H&R Real Estate Investment Trust T.HR.UN

rbc

[hsaber2]

May 14, 2020 H&R REIT [e-mail] [phone] [e-mail] Sasha Stojanovic (Associate) [phone] [e-mail] Sector: Real estate, REITS & Hospitalities $1.3B of FV markdowns and 50% distribution cut overshadow Q1 results Impact: Mixed No real surprises in Q1 results; $1.3B of FV markdowns and 50% distribution cut signal big issues but a willingness to tackle them head-on. Q1/20 Highlights FFO/unit: $0.451, flat YoY ($0.453); in line (+4%) with our $0.432E. SP-NOI growth (cash basis): -4.1% in Canada and +10.3% in the U.S in local currency, due in large part to residential lease-up properties. Rent collection: 85% of April rent and 80% of May (to date). Occupancy: 95.2%; +70 bps QoQ (94.5%) and +150 bps YoY (93.7%). Consolidated D/GBV: 47.9%, +350 bps QoQ and +320 bps YoY. The increase stemmed from sizable property valuation adjustments. IFRS BVPU (pre-tax): $22.26, -14% QoQ ($25.77) and -14% YoY ($25.89). In Q1/20, H&R recorded $1.3B ($4.30/unit) of negative portfolio fair value marks (more below). A 10% appreciation in US$/$CAD in Q1/20, all else equal, should have added ~$300MM or ~$1/unit to equity. $1.3B of fair value markdowns In Q1, H&R recorded investment property valuation marks of -$660MM in the retail portfolio and -$680MM in the office portfolio, for a total of -$1.3B (~$4.30/unit). The adjustments were made to reflect increasingly challenged conditions in: 1) the retail landscape, impacting the market pricing of properties (mostly malls); and, 2) energy sector challenges (e.g., Houston and Calgary) and the related impacts on office tenant credit quality and market fundamentals. 50% distribution cut H&Rs board has approved a 50% distribution cut, to $0.0575/unit/month ($0.69/unit annualized, from $1.38/unit formerly). With 302MM units outstanding, the cut provides incremental retained cash of $208MM/year. Which way do the units go? In the short term, we lack conviction in the answer; in the longer term, we feel better. While the distribution cut signals big challenges at hand, it also shows a desire to tackle them head-on Twelve years ago, H&R was in a difficult spot. Liquidity and funding were tight and costs were rising on its 2MM sf development project (The Bow). On Dec-23-2008, H&R cut its distribution by 50% (to $0.72/unit annually, from $1.44 formerly), which created incremental earnings retention of $106MM annually. Then, as it must have been today, the decision to cut was a difficult one. We believe today's move signals the challenges at hand, but also a desire to tackle them head-on. On Dec-23-2008, H&Rs unit price was $6.30, up from its November lows of ~$5. On Dec-24, H&Rs units closed +6% at $7.35. The unit price then churned for a number of months, but one year later it was $10.20.