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.UN) is pleased
to announce its financial results for the year ended December 31, 2021.
SIGNIFICANT 2021 HIGHLIGHTS
Transformational Strategic Repositioning Plan:
On October 27, 2021, H&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, Vancouver, and high growth U.S. 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, 2021, including 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").
- U.S. office property sale: H&R sold a 172,039 square
foot single-tenanted property in Culver
City, CA for approximately U.S. $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 U.S. residential development completed
in Q4 2020: In September 2021,
the REIT sold its 31.7% non-managing interest in The Exchange at
Bayfront in Hercules, CA for
approximately U.S. $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 2021, H&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 U.S. 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 U.S.
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, 2021, the 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, 2021, the REIT did not purchase any
Units for cancellation.
As at February 9, 2022, the 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 million, at 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 2021, the 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
2021, the 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 income earned
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)
|
(10,741)
|
(42,058)
|
Property operating
income from the Bow
|
8,167
|
8,134
|
8,184
|
24,485
|
98,968
|
Finance cost -
operations
|
(1,390)
|
-
|
-
|
(1,390)
|
(20,172)
|
Finance
income
|
36
|
32
|
2
|
70
|
60
|
Accretion finance
expense on Bow deferred revenue- non-cash
|
(1,426)
|
(3,759)
|
(3,759)
|
(8,944)
|
(8,944)
|
Fair value adjustment
on real estate asset- non-cash
|
-
|
-
|
(4,391)
|
(4,391)
|
90,817
|
Net income from the
Bow
|
5,387
|
4,407
|
36
|
9,830
|
160,729
|
Fair value adjustment
on real estate asset
|
-
|
-
|
4,391
|
4,391
|
(90,817)
|
The Bow non-cash
rental and accretion adjustment
|
(1,208)
|
(3,184)
|
(3,184)
|
(7,576)
|
(7,576)
|
FFO from the
Bow(1)
|
4,179
|
1,223
|
1,243
|
6,645
|
62,336
|
Straight-lining of
contractual rent
|
-
|
-
|
-
|
-
|
(1,254)
|
AFFO from the
Bow(1)
|
$4,179
|
$1,223
|
$1,243
|
$6,645
|
$61,082
|
|
|
(1)
|
These are non-GAAP
measure. Refer to the "Non-GAAP Measures" section in this news
release.
|
Excluding the non-cash rental income adjustment under IFRS 15,
property operating income from the Bow for the three months and
year ended December 31, 2021 was
$8.0 million and $82.4 million, respectively.
The Bell Office Campus Sale
In October 2021, H&R sold its
100% interest in the 1.1 million square foot Bell Office Campus
("Bell Office Campus") located in Mississauga, ON. Total proceeds were
approximately $525.0 million. H&R
continues to manage the Bell Office Campus for the remainder of the
term of the existing Bell Office Campus leases, earning management
fees of approximately $1.6 million
annually.
Property operating income from the Bell Office Campus for the
three months and year ended December 31,
2021 was $1.8 million and
$27.0 million, respectively. FFO for
the three months and year ended December 31,
2021 was $1.7 million and
$22.6 million, respectively. AFFO for
the three months and year ended December 31,
2021 was $1.7 million and
$20.7 million, respectively.
Primaris Spin-Off
On October 27, 2021, H&R
announced its intention to spin-off its enclosed mall portfolio and
together with Healthcare of Ontario Pension Plan ("HOOPP") create
Primaris REIT. Primaris REIT's scale, portfolio composition and
capital structure were designed to allow Primaris REIT to grow and
thrive in the new retail landscape. The Primaris Spin-Off was
completed on December 31, 2021
pursuant to a statutory plan of arrangement (the "Arrangement").
Primaris REIT now owns interests in 35 shopping centres with an
appraised value of approximately $3.2
billion encompassing 11.4 million square feet of gross
leasable area ("GLA") at Primaris REIT's share. H&R contributed
27 properties with an appraised value of approximately $2.4 billion and HOOPP contributed eight
properties with an appraised value of approximately $0.8 billion. H&R's secured debt was reduced
by approximately $580.0 million in
respect of the mortgages assumed by Primaris REIT.
Primaris REIT has substantial scale, a differentiated low
leverage financial model and a full service, vertically integrated
management platform. Primaris REIT's board of trustees and
management are independent with no overlap with H&R's board of
trustees and management, and operates as a distinct and separate
publicly-traded entity. Immediately following the Primaris
Spin-Off, H&R unitholders directly owned approximately 74% of
Primaris REIT units outstanding, and HOOPP owned approximately 26%
of Primaris REIT units outstanding. Primaris REIT's units began
independently trading on the TSX under the ticker PMZ.UN on
January 5, 2022.
Pursuant to a step in the Arrangement, H&R unitholders
received Primaris REIT units having an implied net asset value on
the closing date of $5.53 per
Unit.
As a subsequent step in the Arrangement, the Primaris REIT units
were consolidated such that each holder of Units received one
Primaris REIT unit for every four Units held and resulting in REIT
unitholders holding Primaris REIT units in addition to their Units
as at December 31, 2021.
As the Primaris Spin-Off was completed on December 31, 2021, the assets and liabilities of
the properties now owned by Primaris REIT are not included in the
REIT's consolidated statement of financial position.
The following is a summary of the results from the 27 properties
contributed by H&R to Primaris REIT which have been included in
the consolidated statements of comprehensive income (loss) in the
REIT's Financial Statements as well as a reconciliation to FFO and
AFFO from these properties:
|
Three months
ended
|
Year
ended
|
(in thousands of
Canadian dollars)
|
December 31,
2021
|
Property operating
income
|
$34,590
|
$134,137
|
Finance costs -
operations
|
(4,387)
|
(19,873)
|
Finance
income
|
5
|
17
|
Trust
expenses
|
(1,034)
|
(2,591)
|
Fair value adjustment
on financial instruments
|
-
|
(4,532)
|
Fair value adjustment
on real estate assets
|
(15,854)
|
247,924
|
Gain on sale of real
estate assets
|
-
|
5
|
Income tax
expense
|
-
|
(3)
|
Net income
|
13,320
|
355,084
|
Exchangeable unit
distributions
|
-
|
500
|
Fair value
adjustments on financial instruments and real estate
assets
|
-
|
4,532
|
Fair value adjustment
to unit-based compensation
|
15,854
|
(247,924)
|
Gain on sale of real
estate assets
|
-
|
(5)
|
Incremental leasing
costs
|
1,025
|
4,180
|
FFO(1)
|
30,199
|
116,367
|
Straight-lining of
contractual rent
|
(869)
|
(3,133)
|
Capital
expenditures
|
(4,494)
|
(11,617)
|
Leasing expenses and
tenant inducements
|
(3,392)
|
(9,603)
|
Incremental leasing
costs
|
(1,025)
|
(4,180)
|
AFFO(1)
|
$20,419
|
$87,834
|
|
|
(1)
|
These are non-GAAP
measures. Refer to the "Non-GAAP Measures" section in this news
release.
|
Completion of River Landing Development
River Landing is an urban in-fill mixed use property site in
Miami, FL which was completed
in Q2 2021. River Landing includes approximately 341,000 square
feet of retail space, approximately 149,000 square feet of office
space and 528 residential rental units. It is adjacent to the
Health District with approximately 1,000 feet of waterfront on the
Miami River, two miles from downtown Miami.
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. In Q2 2021, the second
residential tower at River Landing reached substantial completion
and was transferred from properties under development to investment
properties. The total amount transferred from properties under
development to investment properties for the two residential towers
was U.S. $201.6 million. As at
December 31, 2021, residential
occupancy was 94.9%, exceeding management's expectations on leasing
velocity.
In Q4 2020, the retail and office portion of this project "River
Landing Commercial" reached substantial completion and U.S.
$294.3 million was transferred from
properties under development to investment properties. As at
December 31, 2021, retail occupancy
was 79.6% with the remaining retail lease-up expected to occur
during the first half of 2022. Major retail tenants include: Publix
Super Markets Inc., Hobby Lobby, Burlington, Ross Stores Inc., T.J. Maxx, Old
Navy and Planet Fitness.
During Q2 and Q3 2021, the REIT signed two major office leases
with the following tenants: (i) Office of the State Attorney –
Miami-Dade County to occupy
approximately 50,000 square feet and (ii) Public Health Trust of
Miami Dade County to occupy 43,351
square feet. As at December 31, 2021,
committed office occupancy was 64.0%. The REIT is continuing
negotiations with multiple parties on the remaining office
space.
Debt Highlights
Mortgages:
During the year ended December 31, 2021, H&R secured seven new
mortgages totalling $359.2 million at
a weighted average interest rate of 2.1% for an average term of 1.5
years and excluding the Primaris Spin-Off, repaid 28 mortgages
totalling approximately $1.5 billion
(including mortgages repaid upon sale) at a weighted average
interest rate of 3.9%. On December 31,
2021, $580.0 million of
mortgages were transferred to Primaris REIT pursuant to the
Primaris Spin-Off.
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.
In November 2021, H&R used
proceeds from The Bow and Bell Office Campus transactions to redeem
all of its $325.0 million outstanding
2.923% Series L Senior Debentures which were maturing May 6, 2022. H&R incurred a prepayment
penalty of $3.3 million.
Unsecured Term Loans:
In March
2021, the REIT repaid a $200.0
million unsecured term loan.
Lines of Credit:
In April
2021, the REIT secured a one-year extension on the H&R
and CrestPSP revolving secured line of credit for $25.0 million at H&R's ownership interest.
The maturity date was extended to April 30,
2022.
As part of the Primaris Spin-Off, in December 2021, H&R renegotiated its credit
facilities which resulted in H&R cancelling three revolving
unsecured facilities totalling $650.0
million. In addition, H&R reduced the $300.0 million Primaris revolving line of credit
to $150.0 million which was then
transferred to Primaris REIT on December 31,
2021 pursuant to the Primaris Spin-Off. H&R replaced
these facilities with a new $750.0
million revolving unsecured facility maturing December 14, 2026.
Liquidity
As at December 31, 2021, H&R
had cash on hand of $124.1 million,
$952.4 million available under its
unused lines of credit and an unencumbered property pool of
approximately $4.0 billion.
2021 Taxation Consequences for Taxable Canadian
Unitholders
Distributions and special distribution
The REIT's cash
distributions amounted to $0.79 per
Unit during 2021 (including a $0.10
per Unit special cash distribution to unitholders of record on
December 31, 2021). Of these cash
distributions, 3.9% will be designated as capital gains. The REIT
also made a special distribution to unitholders of record on
December 31, 2021 of $0.63 per Unit payable in additional Units, which
were immediately consolidated such that there was no change in the
number of outstanding Units. 100% of the special distribution
payable in Units will be designated as capital gains. The cash
portion of the special distribution was intended to provide
liquidity to unitholders to cover all or part of an income tax
obligation that may arise from the additional taxable income being
distributed via the special distribution. The amount of the special
distribution payable in Units ($0.63
per Unit) will increase the adjusted cost basis ("ACB") of
unitholders' consolidated Units prior to the apportionment of ACB
to Primaris REIT units described below.
Primaris Spin-Off
As described in the REIT's management information circular dated
November 5, 2021 (the "Circular"), a
REIT unitholder will not realize any income or gain solely as a
result of the Primaris Spin-Off and acquisition of Primaris REIT
units. The "REIT Transfer Percentage", as defined in the Circular,
is now confirmed to be 27%. Unitholders' ACB of their REIT Units
should decrease by 27% as a result of the Primaris Spin-Off.
Conversely, unitholders' ACB of the Primaris REIT units issued on
December 31, 2021 should initially be
27% of the unitholders' former ACB of Units immediately prior to
the Primaris Spin-Off.
2022 Distributions
H&R currently anticipates an annual distribution of
$0.52 per Unit. Following the spinoff
of Primaris REIT to H&R's unitholders, Primaris REIT declared
its January 2022 monthly distribution
of $0.067 per Primaris REIT unit,
reflecting $0.80 per unit on an
annualized basis (equivalent to $0.20
per H&R Unit annually prior to the Primaris Spin-Off and 4:1
consolidation of Primaris REIT units). The Primaris REIT
distribution together with H&R's intended annual distribution
of $0.52 equates to a combined
distribution of $0.72 per Unit which
is a 4.3% increase over the $0.69 per
Unit paid by H&R in 2021. The current H&R annual
distribution of $0.52 per Unit is
expected to result in an FFO payout ratio between 45% and 55%.
Monthly Distribution Declared
H&R today declared a distribution for the month of March
scheduled as follows:
|
Distribution/Unit
|
Annualized
|
Record
date
|
Distribution
date
|
March 2022
|
$0.0433
|
$0.520
|
March 31,
2022
|
April 18,
2022
|
Conference Call and Webcast
Management will host a conference call to discuss the financial
results for H&R REIT on Tuesday,
February 15, 2022 at 9.30 a.m.
Eastern Time. Participants can join the call by dialing
1-888-510-2507 or 1-289-514-5065. 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
1-647-362-9199 or 1-800-770-2030 and enter the passcode 3504623
followed by the pound key. The telephone replay will be available
until Tuesday, February 22, 2022 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 $10.5 billion as at
December 31, 2021. H&R REIT has
ownership interests in a North American portfolio comprised of
high-quality office, industrial, residential and retail properties
comprising over 29.5 million square feet. H&R is currently
undergoing a five-year, strategic repositioning to transform into a
simplified, growth-oriented company focusing on residential and
industrial properties to surface significant value for
unitholders.
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 "Significant 2021 Highlights" and "Financial Highlights"
including with respect to H&R's future plans and targets,
including the REIT's strategic repositioning and the REIT's ability
to execute on such repositioning, the expected benefits from the
REIT's strategic repositioning, the REIT's funding of its strategic
repositioning, ongoing management fees from the Bow and Bell Office
Campus, the ability of H&R to capture potential upside in the
Calgary office market, significant
development projects, the timing of lease-up of River Landing
Commercial, the 2021 taxation consequences for taxable Canadian
unitholders, including as a result of the special distribution and
the Primaris Spin-Off, management's expectations regarding future
distributions, including of Primaris REIT, the expected annual FFO
payout ratio of the REIT, management's belief that H&R has
sufficient funds and liquidity for future commitments 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 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
gradually recovering as a result of the COVID-19 pandemic, the
extent and duration of which is unknown; 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; development risks; residential rental business
risk; capital expenditures risk; currency risk; liquidity risk;
financing credit risk; cyber security risk; environmental and
climate change risk; general uninsured losses; co-ownership
interest in properties; joint arrangement risks; dependence on key
personnel; potential acquisition, investment and disposition
opportunities and joint venture arrangements; potential undisclosed
liabilities associated with acquisitions; competition for real
property investments; 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 February 14, 2022 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 Measures
The REIT's financial statements are prepared in accordance with
International Financial Reporting Standards ("IFRS"). However,
H&R's management uses a number of measures, including debt to
total assets at the REIT's proportionate share, NAV per Unit, FFO,
AFFO, payout ratio as a % of FFO and payout ratio as a % of AFFO,
Same-Asset property operating income (cash basis) and the REIT's
proportionate share, which do not have a meaning recognized or
standardized under IFRS or Canadian Generally Accepted Accounting
Principles ("GAAP"). These non-GAAP measures and non-GAAP
ratios 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
measures and ratios may differ from the methods of other real
estate investment trusts or other issuers, and accordingly may not
be comparable. H&R uses these measures to better assess
H&R's underlying performance and provides these additional
measures so that investors may do the same.
For information on the most directly comparable GAAP measures,
composition of the measures, a description of how the REIT uses
these measures and an explanation of how these measures provide
useful information to investors, refer to the "Non-GAAP Measures"
section of the REIT's management discussion and analysis as at and
for the year ended December 31, 2021,
available at www.hr-reit.com and on the REIT's profile on
SEDAR at www.sedar.com, which is incorporated by reference into
this news release.
The reconciliations for each non-GAAP measure included in this
News Release are outlined as follows:
NAV per Unit
The following table reconciles Unitholders' equity per Unit to
NAV per Unit:
|
|
|
|
December
31,
|
December
31,
|
Unitholders'
Equity per Unit and NAV per Unit
|
2021
|
2020
|
Unitholders'
equity
|
$4,773,833
|
$6,071,391
|
Exchangeable
units
|
216,841
|
197,796
|
Deferred tax
liability
|
350,501
|
348,755
|
Total
|
$5,341,175
|
$6,617,942
|
|
|
|
Units outstanding (in
thousands of Units)
|
288,440
|
286,863
|
Exchangeable units
outstanding (in thousands of Units)
|
13,344
|
14,883
|
Total (in thousands
of Units)
|
301,784
|
301,746
|
Unitholders' equity
per Unit(1)
|
$16.55
|
$21.16
|
NAV per
Unit(2)
|
$17.70
|
$21.93
|
|
(1)
Unitholders' equity per Unit is calculated by dividing unitholders'
equity by Units outstanding.
|
Same-Asset property operating income (cash basis)
The following table reconciles property operating income to
Same-Asset property operating income (cash basis):
|
Three months ended
December 31
|
Year ended December
31
|
(in thousands of
Canadian dollars)
|
2021
|
2020
|
Change
|
2021
|
2020
|
Change
|
Rentals
|
$265,794
|
$277,509
|
($11,715)
|
$1,065,380
|
$1,098,680
|
($33,300)
|
Property operating
costs (excluding bad debt expense)
|
(95,017)
|
(90,658)
|
(4,359)
|
(400,508)
|
(395,306)
|
(5,202)
|
Property operating
income (excluding bad debt expense)
|
170,777
|
186,851
|
(16,074)
|
664,872
|
703,374
|
(38,502)
|
Bad debt expense
|
(936)
|
(3,235)
|
2,299
|
(3,290)
|
(39,708)
|
36,418
|
Property operating
income
|
169,841
|
183,616
|
(13,775)
|
661,582
|
663,666
|
(2,084)
|
Adjusted
for:
|
|
|
|
|
|
|
Proportionate share of property operating income
from
equity accounted investments(1)
|
23,985
|
18,376
|
5,609
|
72,111
|
84,698
|
(12,587)
|
Straight-lining of contractual rent at the REIT's
proportionate share(1)
|
(1,057)
|
(4,540)
|
3,483
|
(23,664)
|
(10,541)
|
(13,123)
|
Realty
taxes in accordance with IFRIC 21 at the REIT's
proportionate share(1)
|
(12,192)
|
(12,229)
|
37
|
-
|
-
|
-
|
Property
operating income (cash basis) from Transactions
at the REIT's proportionate
share(1)
|
(39,959)
|
(54,007)
|
14,048
|
(182,284)
|
(180,841)
|
(1,443)
|
Same-Asset property
operating income (cash basis)(2)
|
$140,618
|
$131,216
|
$9,402
|
$527,745
|
$556,982
|
($29,237)
|
|
(1) The
REIT's proportionate share is a non-GAAP measure.
|
Funds from Operations and Adjusted Funds from
Operations
The following table reconciles net income (loss) to FFO and
AFFO:
FFO AND
AFFO
|
Three Months Ended
December 31
|
Year ended December
31
|
(in thousands of
Canadian dollars except per Unit amounts)
|
2021
|
2020
|
2021
|
2020
|
Net income (loss)
per the REIT's Financial Statements
|
$208,195
|
$111,644
|
$597,907
|
($624,559)
|
Realty taxes in
accordance with IFRIC 21
|
(11,014)
|
(11,069)
|
-
|
-
|
FFO adjustments from
equity accounted investments (page 33)
|
(77,139)
|
52,555
|
(92,217)
|
62,122
|
Exchangeable unit
distributions
|
3,636
|
2,567
|
11,088
|
13,966
|
Fair value
adjustments on financial instruments and real estate assets
|
(37,799)
|
(25,876)
|
(56,843)
|
1,112,984
|
Fair value adjustment
to unit-based compensation
|
(64)
|
2,561
|
5,083
|
(15,992)
|
(Gain) loss on sale
of real estate assets
|
(3,192)
|
62
|
(6,957)
|
2,229
|
Deferred income taxes
expense (recoveries) applicable to U.S. Holdco
|
27,957
|
(6,612)
|
4,458
|
(54,000)
|
Incremental leasing
costs
|
1,568
|
1,566
|
6,422
|
6,346
|
The Bow non-cash
rental and accretion adjustment
|
(7,576)
|
-
|
(7,576)
|
-
|
FFO(1)
|
$104,572
|
$127,398
|
$461,365
|
$503,096
|
Straight-lining of
contractual rent
|
(1,261)
|
(4,297)
|
(23,581)
|
(10,652)
|
Rent amortization of
tenant inducements
|
1,149
|
1,175
|
4,557
|
2,661
|
Capital
expenditures
|
(18,574)
|
(14,479)
|
(47,089)
|
(52,980)
|
Leasing expenses and
tenant inducements
|
(6,737)
|
(40,309)
|
(18,865)
|
(49,927)
|
Incremental leasing
costs
|
(1,568)
|
(1,566)
|
(6,422)
|
(6,346)
|
AFFO adjustments from
equity accounted investments (page 33)
|
(1,354)
|
(642)
|
(4,140)
|
(2,041)
|
AFFO(1)
|
$76,227
|
$67,280
|
$365,825
|
$383,811
|
Weighted average
number of Units and exchangeable units (in thousands of
Units)(2)
|
301,779
|
301,746
|
301,772
|
301,687
|
Diluted weighted
average number of Units and exchangeable units (in thousands of
Units)(2)(3)
|
302,612
|
302,292
|
302,605
|
302,234
|
FFO per basic Unit
(adjusted for conversion of exchangeable
units)(4)
|
$0.347
|
$0.422
|
$1.529
|
$1.668
|
FFO per diluted
Unit(4)
|
$0.346
|
$0.421
|
$1.525
|
$1.665
|
AFFO per basic Unit
(adjusted for conversion of exchangeable
units)(4)
|
$0.253
|
$0.223
|
$1.212
|
$1.272
|
AFFO per diluted
Unit(4)
|
$0.252
|
$0.223
|
$1.209
|
$1.270
|
Cash Distributions
per Unit(5)
|
$0.272
|
$0.172
|
$0.790
|
$0.920
|
Payout ratio as a %
of FFO(4)(5)
|
77.1%
|
40.5%
|
51.6%
|
55.1%
|
Payout ratio as a %
of AFFO(4)(5)
|
108.0%
|
77.3%
|
65.3%
|
72.4%
|
|
|
(1)
|
For both the three
months and year ended December 31, 2021, included in the weighted
average and diluted weighted average number of Units are
exchangeable units of 13,350,995 and 14,112,090,
respectively. For both the three months and year ended
December 31, 2020, included in the weighted average and diluted
weighted average number of Units are exchangeable units of
14,883,065.
|
(2)
|
For the three months
and year ended December 31, 2021, included in the determination of
diluted FFO and AFFO with respect to H&R's Unit Option Plan and
Incentive Unit Plan are 832,976 Units. For the three months and
year ended December 31, 2020, included in the determination of
diluted FFO and AFFO with respect to H&R's Unit Option Plan and
Incentive Unit Plan are 546,306 Units.
|
(3)
|
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.
|
Additional information regarding H&R is available at
www.hr-reit.com and on www.sedar.com.
SOURCE H&R Real Estate Investment Trust