H&R REIT Reports Fourth Quarter and 2021 Annual Results – QNT Press Release

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Enhanced geographical exposure, improved asset mix, strengthened balance sheet and NCIB utilization

TORONTO, Feb. 14, 2022 /CNW/ – H&R Real Estate Investment Trust (“H&R” or “the REIT”) (TSX:HR) is pleased to announce its financial results for the year ended December 312021.

SIGNIFICANT 2021 HIGHLIGHTS

Transformational Strategic Repositioning Plan:

On October 27, 2021H&R announced its transformational strategic repositioning plan to create a simplified, growth-oriented business focused on residential and industrial properties in order to surface significant value for unitholders. H&R’s target is to be a leading owner, operator and developer of residential and industrial properties, creating value through redevelopment and greenfield development in prime locations within Toronto, Montreal, Vancouverand high growth US sunbelt and gateway cities.

“2021 truly was a transformational year for the REIT. Despite the enduring global pandemic, our teams accomplished many significant milestones including simplifying and enhancing our portfolio’s geographical exposure, asset mix, and tenant diversity, while also lowering leverage and increasing liquidity. To enable this change, H&R successfully transacted on approximately $4.7 billion of real estate during the year,” said President & CEO Tom Hofstedter. “Management and the board remain fully committed to the Strategic Repositioning Plan and are actively evaluating opportunities to increase unitholder value and address the significant discount at which our Units trade. Equipped with a strong balance sheet, significant liquidity and enhanced portfolio concentration in large primary markets with strong population and economic growth, H&R is very well positioned to continue its evolution.”

2021 Highlights:

  • Bow and Bell office campus sale: The sale of the Bow and Bell Office Campus in October 2021 significantly reduced Calgary office exposure, enhanced tenant diversification, and created the liquidity and strengthened balance sheet to enable the Primaris Spin-Off.
  • Primaris Spin-Off: H&R carried out a tax-free Primaris spin-off of the REIT’s Primaris properties on December 31, 2021including all of H&R’s enclosed malls into a new, completely independent, stand-alone, publicly traded REIT, known as Primaris REIT (the “Primaris Spin-Off”).
  • US office property sale: H&R sold a 172,039 square foot single-tenanted property in Culver City, CA for approximately US $165.0 million in January 2021.
  • 50% owned Industrial dispositions: During 2021, H&R sold its 50% ownership interest in 14 single tenanted properties and two multi-tenanted properties encompassing 915,611 square feet located across Canada for approximately $160.4 million.
  • Sold partially owned US residential development completed in Q4 2020: In September 2021the REIT sold its 31.7% non-managing interest in The Exchange at Bayfront in Hercules, CA for approximately US $35.9 million.
  • River Landing Development: H&R completed its River Landing development in Miami, FL in Q2 2021 with residential occupancy exceeding management’s expectations on leasing velocity.
  • $300M debenture issuance: In February 2021H&R issued $300.0 million principal amount of 2.633% Series S Senior Debentures maturing February 19, 2027.
  • Future Intensification projects: H&R has submitted rezoning, site plan and plan amendment applications for six office properties with an additional three submissions pending for two office properties and one industrial property.

Benefits of these transactions include:
(comparison figures are from December 31, 2020 to December 31, 2021 at the REIT’s proportionate share(1)unless otherwise stated)

  • Greater concentration to higher growth residential and industrial assets, with reduced exposure to retail and office properties.
    • Increased US residential property exposure from 21.0% to 32.1%.
    • Completely eliminated exposure to enclosed retail shopping centres.
    • Reduced retail property exposure from $3.9 billion to $1.8 billion.
    • Reduced Calgary office property exposure from $1.2 billion to $221.1 million.
  • Enhanced major market presence in the Greater Toronto Area and high-growth US sunbelt and gateway cities.
    • Reduced Alberta property exposure from $2.3 billion to $482.5 million.
  • Improved balance sheet enhances financial flexibility to execute on expanding the REIT’s residential platform through developments.
    • Improved debt to total assets at the REIT’s proportionate share from 51.1% to 46.6%.
  • Enhanced tenant diversification
    • Reduced exposure to Ovintiv Inc. from 11.9% to 2.7% of rental revenue from investment properties.

(1)

This is a non-GAAP measure. Refer to the “Non-GAAP Measures” section in this news release.

Normal Course Issuer Bid

On December 13, 2021the REIT received approval from the TSX for the renewal of its normal course issuer bid (“NCIB”) allowing the REIT to purchase for cancellation up to a maximum of 14.0 million Units on the open market until the earlier of December 15, 2022 or the date on which the REIT purchased the maximum number of Units permitted under the NCIB. During the year ended December 31, 2021the REIT did not purchase any Units for cancellation.

As at February 9, 2022the REIT purchased and cancelled 4,222,700 Units at a weighted average price of $13.00 per Unit, for a total cost of $54.9 millionat a material discount to net asset value (“NAV”)(1).

(1)

This is a non-GAAP measure. Refer to the “Non-GAAP Measures” section in this news release.

FINANCIAL HIGHLIGHTS

December 31,
2021

December 31,
2020

Total assets (thousands)

$10,501,141

$13,355,444

Debt to total assets at the REIT’s proportionate share(1)(2)

46.6%

51.1%

Unitholders’ equity (thousands)

$4,773,833

$6,071,391

Units outstanding (in thousands of Units)

288,440

286,863

Unitholders’ equity per Unit

$16.55

$21.16

NAV per unit(3)

$17.70

$21.93

3 months ended December 31

Year ended December 31

2021

2020

2021

2020

Rentals from investment properties (millions)

$265.8

$277.5

$1,065.4

$1,098.7

Property operating income (millions)

$169.8

$183.6

$661.6

$663.7

Same-Asset property operating income (cash basis) (millions)(3)

$140.6

$131.2

$527.7

$557.0

Net income (loss) from equity accounted investments (millions)

$89.3

($44.7)

$125.6

($17.0)

Fair value adjustment on real estate assets (millions)

($13.0)

$70.0

$13.0

($1,196.0)

Net income (loss) (millions)

$208.2

$111.6

$597.9

($624.6)

Funds from operations (“FFO”) (millions)(3)

$104.6

$127.4

$461.4

$503.1

FFO per Unit (basic)(3)

$0.35

$0.42

$1.53

$1.67

Adjusted Funds from Operations (“AFFO”) (millions)(3)

$76.2

$67.3

$365.8

$383.8

AFFO per Unit (basic)(3)

$0.25

$0.22

$1.21

$1.27

Weighted average number of Units and exchangeable units for FFO

301,779

301,746

301,772

301,687

Cash distributions per Unit(4)

$0.27

$0.17

$0.79

$0.92

Payout ratio per Unit (as a % of FFO)(2)(3)

77.1%

40.5%

51.6%

55.1%

Payout ratio per Unit (as a % of AFFO)(2)(3)

108.0%

77.3%

65.3%

72.4%

(1)

Debt includes mortgages payable, debentures payable, unsecured term loans and lines of credit.

(2)

These are non-GAAP ratios. Refer to the “Non-GAAP Measures” section in this news release.

(3)

These are non-GAAP measures. Refer to the “Non-GAAP Measures” section in this news release.

(4)

Distributions for the three months and year ended December 31, 2021, include the special cash distribution of $0.10 per Unit declared on
November 15, 2021, payable to all unitholders on record as at December 31, 2021. This distribution was paid on January 12, 2022 and has been
Included in the calculations of Payout ratio as a % of FFO and AFFO.

The Bow Sale

Sale of the Bow property and 40% interest in the Ovintiv lease

In October 2021the REIT sold its interest in the Bow office property (“The Bow”) in Calgary, AB including 40% of the future income stream derived from the Ovintiv lease until the end of the lease term in May 2038 to an arm’s length third party, Oak Street Real Estate Capital (“Oak Street”) for approximately $528.0 million. Subsequent to the maturity of the Ovintiv lease, Oak Street will receive all future lease revenue earned by the property. Although the REIT sold the property, the transaction did not meet the criteria of a transfer of control under IFRS 15 as the REIT has an option to repurchase 100% of the Bow property for approximately $737.0 million ($368 per sq. ft.) in 2038 or earlier under certain circumstances. This option is substantially below the current aggregate sale proceeds of $946.0 million and it provides H&R the ability to capture potential upside in the Calgary office market over an extended time frame of approximately 16 years. As such, the REIT continues to recognize the income producing property whereby the fair value will be adjusted over the remaining life of the Ovintiv lease bringing the value of the real estate asset to nil by the lease maturity. The net proceeds received by the REIT on disposition were $496.1 million. These proceeds were recorded as Bow deferred revenue (classified as a liability) and will be amortized over the remaining term of the lease (40% of the rental income remitted to Oak Street will consist of principal and interest).

Sale of 45% interest in the Ovintiv lease

In a separate transaction, in October 2021the REIT sold 45% of its residual 60% interest in the future income stream derived from the Ovintiv lease to an arm’s length third party that was financed by Deutsche Bank Credit Solutions and Direct Lending (“Deutsche Bank”). The REIT received a lump-sum cash payment of $418.0 million as consideration.

The net proceeds received of $408.3 million were also recorded as Bow deferred revenue (classified as a liability) and will be amortized over the remaining term of the lease as the 45% lease payments are made to Deutsche Bank and will consist of principal and interest.

Summary

H&R effectively retains a 15% interest in the net rent payable under the Ovintiv lease to the expiry of the lease in May 2038. The retained interest in the cash flow from the Ovintiv lease totals approximately $15.0 million annually.

The following is a summary of the Bow in the REIT’s consolidated statement of financial position in the REIT’s Financial Statements:

December 31

2021

(in thousands of Canadian dollars)

Income producing property- fair value of the Bow

$1,042,918

Bow deferred revenue (net of amortized principal of $7,576)

896,801

The following is a summary of the financial results for the Bow Included in the consolidated statements of comprehensive income (loss) in the REIT’s Financial Statements as well as a reconciliation of the Bow’s contribution to FFO and AFFO:

October

2021

November

2021

December

2021

Three months ended

December 31, 2021

Year ended

December 31, 2021

(in thousands of Canadian dollars)

Rental earned income from the Bow

$5,533

$1,191

$1,241

$7,965

$81,194

Rental income accrued from the Bow- non-cash

2,634

6,943

6,943

16,520

16,520

Straight-lining of contractual rent

1,254

Revenue reimbursement for property operating costs

1,754

5,618

3,369

10,741

42,058

Property operating costs

(1,754)

(5,618)

(3,369)

Full story available on Benzinga.com

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