TORONTO , Aug. 12, 2020 /CNW/ - H&R Real Estate Investment Trust ("H&R" or "the REIT") (TSX:HR-UN.TO) announces its financial results for the three and six months ended June 30, 2020 .
Tom Hofstedter , President & CEO of H&R REIT said "In these exceptional circumstances, we are pleased to report operating and financial results that reflect the high quality of our portfolio and the diligent efforts of our team. Our office, industrial and multi-residential portfolios have seen almost no disruption and tenant closures in our retail portfolio total less than 65,000 sq.ft., or 0.5% of retail GLA. While there remains a great deal of economic uncertainty, overall rent collections surpassing 90% in July and a gradual resumption of more typical activity bode well for the second half of 2020."
FINANCIAL HIGHLIGHTS
| | 3 months ended June 30 | 6 months ended June 30 |
| | 2020 | 2019 | 2020 | 2019 |
| Rentals from investment properties (millions) | $269.9 | $287.0 | $549.6 | $585.7 |
| Property operating income (millions) | $163.6 | $187.1 | $304.3 | $341.0 |
| Same-Asset property operating income (cash basis) (millions) (1) | $171.8 | $184.8 | $364.5 | $375.6 |
| Fair value adjustment on real estate assets (millions) | ($57.7) | ($27.3) | ($1,358.9) | ($35.0) |
| Net income (loss) (millions) | $35.8 | $109.6 | ($984.1) | $107.6 |
| Funds from operations ("FFO") (millions) (1) | $115.0 | $128.2 | $251.2 | $265.1 |
| FFO per Unit (basic) (1) | $0.38 | $0.43 | $0.83 | $0.88 |
| Adjusted Funds from Operations ("AFFO") per unit (1) | $0.29 | $0.30 | $0.69 | $0.68 |
| Distributions per Unit | $0.23 | $0.35 | $0.58 | $0.69 |
| Payout ratio per Unit (as a % of FFO) (1) | 60.4% | 81.2% | 69.0% | 78.4% |
| Net Asset Value ("NAV") per Unit as at June 30 (1) | $21.80 | $25.81 | $21.80 | $25.81 |
| | |
| (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 and six months ended June 30, 2020 includes a reconciliation of property operating income to Same-Asset property operating income (cash basis) and 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. |
The primary reason for the decrease in rentals from investment properties is net disposition activity over the past 18 months. During this period, the REIT completed approximately $1.0 billion of asset sales compared to $206.6 million of acquisitions over the past 18 months, substantially repositioning its portfolio and enhancing its internal growth profile. H&R continues to actively reallocate capital through property dispositions to fund value-creating developments, expand its residential rental platform and strengthen its balance sheet.
Property operating income and Same-Asset property operating income (cash basis) decreased for the three and six months ended June 30, 2020 compared to the respective 2019 periods primarily due to a $24.5 million provision for bad debts taken as a result of the impact of COVID-19, which predominantly impacted H&R's retail segment.
Same-Asset property operating income (cash basis) in H&R's office, industrial and residential segments increased by 3.8%, 7.2% and 15.3%, respectively during the three months ended June 30, 2020 compared to the three months ended June 30, 2019 .
Same-Asset property operating income (cash basis) for the retail segment decreased 34.7% for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 . Excluding the $22.8 million provision for bad debts taken with respect to the retail segment, retail Same-Asset property operating income (cash basis) would have increased by 2.9%.
Net income decreased by $73.8 million for the three months ended June 30, 2020 compared to the respective 2019 period primarily due to the fair value adjustment on real estate assets and financial instruments, gain (loss) on real estate assets, and the provision for bad debts.
Net income (loss) decreased by $1.1 billion for the six months ended June 30, 2020 compared to the respective 2019 period primarily due to the fair value adjustment of certain office and retail properties by approximately $1.3 billion and an increase in the provision for bad debts.
BUSINESS UPDATE
COVID-19
The COVID-19 pandemic has brought dramatic and unprecedented challenges to nearly every corner of society and the global economy and significantly impacted the commercial property industry. Risk management has been and continues to be a core component of H&R since the time of its IPO, most evident in a focus on long-term leases, high credit quality tenants and a conservative balance sheet.
H&R is doing everything possible to support and protect everyone its organization touches, as it pulls together as a community. H&R has made considerable efforts to ensure the safety and wellbeing of its employees, tenants and visitors to its properties.
Certain properties were closed to comply with government mandates while providing for certain essential service tenants to continue to operate out of these otherwise closed properties, and H&R has engaged with tenants across all of its properties to work together to reach customized operating and financial arrangements. H&R has also undertaken detailed reviews of its operations to reduce expenses and mitigate the financial impact of economic disruptions and property closures on its tenants and on its unitholders.
Fair Value Adjustments on Real Estate Assets
The financial results for the six months ended June 30, 2020 include significant fair value adjustments recorded in Q1 2020. These adjustments are a result of H&R's regular quarterly IFRS fair value process, and include the following impacts of COVID-19: (i) an acceleration of challenging conditions in the retail landscape impacting the valuation assumptions of retail properties; and (ii) energy sector challenges that have impacted the credit quality of many companies operating in this industry and the related impacts on property market fundamentals in markets significantly influenced by energy industry employment.
| Fair Value Adjustment on Real Estate Assets
(in thousands of Canadian dollars) | Three months ended
June 30, 2020 | Six months ended
June 30, 2020 |
| Operating Segment: | | |
| Office | ($40,447) | ($688,767) |
| Retail | (5,338) | (665,218) |
| Industrial | (4,074) | 2,808 |
| Residential | (7,817) | (7,741) |
| Total fair value adjustment on real estate assets | ($57,676) | ($1,358,918) |
Given the rapidly changing dynamics within these industries and the broader economy, management and the Board strongly supported taking a more proactive approach to updating fair market values to ensure appropriate financial reporting practices. Should the retail industry recover or energy industry conditions improve, H&R will have the opportunity to update fair values as market conditions evolve.
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 August 10 , 2020, H&R's rent collections since the onset of COVID-19 are as follows:
| Tenant Type (1) | Average Share
of Rent (2) | April
Collection (2) | May
Collection (2) | June
Collection (2) | July
Collection (2) | August
Collection (2)(3) |
| Office | 44% | 99% | 99% | 99% | 99% | 99% |
| Retail: | | | | | | |
| Enclosed | 21% | 54% | 49% | 56% | 66% | 64% |
| Other | 13% | 91% | 88% | 90% | 95% | 83% |
| Total Retail | 34% | 68% | 64% | 69% | 77% | 71% |
| Residential | 16% | 97% | 96% | 96% | 96% | 90% |
| Industrial | 6% | 99% | 99% | 99% | 98% | 97% |
| Total (4) | 100% | 89% | 87% | 89% | 91% | 87% |
| | |
| (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 include monthly billings for base rent and property operating costs. |
| (3) | Includes Government tenancies whose rent is only due at the end of August. |
| (4) | April to July collections include an aggregate amount of $5.6 million received from the Government of Canada under the Canada Emergency Commercial Rent Assistance ("CECRA") program. |
H&R's high-quality, long-term leased office portfolio delivered strong rent collection consistent with the profile of the tenant base, where 86.6% of tenants are investment-grade. Rent collection was also strong 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.
The tenants that have been impacted the most by the COVID-19 pandemic have been retailers. Rent collection in H&R's retail portfolio reflects a blend of grocery-anchored centres, single tenant and enclosed mall properties. Non-essential stores across the country were closed by government mandates in March, however by the end of June all properties, including most stores at enclosed shopping centres, were re-opened. Rent collection has improved in July and August as most tenants have been able to resume operations. In prior months, rent collection has trended slightly higher through the second half of the month, and management expects August collections to continue to improve through the end of the month, and improve further in September.
The CECRA program for small businesses implemented by the Government of Canada provides forgivable loans to qualifying landlords to cover 50% of five monthly rent payments that are payable by eligible small business tenants who are experiencing financial hardship during April, May, June, July and August. Tenants are responsible for contributing 25% of the rent payments with the landlords abating the remaining 25% share. Establishing eligibility, the administration of applications and the timing of payments have all contributed to a delay in the resolution of rent deferrals, with many agreements still in discussion.
In July 2020 , H&R filed CECRA applications for 37 properties covering approximately $16 .0 million of gross rent at H&R's ownership interest cumulatively for the four month period from April to July. H&R's 25% abatement is approximately $4 .0 million and the Government's forgivable 50% is approximately $8.0 million . As at August 10, 2020 , H&R has received approximately $5.6 million from the Government under the CECRA program for the months of April to July and anticipates receiving the remaining $2.4 million in the very near future.
As at June 30, 2020 H&R's tenant receivables were $29.1 million net a provision for bad debts of $23.9 million .
Provision for Bad Debts
The provision for bad debts is classified as an expense and is grouped together with other expenses in property operating costs. The following tables disclose H&R's provision for bad debts as a result of the impact of COVID-19. H&R's retail segment was impacted the most due to government mandated closures primarily affecting the REIT's enclosed shopping centres.
| Provision for Bad Debts (in thousands of Canadian dollars) | Three months ended
June 30, 2020 | Six months ended
June 30, 2020 |
| Expected rent abatements and general provision for bad debts | $18,480 | $18,814 |
| Bankruptcies - tenants who have filed for creditor protection | 2,907 | 2,907 |
| CECRA application related abatements - April, May and June 2020 | 3,093 | 3,093 |
| Provision for bad debts per the REIT's proportionate share | 24,480 | 24,814 |
| Less: equity accounted investments | (958) | (945) |
| Provision for bad debts per the REIT's Financial Statements | $23,522 | $23,869 |
The provision for bad debts amounts to 45% of the gross accounts receivable balance as at June 30, 2020 .
| Provision for Bad Debts | Three months ended June 30 | Six months ended June 30 |
| (in thousands of Canadian dollars) | 2020 | 2019 | Change | 2020 | 2019 | Change |
| Bad debts by Same-Asset operating segment: | | | | | | |
| Office | $362 | $33 | $329 | $375 | $79 | $296 |
| Retail | 22,842 | 39 | 22,803 | 22,912 | 152 | 22,760 |
| Industrial | 52 | - | 52 | 52 | - | 52 |
| Residential | 1,027 | 182 | 845 | 1,225 | 521 | 704 |
| Total Same-Asset bad debts | 24,283 | 254 | 24,029 | 24,564 | 752 | 23,812 |
| Transactions | 197 | 9 | 188 | 250 | 73 | 177 |
| Provision for bad debts per the REIT's proportionate share | 24,480 | 263 | 24,217 | 24,814 | 825 | 23,989 |
| Less: equity accounted investments | (958) | 24 | (982) | (945) | 48 | (993) |
| Provision for bad debts per the REIT's Financial Statements | $23,522 | $287 | $23,235 | $23,869 | $873 | $22,996 |
Tenant Closures
Many retailers have faced very challenging conditions in recent months, as several have filed for Companies' Creditors Arrangement Act ( Canada ) ("CCAA") creditor protection and several have announced store closures. The REIT's focus on maintaining affordable cost structures for its mall-based retailers has resulted in above average rent collections as compared to other large mall owners, and high retention of store locations by tenants planning store closures elsewhere. The following table summarizes the tenant groups that have filed for creditor protection under the CCAA:
| | | ----------------Current----------------- | ------Expected to be Retained----- |
| Tenant Group | CCAA
Filing Date | Square
Footage (1) | Number of Stores | Square Footage (1) | Number of Stores |
| Pier One | February 29, 2020 | 28,583 | 3 | - | - |
| Aldo | May 7, 2020 | 27,715 | 19 | 23,724 | 15 |
| Reitmans | May 19, 2020 | 43,917 | 17 | 38,544 | 14 |
| Comark | June 3, 2020 | 79,890 | 26 | 79,890 | 26 |
| General Nutrition Centres | June 24, 2020 | 6,868 | 8 | 6,868 | 8 |
| David's Tea | July 8, 2020 | 9,158 | 16 | - | - |
| Tristan | July 21, 2020 | 2,500 | 1 | 2,500 | 1 |
| Ascena | July 23, 2020 | 19,187 | 7 | 2,199 | 1 |
| Laura's Group | August 4, 2020 | 9,047 | 3 | 9,047 | 3 |
| Total subject to CCAA | | 226,865 | 100 | 162,772 | 68 |
| Total Retail Segment | | 13,254,000 | 2,675 | | |
| | |
| (1) | At H&R's ownership interest. |
Le Chateau (13 locations) has also announced plans for closures, and management is in discussions with them regarding their intentions. Management expects no closures from GAP, H&M, or L Brands in the REIT's portfolio, and the REIT does not have any locations with Brooks Brothers, Lucky Brands, J. Crew, Medocino, Frank & Oak, Lole or Microsoft, each of which has announced plans for store closures.
Distributions
As previously announced in May 2020 , in light of current operating and capital markets conditions, management recommended and the Board approved a 50% reduction of monthly distributions effective May 2020 , from $0.115 per Unit to $0 .0575 per Unit, or $0.690 per Unit annually.
This distribution rate provides additional financial flexibility to absorb any income interruption related to the pandemic in the near term, and allows for significant capital reinvestment into the REIT's properties to address tenant turnover without increasing the REIT's financial leverage. The new distribution rate is also expected to satisfy the REIT's requirement to distribute all of its taxable income. The Board will continue to re-evaluate the distribution on a quarterly basis taking into account a variety of relevant factors including the REIT's taxable income.
Liquidity
Management has taken precautionary steps to further bolster the REIT's liquidity as a result of the severity of the pandemic's impact on economic conditions. During Q2 2020, the REIT secured a new $500.0 million unsecured line of credit from a syndicate of five Canadian banks. The REIT also arranged a new $100.0 million secured mortgage on a previously unencumbered property, maturing in 2029. Further, H&R issued $400.0 million Series Q Senior Debentures maturing June 16, 2025 , the proceeds of which were used to repay lines of credit. Notably, both the new line of credit and mortgage were arranged following the onset of the COVID-19 economic disruption, underscoring H&R's strong access to capital availability and cash on hand. As at June 30, 2020 , H&R had $995.8 million of unused borrowing capacity available under its lines of credit and $131.4 million of cash on hand. As at June 30, 2020 , H&R had $99.2 million of debt maturing during the remainder of 2020.
SUMMARY OF SIGNIFICANT Q2 2020 ACTIVITY
Developments
H&R's active development pipeline in the United States currently comprises five residential developments and one mixed-used development with a total development budget of U.S. $679.3 million . As at June 30, 2020 , U.S. $535.7 million had been spent on properties under development with U.S. $143.6 million of budgeted costs remaining to complete of which U.S. $69.4 million will be funded through secured construction facilities, in each case at the REIT's proportionate share.
The 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 373,000 square feet of retail space, approximately 118,000 square feet of office space and 528 residential rental units. Construction is nearing completion with retail occupancy scheduled to commence in Q3 2020. The total cost of the project is expected to be approximately U.S. $495.9 million . As at June 30, 2020 , approximately U.S. $421.7 million has been included in properties under development.
Construction continued on the first phase of a 2.7 million square foot industrial development in Caledon, ON . The first phase consists of three buildings, which will total approximately 526,000 square feet upon completion. In January 2020 , H&R completed a 10-year lease with Deutsche Post AG to occupy the largest of the three buildings totalling 342,821 square feet. The lease is expected to commence in November 2020 . The total budget for this building is $54.6 million . As a result of COVID-19, H&R has temporarily suspended construction of the second and third buildings.
Office
Committed occupancy for the Office segment was 99.8% compared to actual occupancy of 99.5% as at June 30 , 2020.
Same-Asset property operating income (cash basis) from office properties increased by 3.8% for the three months ended June 30, 2020 compared to the respective 2019 period. Included in the three months ended June 30, 2020 are lease termination fees of $2.9 million compared to $0.1 million for the three months ended June 30, 2019 .
Industrial
In April 2020 , H&R sold a 50% ownership interest in a 363,983 square foot single-tenanted property in Boucherville, QC for approximately $17.4 million , at H&R's ownership interest. This property was previously classified as held for sale as at December 31, 2019 and March 31, 2020 .
Same-Asset property operating income (cash basis) from industrial properties increased by 7.2% for the three months ended June 30, 2020 compared to the respective 2019 period.
Residential
Same-Asset property operating income (cash basis) from residential properties in U.S. dollars increased by 11.0% for the three months ended June 30, 2020 compared to the respective 2019 period.
Retail
In April 2020 , H&R sold a 164,365 square foot multi-tenanted retail property in Niagara Falls, ON for gross proceeds of $10.2 million .
Committed occupancy for the Retail segment was 92.5% compared to actual occupancy of 90.6% as at June 30, 2020 .
Same-Asset property operating income (cash basis) from retail properties decreased by 34.7% for the three months ended June 30, 2020 compared to the respective 2019 period primarily due to the provision for bad debts as a result of the impact of COVID-19. Excluding the provision for bad debts, Same-Asset property operating income increased by 2.9%.
Debt Highlights
As at June 30, 2020 , debt to total assets was 48.1% compared to 44.4% as at December 31 , 2019. The increase in debt to total assets is primarily due to the fair value adjustment of certain office and retail properties recognized in Q1 2020 of approximately $1.3 billion . The weighted average interest rate of H&R's debt as at June 30, 2020 was 3.5% with an average term to maturity of 3.9 years.
Mortgages:
During Q2, 2020, H&R secured three new mortgages totalling $113.9 million at a weighted average interest rate of 3.8% for an average term of 8.1 years and repaid four mortgages totalling $24.1 million at a weighted average interest rate of 4.1%.
Debentures:
In June 2020 , H&R issued $400.0 million principal amount of 4.071% Series Q Senior Debentures maturing June 16, 2025 . The proceeds were used to repay lines of credit.
Lines of Credit:
In Q2 2020, H&R bolstered its liquidity by securing a $500.0 million unsecured line of credit from a syndicate of five Canadian banks for a one-year term.
Monthly Distributions Declared
H&R today declared distributions for the months of August and September scheduled as follows:
| | Distribution/Unit | Annualized | Record date | Distribution date |
| August 2020 | $0.0575 | $0.690 | August 21, 2020 | September 4, 2020 |
| September 2020 | $0.0575 | $0.690 | September 22, 2020 | October 6, 2020 |
Conference Call and Webcast
Management will host a conference call to discuss the financial results for the REIT on Thursday, August 13, 2020 at 9.30 a.m. Eastern Time . Participants can join the call by dialing 647-427-7450 or 1-888-231-8191. 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 416-849-0833 or 1-855-859-2056 and enter the passcode 3534627 followed by the pound key. The telephone replay will be available until Thursday, August 20, 2020 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