H&R REIT Reports First Quarter 2021 Results
TORONTO, May 13, 2021 /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, 2021.
BUSINESS UPDATE
H&R is pleased to report stable and consistent Q1 2021 financial and operating results reflecting the quality of the REIT's portfolio and the strength of the REIT's balance sheet. While the extraordinary events that followed the arrival of the COVID-19 pandemic a year ago have required significant management attention to ensure the safety and security of the REIT's employees, tenants, properties and financial condition, management has continued to invest considerable time and effort into the REIT's objectives of improving the quality and value of the REIT's portfolio and improving the profile of an investment in H&R units.
President & CEO Tom Hofstedter commented "As we emerge from the past year's challenging environment, we are pleased with both the REIT's financial and operating results and the progress we continue to make in advancing strategic initiatives. In the past year we have completed substantial dispositions and acquisitions, completed successful developments and advanced future development projects which will commence in 2021 and 2022, and expect to complete further property dispositions in the remainder of 2021. These activities have laid the foundation for more significant strategic changes, which we hope to provide more details of in coming months."
FINANCIAL HIGHLIGHTS
3 months ended March 31 |
||
2021 |
2020 |
|
Rentals from investment properties (millions) |
$266.5 |
$279.7 |
Property operating income (millions) |
$133.7 |
$140.6 |
Fair value adjustment on real estate assets (millions) |
$64.7 |
($1,301.2) |
Net income (loss) (millions) |
$159.5 |
($1,019.8) |
Funds from operations ("FFO") (millions)(1) |
$119.7 |
$136.1 |
FFO per Unit (basic)(1) |
$0.40 |
$0.45 |
Adjusted Funds from Operations ("AFFO") (millions)(1) |
$97.1 |
$120.1 |
AFFO per Unit (basic)(1) |
$0.32 |
$0.40 |
Distributions per Unit |
$0.17 |
$0.35 |
Payout ratio per Unit (as a % of FFO)(1) |
43.5% |
76.5% |
Net Asset Value ("NAV") per Unit as at March 31(1) |
$22.24 |
$22.26 |
(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, 2021 includes a reconciliation of net income (loss) to FFO and AFFO as well as the calculation of NAV per Unit. Readers are encouraged to review the reconciliations and calculation in H&R's MD&A. |
Property operating income decreased by $7.0 million for the three months ended March 31, 2021 compared to the respective 2020 period primarily due to the Retail segment, which decreased by $6.6 million due to factors relating to the COVID-19 pandemic, including: (i) tenant closures mainly affecting enclosed shopping centres; (ii) temporary lease amendments reducing rental rates in order to retain tenants who have faced challenging conditions; and (iii) lower percentage rent and specialty leasing earned due to government mandated closures primarily affecting enclosed shopping centres. In addition, four single-tenant retail properties in the United States were vacated in June 2020, and to date only a portion of the space has been re-leased at lower rental rates.
Net income (loss) before income taxes increased by approximately $1.2 billion for the three months ended March 31, 2021 compared to the respective 2020 period primarily due to fair value adjustments of real estate assets. This is primarily due to negative fair value adjustments taken in Q1 2020 during the onset of COVID-19 as a result of challenging conditions in the retail landscape and energy sector volatility affecting office property market fundamentals. This was partially offset by fair value adjustments on financial instruments.
Rent Collection
Rent collection has been a key focus during the pandemic and one where H&R believes it has performed well while also accommodating the needs of its tenants. As of May 7, 2021, H&R's rent collections are as follows:
Tenant Type(1) |
Share of Rent(2) |
Q4 2020 |
Q1 2021 |
April 2021 |
|||
Office |
44% |
100% |
99% |
99% |
|||
Retail: |
|||||||
Enclosed |
20% |
87% |
89% |
81% |
|||
Other |
14% |
96% |
96% |
94% |
|||
Total Retail |
34% |
90% |
92% |
86% |
|||
Residential |
16% |
97% |
96% |
96% |
|||
Industrial |
6% |
100% |
100% |
100% |
|||
Total |
100% |
96% |
96% |
94% |
|||
(1) |
Retail tenants in an office property for the purpose of this table have been classified as retail. |
(2) |
The average share of rent and collections includes monthly billings for base rent and property operating costs. |
H&R's high-quality, long-term leased office portfolio delivered strong rent collection consistent with the profile of the tenant base, with 85.8% of revenues coming from investment-grade rated tenants. Rent collection was also stable in H&R's industrial and residential portfolios, reflecting the stronger-than-average credit profile of the REIT's tenant base across both of these portfolios.
H&R has recorded a bad debt expense for the three months ended March 31, 2021 of $1.0 million compared to $3.2 million for Q4 2020 and $0.3 million for the three months ended March 31, 2020.
Liquidity
As at March 31, 2021, H&R had ample liquidity including cash on hand of $54.5 million, $1.4 billion available under its unused lines of credit and an unencumbered property pool of approximately $3.9 billion.
SUMMARY OF SIGNIFICANT Q1 2021 ACTIVITY
Developments
H&R's active development pipeline in the United States currently comprises five residential developments with a total development budget of U.S. $241.6 million. As at March 31, 2021, U.S. $214.9 million had been spent on properties under development with U.S. $26.7 million of budgeted costs remaining to be spent. The REIT has U.S. $30.6 million available to be funded through secured construction facilities, in each case at the REIT's proportionate share.
The REIT's 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 339,000 square feet of retail space, approximately 125,000 square feet of office space and 528 residential rental units.
In Q4 2020, the retail and office portion of this project known as "River Landing Commercial", reached substantial completion and was transferred from properties under development to investment properties. Retail occupancy was 74.6% as at March 31, 2021, which includes the following major tenants: Publix Super Markets Inc., Hobby Lobby, Burlington, Ross Stores Inc., T.J. Maxx, Old Navy and Planet Fitness. Committed occupancy for retail space as at March 31, 2021 was 81.7% with the remaining retail lease-up expected to occur during 2021. The REIT is continuing negotiations with multiple parties on the office space.
In Q1 2021, the first of two residential towers at River Landing reached substantial completion and was transferred from properties under development to investment properties. As at March 31, 2021, 228 residential leases in the first tower had been entered into and occupancy was 62.9%, exceeding management's expectations on leasing velocity. The second residential tower, with the remaining 218 of 528 total residential rental units, is expected to be transferred from properties under development to investment properties in Q2 2021. The total cost of the project is expected to be completed on budget at approximately U.S. $495.9 million of which U.S. $294.3 million was allocated to River Landing Commercial and the remaining U.S. $201.6 million has been allocated to the residential towers. As at March 31, 2021, U.S. $412.7 million has been included in investment properties and U.S. $80.6 million has been included in properties under development.
In January 2021, H&R acquired 12.4 acres of vacant land in Jersey City, NJ for U.S. $162.0 million and H&R received approximately U.S. $146.2 million for the repayment of the outstanding mortgage receivable secured by this land which bore interest at 10% per annum.
In January 2021, H&R acquired 4.2 acres of land in Dallas, TX for U.S. $9.1 million, which is expected to be developed into 352 residential rental units. The site is located adjacent to US Hwy 75 with proximity to downtown Dallas and other major thoroughfares including I-635 and the Dallas North Tollway.
Subsequent to March 31, 2021, H&R completed a 10-year lease with an industrial tenant to occupy 105,133 square feet at 34 Speirs Giffen Ave., Caledon, ON, a single-tenant property currently under development. The total development budget is $16.3 million and the expected yield on budgeted cost is approximately 7.0%. Occupancy is expected to commence in Q2 2022. This will be the second property constructed at H&R's industrial business park in Caledon which consists of approximately 144 acres.
Properties in Lease-up
H&R currently has three properties in lease-up: River Landing, Phase 1 of the Hercules Project and Jackson Park.
As noted above, River Landing Commercial was transferred from properties under development to investment properties in Q4 2020 and in Q1 2021, the first of two residential towers at River Landing reached substantial completion and was transferred from properties under development to investment properties. Property operating income (cash basis) (a non-GAAP measure - see "Non-GAAP Financial Measures" in this press release) from River Landing for the three months ended March 31, 2021 was approximately U.S. $0.6 million. The pro forma unlevered yield on cost is expected to be approximately 5.0% based on a total budget of U.S. $495.9 million. As at March 31 2021, U.S. $412.7 million has been included in investment properties and U.S. $80.6 million has been included in properties under development.
Phase 1 of the Hercules Project in Hercules, CA reached substantial completion in Q4 2020 and was transferred from properties under development to investment properties. Property operating income (cash basis) for the three months ended March 31, 2021 was approximately U.S. $0.3 million at H&R's ownership interest. The pro forma unlevered yield on cost is expected to be approximately 5.4% based on a total budget of U.S. $25.7 million, at H&R's ownership interest.
Jackson Park in Long Island City, NY has been negatively impacted by COVID-19 with higher vacancy and lower than average lease renewals. Property operating income (cash basis) for the three months ended March 31, 2021 was approximately U.S. $3.0 million at H&R's ownership interest. Prior to the onset of COVID-19, property operating income (cash basis) for Jackson Park for the three months ended March 31, 2020 was approximately U.S. $8.0 million, at H&R's ownership interest.
Office
In January 2021, H&R sold a 172,039 square foot single-tenanted property in Culver City, CA for approximately U.S. $165.0 million. Upon closing, the REIT repaid the two associated mortgages totalling U.S. $13.0 million, bearing interest at a weighted average rate of 5.7%. The REIT acquired this property in May 2004 for U.S. $60.3 million. This property was classified as held for sale as at December 31, 2020.
Same-Asset property operating income (cash basis) (a non-GAAP measure - see "Non-GAAP Financial Measures" in this press release) from office properties decreased by 10.0% for the three months ended March 31, 2021 compared to the respective 2020 period, primarily due to Hess Corporation ("Hess") receiving a seven-month free rent period (commencing December 2020) as part of a lease extension and amending agreement completed in November 2020 for its premises in Houston, TX, the ("Hess Lease Amendment") under which Hess agreed to extend the term of its lease on approximately two-thirds of the building for an additional term of 10 years beyond its current expiry of June 30, 2026. Excluding the impact of Hess Lease Amendment, Same-Asset property operating income (cash basis) increased by 2.0%.
Industrial
In March 2021, H&R sold a 50% ownership interest in a 39,294 square foot multi-tenanted property in Richmond Hill, ON for approximately $9.6 million. This property was previously classified as held for sale as at December 31, 2020.
Same-Asset property operating income (cash basis) from industrial properties decreased by 2.3% for the three months ended March 31, 2021 compared to the respective 2020 period, primarily due to the decrease in Same-Asset occupancy from 98.9% as at March 31, 2020 to 96.6% as at March 31, 2021.
Residential
Same-Asset property operating income (cash basis) from residential properties in U.S. dollars decreased by 18.6% for the three months ended March 31, 2021 compared to the respective 2020 period, primarily due to Jackson Park in New York which has been negatively impacted by COVID-19 with higher vacancy and lower than average lease renewals. H&R believes this decline is temporary and expects operating fundamentals to improve in the second half of 2021. Further to this expectation, property operating income (cash basis) for Jackson Park increased by 7.7% from Q4 2020 to Q1 2021. Excluding Jackson Park, Same-Asset property operating income (cash basis) from residential properties in U.S. dollars increased by 4.1% for the three months ended March 31, 2021 compared to the respective 2020 period, primarily due to an increase in revenue and the stabilization of various assets in the portfolio.
Retail
Same-Asset property operating income (cash basis) from retail properties decreased by approximately $8.3 million or 13.4% for the three months ended March 31, 2021 compared to the respective 2020 period, primarily due to factors relating to the COVID-19 pandemic, including: (i) tenant closures; (ii) temporary lease amendments reducing rental rates in order to retain tenants who have faced challenging conditions; and (iii) lower percentage rent and specialty leasing earned due to government mandated closures.
Of the $8.3 million decline, enclosed shopping centres accounted for $6.6 million. Temporary rent reductions accounted for 34% of this decline, 28% related to rent reductions that remain in place until lease maturity, 11% related to lower percentage rents, specialty leasing and miscellaneous revenues (including a greater number of leases with percentage rent clauses, but lower tenant sales due to centre closures), and the remaining 27% was due to the impact of vacancies net of replacement leasing, much of which has yet to commence.
The remainder of the decline is split evenly between ECHO and the REIT's other retail properties. Notably, four single-tenant retail properties in the United States were vacated in June 2020, and to date only a portion of the space has been re-leased.
Funds from Operations and Adjusted Funds from Operations
FFO per Unit in Q1 2021 was $0.40 compared to $0.42 in Q4 2020 and $0.45 in Q1 2020. AFFO per Unit was $0.32 in Q1 2021 compared to $0.22 in Q4 2020 and $0.40 in Q1 2020. Distributions paid as a percentage of AFFO was 53.6% in Q1 2021, resulting in significant retained cash flow.
Debt Highlights
As at March 31, 2021, debt to total assets was 46.7% compared to 47.7% as at December 31, 2020. The weighted average interest rate of H&R's debt as at March 31, 2021 was 3.6% with an average term to maturity of 3.6 years.
Mortgages:
As at March 31, 2021, H&R had $818.2 million in mortgage principal maturing during the remainder of 2021. Of this amount, H&R completed renewals for $237.5 million subsequent to March 31, 2021, $250.0 million is expected to be repaid from H&R's unused lines of credit and $0.9 million relates to final payments for mortgages fully amortized upon maturity.
Debentures:
In February 2021, H&R issued $300.0 million principal amount of 2.633% Series S Senior Debentures maturing February 19, 2027. The proceeds were used to repay the term loan noted below as well as lines of credit.
Unsecured Term Loans:
In March 2021, the REIT repaid its $200.0 million unsecured term loan. The REIT had entered into an interest rate swap to fix the interest rate at 2.56% per annum on U.S. $130.0 million of the U.S. dollar denominated borrowing of this facility, which settled in March 2021.
Lines of Credit:
In April 2020, at the onset of COVID-19, H&R bolstered its liquidity by securing a $500.0 million unsecured line of credit for a one-year term. With the vaccine rollout expanding throughout Canada and the United States and the Canadian economy slowly reopening, H&R believes it has sufficient liquidity to withstand the remainder of the pandemic and has therefore opted to reduce the amount of this facility. Therefore, in April 2021, the REIT secured a one-year extension on the unsecured line of credit from a syndicate of five Canadian banks for $300.0 million. The maturity date was extended to April 17, 2022.
In April 2021, the REIT secured a one-year extension on the H&R and CrestPSP revolving secured line of credit for $62.5 million at H&R's ownership interest. The maturity date was extended to April 30, 2022.
Monthly Distributions Declared
H&R today declared distributions for the months of May and June scheduled as follows:
Distribution/Unit |
Annualized |
Record date |
Distribution date |
|
May 2021 |
$0.0575 |
$0.690 |
May 26, 2021 |
June 8, 2021 |
June 2021 |
$0.0575 |
$0.690 |
June 22, 2021 |
July 7, 2021 |
Conference Call and Webcast
Management will host a conference call to discuss the financial results for H&R REIT on Friday, May 14, 2021 at 9.30 a.m. Eastern Time. Participants can join the call by dialing 1-833-282-0020 or 1-236-714-3488. 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 416-621-4642 or 1-800-585-8367 and enter the passcode 8947468 followed by the pound key. The telephone replay will be available until Friday, May 21, 2021 at midnight.
A live audio webcast will be available through https://www.hr-reit.com/investor-relations/#investor-events. 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 https://www.hr-reit.com/investor-relations/#investor-presentation
About H&R REIT
H&R REIT is one of Canada's largest real estate investment trusts with total assets of approximately $13.2 billion at March 31, 2021. 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 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 headings "Business Update", "Financial Highlights" and "Summary of Significant Q1 2021 Activity" including with respect to H&R's future plans, including future property dispositions and significant strategic changes, 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 lease-up, the expected total cost and yield on cost from development properties and the timing of transfer from properties under development to investment properties, the impact of the COVID-19 virus on the REIT and the REIT's tenants, the REIT's bad debt expense, management's expectations regarding the REIT's leverage and portfolio quality, management's belief that Jackson Park's decline is temporary and expectations regarding future operating fundamentals, management's expectations regarding future distributions, management's belief that H&R has sufficient funds and liquidity for future commitments and to withstand the remainder of the pandemic and management's expectation to be able to meet all of the REIT's 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. 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 fluctuations in 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, and additional tax risk applicable to unitholders. 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 13, 2021 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 per Unit, FFO, AFFO, Payout Ratio per Unit, property operating income (cash basis), Same-Asset property operating income (cash basis) and the REIT's proportionate share as well as other non-GAAP measures discussed elsewhere in this news 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 the three months ended March 31, 2021, 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
Larry Froom, Chief Financial Officer, H&R REIT, 416-635-7520, or e-mail [email protected]
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