First Look: In-Line Q2/22 With Many Positive Data Points

Bottom Line:

H&R REIT reported an in-line quarter for Q2/22 that featured many positive data points including another quarter of outsized SPNOI growth, significant unit buybacks, and another increase in its IFRS NAV/unit. Management continues to make progress on its strategic repositioning plan, which should help narrow the gap to NAV. With HR.UN trading at a significant discount of -26% to BMO's NAV estimate and -38% to IFRS NAV, we think there's good value in the stock.

Key Points

IFRS NAV increased 5% sequentially to $22.14/unit, primarily driven by unit buybacks and a stronger US$. H&R's IFRS cap rate was unchanged sequentially at 5.10% (+8bps for residential, +2bps for office, -5bps for retail, and unchanged for industrial).

Continuing to utilize NCIB. Unit buybacks totaled $136.8M in Q2/22 (10.5M units at $13.01), with an additional $28.3M repurchased (2.2M units at $12.76) post quarter-end. YTD, H&R has bought back 22.1M units or 78% allowed under its NCIB which is effective until December 15, 2022.

Continuing to recycle capital through asset sales. YTD, H&R sold $238.3M of properties, with another $167.7M pending with binding agreements. In Q2/22, H&R sold a residential property in San Antonio, Texas for US$69.3M (3.6% cap rate), seven automotive-tenanted retail properties in the US for US$58.1M (5.2% cap rate), and a 50% interest in an industrial property in Calgary, Alberta for $3.5M.

Florida land acquisitions. In Q2/22, H&R acquired two parcels of land, 6.8 acres in Clearwater, Florida for US$17.1M, and 16.3 acres in Orlando, Florida for US$15.5M, to be developed into 425 and 380 residential rental units, respectively.

Development completions. In Q2/22, H&R transferred two developments to IPP, Shoreline in Long Beach, California, and The Grand at Bayfront in Hercules, California, reporting fair value increases of US$19.0M and US$3.0M over cost (H&R's interest), respectively.

Q2/22 FFO/unit met expectations. H&R REIT reported FFO/diluted unit of $0.28, -26.1% y/y, exactly in-line with BMOe and consensus of $0.28.

Another quarter of outsized SPNOI growth. Q2/22 cash SPNOI was +18.8% y/y (+6.4% normalized). By asset class: residential +43.7% (+24.8% excluding Jackson Park), office +23.2% (+1.5% excluding Hess Corporation lease), industrial +4.9%, retail -3.5% (+1.5% excluding River Landing).