tenants and a
conservative balance sheet.
Tom Hofstedter, President and CEO
said "We are doing everything we can to support and protect
everyone our organization touches, as we pull together as a
community. We have made considerable efforts into
ensuring the safety and wellbeing of our employees, tenants and
visitors to our properties. I thank our team's diligent
efforts, patience and creativity, as we face new and unique
challenges".
We have facilitated the transition of large numbers of staff to
work-from-home, and engaged with residential tenants to provide
more payment methods, payment plans, and early renewal options at
unchanged rents. Certain retail properties were closed to
comply with government mandates while providing for certain
essential service tenants to continue to operate out of these
otherwise closed properties, and we have engaged with tenants
across all of our properties to work together to reach customized
operating and financial arrangements. We have also undertaken
detailed reviews of operations to reduce expenses, mitigating the
financial impact of economic disruptions and property closures on
our tenants and on our unitholders.
Liquidity
Management has taken precautionary steps to further bolster the
REIT's liquidity as a result of the severity of the pandemic's
impact on economic conditions. In April the REIT secured a
new $425 million unsecured line of
credit from a syndicate of four Canadian banks. The REIT also
arranged a new $100 million secured
mortgage on a previously unencumbered property, maturing in 2029.
Notably, both the new credit facility and mortgage were arranged
following the onset of the COVID-19 economic disruption,
underscoring H&R's strong access to capital. As at March 31, 2020, H&R had $116.3 million of debt maturing during the
remainder of 2020.
H&R has a number of development projects underway, in
various stages of planning and construction. The REIT has postponed
certain of these development projects where construction had not
yet commenced, reducing near-term capital commitments. The REIT's
largest development project, River
Landing in Miami, is
nearing completion and requires limited further capital
investment. Final completion of this project has been delayed
to accommodate tenant preferences for the timing of lease
commencements and occupancy, and is now expected to occur
later this year.
Rent Collection
Rent collection has been a key focus for the REIT during the
pandemic, and one where we believe we have performed well while
also accommodating the needs of our tenant partners. As of
May 14th, 2020, April's overall rent
collection was 85%, with May's rent collections at 80% as detailed
below:
Tenant
Type(2)
|
Share of
Rent
|
April
Collection(1)
|
May
Collection(1)(3)
|
Office
|
44%
|
99%
|
99%
|
Retail:
|
|
|
|
Enclosed
malls
|
20%
|
40%
|
30%
|
Other
|
13%
|
88%
|
80%
|
Total
Retail
|
33%
|
59%
|
50%
|
Residential
|
17%
|
97%
|
92%
|
Industrial
|
6%
|
98%
|
90%
|
Total
|
100%
|
85%
|
80%
|
(1)
|
These collections
include monthly billings for base rent and property operating
costs.
|
(2)
|
Retail tenants in an
office property for the purpose of this table have been classified
as retail.
|
(3)
|
Includes Government
tenancies whose rent is only due at the end of May.
|
Our high-quality, long-term leased office portfolio delivered
strong rent collection in April and in May, consistent with the
profile of the tenant base, where 87.4% of tenants are investment
grade-rated. Rent collection was also strong in our
industrial and multi-residential portfolios, reflecting the
stronger-than-average credit profile of our tenant base across both
of these portfolios.
The tenants that have experienced the greatest impact in the
COVID-19 pandemic have been retailers. Rent collection in our
retail portfolio was 59% in April (50% May to date), reflecting a
blend of grocery-anchored centres, single tenant and enclosed mall
properties. Non-essential stores across the country were
closed by government mandates in March and are beginning to reopen
in some parts of the country.
While visibility remains limited as to when operating conditions
might return to a more normal state, and government rent assistance
programs have yet to become effective in providing significant
relief to retailers, we remain committed to working with our
tenants and all levels of government to ensure the most timely and
efficient resumption of operations, while preserving the safety and
security of all stakeholders.
IFRS Fair Value Adjustments
The Q1 2020 financial results include fair value adjustments
that are more significant than previous periods. These adjustments
are a result of our regular quarterly IFRS fair value process and
include the impact of COVID-19 reflecting two trends: i) an
acceleration of challenging conditions in the retail landscape
impacting the market pricing of retail properties; and ii) energy
sector challenges that have impacted the credit quality of many
companies operating in this industry, and the related impacts on
property market fundamentals in markets significantly influenced by
energy industry employment and profitability.
The IFRS fair value of H&R's retail portfolio has been
reduced by an aggregate of $659.9
million, with the changes relating primarily to inputs into
the forecasting of cashflows, including normalized vacancy rates,
market rental rates, tenant retention rates and releasing
assumptions. The revised inputs into discounted cash flow models
have resulted in lower fair market values and higher implied
overall cap rates, in particular for our enclosed mall
properties.
The IFRS fair value of H&R's office portfolio with
significant energy sector tenancies has been reduced by an
aggregate of $679.5 million.
These properties are generally subject to long-term leases, and as
such there have been limited changes to cash flow models, but more
significant changes to the discount rates. While there have
been very few recent transactions for comparable properties, our
valuation team used assumptions reflecting pricing signals observed
in oil prices and the energy sector corporate credit market.
Management and the Board strongly supported taking a more
proactive approach to updating fair market values to ensure prudent
financial reporting practices. Should the retail industry recover,
and energy industry conditions improve, H&R will have the
opportunity to update fair values as market conditions evolve.
OUTLOOK
In the midst of the economic disruption and uncertainty caused
by the COVID-19 pandemic, forecasts and guidance are inherently
more challenging and less reliable, given the wide range of
potential pandemic and economic outcomes. Over the past
few years, H&R has made significant progress, as detailed in
our 2019 annual report, towards the strategic goals outlined in our
2017 annual report of streamlining and simplifying our portfolio,
recycling capital into higher growth assets, and improving the
profile of an investment in H&R REIT. Since the beginning of
2018, H&R has executed approximately $2.0 billion of asset sales, reducing financial
leverage and allowing for a portion of the proceeds to be
reinvested into high-quality primarily residential and industrial
properties, including new developments, in high-growth markets like
Toronto, New York, Miami, San
Francisco and Los Angeles. Management expects this
reduced leverage and improved portfolio quality to serve the REIT
well as it navigates uncertain times ahead, and remains committed
to preserving and enhancing unitholder value.
Change in Distribution
Management and the Board have spent considerable time in recent
years reviewing the REIT's strategy, capital structure and
operations, which has led to many of the changes outlined above. In
light of current operating and capital market conditions, and
consistent with the prior conclusions management and the Board
reached in the above reference review,
management has recommended and the Board approved
a 50% reduction of monthly distributions effective
May 2020, from $0.115 per unit to $0.0575 per unit, or $0.690 per unit annually.
This new distribution rate provides additional financial
flexibility to absorb any income interruption related to the
pandemic in the near term, and allows for significant capital
reinvestment into our properties to address tenant turnover without
increasing the REIT's financial leverage. The new distribution
rate is also expected to satisfy the REIT's requirement to
distribute all of its taxable income.
The Board and management have not taken this decision lightly,
and are hopeful conditions will improve to result in this decision
appearing to have been overly cautious. However, as
unitholders with significant holdings, and reflecting an abundance
of caution, the trustees and management believe this action is
prudent and conservative in light of the economic uncertainty that
currently exists. We believe unitholders are best served by a
well capitalized REIT, supporting the capital maintenance of its
existing portfolio and providing opportunities for the REIT to
enhance its investment profile. The Board of Trustees will
reevaluate the distribution on a quarterly basis taking into
account a variety of relevant factors including the REIT's taxable
income.
SUMMARY OF SIGNIFICANT Q1 2020
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 March 31, 2020, the total
development budget was U.S. $651.2
million, including U.S. $495.7
million in properties under development with U.S.
$155.5 million of budgeted costs
remaining to complete, of which U.S. $84.8
million will be funded through secured construction
facilities, 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 Q3
2020. The total cost of the project is expected to be
approximately U.S. $467.9 million. As
at March 31, 2020, approximately U.S.
$397.1 million has been included in
properties under development.
Construction continued 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. In January 2020, H&R
completed a 10-year lease with Deutsche Post AG to occupy the
largest of the three buildings totalling 342,821 square feet. As a
result of COVID-19, H&R has temporarily suspended construction
of the second and third buildings. The total budget for these three
buildings is $83.0 million.
Office
In January 2020, the $256.0 million mortgage receivable secured by The
Atrium associated with the sale of the property in June 2019 was repaid. H&R continues to
make significant leasing progress in its office portfolio having
achieved a committed occupancy rate of 99.8% as at March 31, 2020. Excluding lease termination fees,
Same-Asset property operating income (cash basis) from office
properties increased by 1.2%.
Industrial
In January 2020, H&R purchased
a 50% ownership interest in a 93,330 square foot single-tenanted
property in Whitby, ON for
approximately $6.6 million, at
H&R's ownership interest.
In February 2020, H&R
purchased the remaining 49.5% interest in 7575 Brewster Ave.,
Philadelphia, PA for U.S.
$11.6 million. As H&R owns 100%
of this property, it is now consolidated in the REIT's Financial
Statements. The property is leased to Amazon.com, Inc. with a
remaining lease term of approximately 11.4 years.
Same-Asset property operating income (cash basis) from
industrial properties increased by 2.8%.
Residential
In January 2020, H&R sold two
properties which were previously 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.
Same-Asset property operating income (cash basis) from
residential properties in U.S. dollars increased by 33.0% for the
three months ended March 31, 2020
compared to the respective 2019 period primarily due to four
properties including Jackson Park
that were or are still currently in lease-up. Excluding the
properties in lease-up, Same-Asset property operating income (cash
basis) increased by 8.0% primarily due to an increase in revenue
from rental rate growth and the stabilization of various assets in
the portfolio.
Retail
Committed occupancy for the Retail segment was 93.8% compared to
actual occupancy of 91.1% as at March
31, 2020. Same-Asset property operating income (cash
basis) from retail properties decreased by 2.1%.
Debt Highlights
As at March 31, 2020, debt to
total assets was 47.9% compared to 44.4% as at December 31, 2019. The increase in debt to
total assets is primarily due to the fair value adjustment of
certain office and retail properties by approximately $1.3 billion. The weighted average interest rate
of H&R's debt as at March 31,
2020 was 3.6% with an average term to maturity of 4.0
years.
In February 2020, H&R repaid
all of its Series P senior debentures upon maturity for a cash
payment of U.S. $125.0 million.
In March 2020, H&R repaid all of
its Series F senior debentures upon maturity for a cash payment of
$175.0 million.
Monthly Distribution Declared
As mentioned above, H&R today declared a distribution
for the month of May scheduled as follows:
|
Distribution/Unit
|
Annualized
|
Record
date
|
Distribution
date
|
May 2020
|
$0.0575
|
$0.690
|
May 22,
2020
|
June 5,
2020
|
Conference Call and Webcast
Management will host a conference call to discuss the financial
results for the REIT on Friday, May 15,
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 2981258
followed by the pound key. The telephone replay will be
available until Friday, May 22, 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 $13.4 billion at
March 31, 2020. H&R REIT has
ownership interests in a North American portfolio of high quality
office, retail, industrial and residential properties comprising
over 40 million square feet.
Forward-Looking Disclaimer
Certain information in this press 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
headings "COVID-19 Update" and "Summary of Significant Q1 2020
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 the building of new properties, the timing of
construction, the timing of occupancy and the expected total cost
from development properties, the impact of the COVID-19 virus on
the REIT's retail tenants, capitalization rates and other
assumptions used to estimate fair values, management's expectations
regarding the REIT's leverage and portfolio quality, 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 press release. Material factors or assumptions
that were applied in drawing a conclusion or making an estimate set
out in the forward‑looking statements include that the general
economy is currently volatile and in an economic downturn as a
result of the COVID-19 pandemic and low oil and gas prices, the
extent and duration of which is unknown; interest rates are
volatile as a result of general economic conditions; and debt
markets continue to provide access to capital at a reasonable cost,
notwithstanding the ongoing economic downturn. Additional risks and
uncertainties include, among other things, risks related to: real
property ownership; the current economic environment; COVID-19;
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 and 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 press 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
press release. All forward-looking statements in this press
release are qualified by these cautionary statements. These
forward-looking statements are made as of May 14, 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, AFFO, 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, 2020,
available at www.hr-reit.com and on www.sedar.com.
SOURCE H&R Real Estate Investment Trust