H&R Reports Solid Q3 Results and Increases Monthly Distributions
TORONTO, Nov. 11 /CNW/ - H&R Real Estate Investment Trust ("H&R REIT") and H&R Finance Trust (collectively, "H&R") (TSX: HR.UN; HR.DB; HR.DB.B, HR.DB.C, HR.DB.D) announced its financial results for the third quarter ended September 30, 2010.
Financial Highlights
The following table includes non-GAAP (Generally Accepted Accounting Principles) information that should not be construed as an alternative to net earnings or cash provided by operations and may not be comparable to similar measures presented by other issuers as there is no standardized meaning of funds from operations ("FFO"), normalized funds from operations ("NFFO") and adjusted funds from operations ("AFFO") under GAAP. Management believes that these are meaningful measures of operating performance. Readers are encouraged to refer to H&R's MD&A for further discussion of non-GAAP information presented.
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3 months ended 9 months ended
September 30 September 30
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2010 2009 2010 2009
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FFO (millions)(1) $67.2 $41.7 $134.9 $163.1
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FFO per Stapled Unit
(basic) $0.45 $0.28 $0.90 $1.10
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NFFO (millions)(1)(2) $54.8 $55.4 $162.2 $179.5
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NFFO per Stapled Unit
(basic) $0.37 $0.37 $1.09 $1.21
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AFFO (millions)(1) $55.2 $52.5 $123.2 $172.3
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AFFO per Stapled Unit
(basic) $0.37 $0.35 $0.82 $1.17
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Cash distributions paid
(millions) $27.1 $24.2 $75.2 $73.4
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Cash distributions per
Stapled Unit $0.21 $0.18 $0.57 $0.54
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(1) H&R's MD&A includes reconciliations of: net earnings to FFO and NFFO;
FFO to AFFO; and AFFO to cash provided by operations. Readers are
encouraged to review such reconciliations in the MD&A.
(2) NFFO adjusts FFO for additional recoveries of capital expenditures in
excess of items expensed in property operating costs, the net loss on
derivative instruments and foreign exchange, the mortgage interest
accruals on non-recourse mortgage defaults and other non-recurring
items.
For the 9 months ended September 30, 2010, FFO and AFFO were each reduced by a one-time, non-recurring loss of $38.8 million on early repayment of the Fairfax non-convertible debentures in February 2010. Excluding this one-time debenture repayment loss, FFO and AFFO for the 9 months ended September 30, 2010 would have been $1.16 and $1.08 respectively per Stapled Unit. The following table includes results reported in accordance with Canadian GAAP.
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3 months ended 9 months ended
September 30 September 30
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2010 2009 2010 2009
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Rentals from income
properties (millions) $152.7 $148.2 $455.3 $453.5
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Net earnings (millions) $34.4 $15.7 $161.8 $56.7
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Net earnings per
Stapled Unit (basic) $0.24 $0.11 $1.12 $0.40
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Cash provided by
operations (millions) $51.6 $51.8 $163.5 $172.3
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During the second quarter of 2010, H&R REIT completed the necessary restructuring to qualify for the REIT Exemption under the SIFT rules commencing January 1, 2011. Accordingly, net future income tax liability of $123.3 million for the 9 months ended September 30, 2010 was reversed into earnings. Excluding this income tax recovery and the one-time debenture repayment loss of $38.8 million, basic net earnings per Stapled Unit would have been $0.54 for the 9 months ended September 30, 2010.
As at September 30, 2010, the ratio of H&R's debt to gross book value (calculated in accordance with the REIT's Declaration of Trust) was 49.5% compared to 52.5% as at December 31, 2009. The improvement was primarily due to changes to the definition of this ratio which were approved by the unitholders at the annual general meeting in June 2010. Non-recourse debt to total debt was 41.2% (44.9% at year end 2009).
Development Highlights
H&R REIT is currently building The Bow, a two million square foot landmark office building in Calgary's downtown financial district. EnCana Corporation is head-leasing the entire office tower and all underground parking spaces on a triple-net basis for an initial term of 25 years including annual contractual escalations. As at September 30, 2010, H&R REIT had incurred approximately $955 million of the $1.33-billion budgeted costs (excluding interest costs capitalized for accounting purposes). H&R REIT has effectively locked in 94% of total budgeted costs before contingencies and has successfully secured all of the financing required for completion of this trophy office development.
Construction Facility Amendment
In October 2010, H&R REIT's construction facility was amended. The amendments included eliminating the limit on distributions and reducing the annual effective interest rate, including the cost of the swap, from 6.9% to 4.65%.
Capital Transaction Highlights
During the third quarter 2010, H&R REIT:
- issued $100 million of 5.9% convertible unsecured debentures
maturing in June 2020;
- issued $125 million of 5.0% unsecured debentures maturing in
December 2018;
- acquired nine retail properties in the United States for
approximately CAD $58 million, leased for a weighted average term of
20 years. H&R REIT assumed CAD $35 million of mortgages and expects
the levered return from these acquisitions to be over 9%.
Operating Highlights
H&R REIT's operating strategy is to stabilize annual earnings and minimize market risk by leasing and mortgaging its properties on a long-term basis. As a result, the average remaining term to maturity as at September 30, 2010 was 10.1 years for leases and 8.2 years for mortgages payable. Leases representing only 4% of total rentable area will expire from Q4 2010 to Q4 2012, while only 12.6% of H&R REIT's total mortgage payable will mature in that period.
Distribution Policy Adopted
H&R REIT previously announced that its trustees have adopted a distribution policy pursuant to which the monthly combined distribution is intended to be increased as shown in the following table.
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Monthly Annualized
Distribution Distribution
Per Per
Distribution Period Stapled Unit Stapled Unit
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Q4 2010 (October, November and December) $0.0725 $0.87
Q1 2011 (January, February and March) $0.0750 $0.90
Q2 2011 (April, May and June) $0.0775 $0.93
Q3 2011 (July, August and September) $0.0800 $0.96
Q4 2011 (October, November and December) $0.0825 $0.99
Q1 2012 (January, February and March) $0.0850 $1.02
Q2 2012 (April, May and June) $0.0875 $1.05
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H&R's payout ratio is projected to remain one of the lowest in the Canadian REIT sector, even with these anticipated distribution increases. By the end of the second quarter 2012, upon completion and full occupancy of The Bow, the trustees will review this distribution policy taking into account the additional cash being generated by The Bow. The trustees retain the right to re-evaluate this distribution policy from time to time as they consider appropriate. As all distributions are at the sole discretion of the trustees, and remain subject to the declaration by the trustees, there is no assurance that the actual distributions declared, if any, will be as provided in this distribution policy.
Monthly Distributions Declared
The next declared distributions are scheduled as follows.
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Distribution/ Distribution
stapled unit Annualized Record date date
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December 2010 $0.0725 $0.87 December 15 December 31
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January 2011 $0.0750 $0.90 January 14 January 31
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February 2011 $0.0750 $0.90 February 11 February 28
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About H&R REIT and H&R Finance Trust
H&R REIT is an open-ended real estate investment trust, which owns a North American portfolio of 33 office, 118 industrial and 130 retail properties comprising over 39 million square feet, with a net book value of $4.1 billion. The foundation of H&R REIT's success since inception in 1996 has been a disciplined strategy that leads to consistent and profitable growth. H&R REIT leases its properties long term to creditworthy tenants and strives to match those leases with primarily long-term, fixed-rate financing.
H&R Finance Trust is an unincorporated investment trust, which primarily invests in notes issued by an H&R REIT subsidiary. In 2008, H&R REIT completed an internal reorganization which resulted in each issued and outstanding H&R REIT unit trading together with a unit of H&R Finance Trust as a "stapled unit" on the Toronto Stock Exchange.
Additional information regarding H&R REIT and H&R Finance Trust is available at www.hr-reit.com and on www.sedar.com.
Forward-looking Statements
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 relating to the objectives of H&R REIT and H&R Finance Trust (together, "H&R"), strategies to achieve those objectives, H&R's beliefs, plans, estimates, and intentions, and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts including, in particular, H&R REIT's expectation regarding future developments in connection with The Bow, and the amount of actual distributions to unitholders notwithstanding the trustees adoption of a distribution policy. 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. These statements are not guarantees of future performance and are based on H&R's estimates and assumptions that are subject to risk and uncertainties, including those discussed in H&R's materials filed with the Canadian securities regulatory authorities from time to time, which could cause the actual results and performance of H&R to differ materially from the forward-looking statements contained in this news release. Those risks and uncertainties include, among other things, risks related to: prices and market value of securities of H&R; availability of cash for distributions; development and financing relating to The Bow development; restrictions pursuant to the terms of indebtedness; liquidity; credit risk and tenant concentration; interest rate and other debt related risk; tax risk; ability to access capital markets; dilution; lease rollover risk; construction risks; currency risk; unitholder liability; co-ownership interest in properties; competition for real property investments; environmental matters; reliance on one corporation for management of substantially all H&R REIT's properties; changes in legislation and indebtedness of H&R. 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 stable; local real estate conditions are stable; interest rates are relatively stable; and equity and debt markets continue to provide access to capital. H&R cautions that this list of factors is not exhaustive. Although the forward-looking statements contained in this news release are based upon what H&R believes is reasonable assumptions, there can be no assurance that actual results will be consistent with these forward-looking statements. All forward-looking statements in this news release are qualified by these cautionary statements. These forward-looking statements are made as of today, and H&R, except as required by applicable law, assumes no obligation to update or revise them to reflect new information or the occurrence of future events or circumstances.
For further information: Larry Froom, Chief Financial Officer, H&R REIT, 416-635-7520, or e-mail [email protected]
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