RE:From RBC
November 17, 2020H&R REITThe toolkit to navigate the challenges, and surfacevalue over timeOur view: Reflecting on the recent challenges in the economy at large,H&R REIT’s (“H&R”) recently released Q3/20 results were lower year-over-year, but in line with our expectation. We expect weakness to persistspecifically for several more quarters, but beyond, we also see a routeto improving results. We continue to see H&R as a multi-year portfoliorefocusing story, and one that may lead to more significant and strategicmoves to surface value. The global COVID pandemic may have pushedback this process, but in no way do we think it is derailed. We believe HRhas the “toolkit” (e.g., the people, properties, financial strength, liquidityand retained earnings) to reasonably navigate this path. Increasing ourprice target +$2 to $17, we reiterate our Sector Perform on H&R’s units.Key points:Q3/20 results recap – Q3 FFO/unit of 0.412 was in line with our $0.417,-4% YoY from Q3/19’s $0.430 and +8% QoQ from Q2/20’s $0.381. The YoYdecline was attributable to Q3/20 bad debt charges of $13.5MM ($0.04/unit) and weak results in the Residential segment due to a material declinein renewal and leasing activity at Jackson Park. Overall, 95% of Q3/20’sbad debt provisions related to the enclosed mall portfolio, and H&R notesthere will be more to come in Q4/20, although they are expected to be lessthan Q3’s. Driven largely by the bad debt provisions, Q3/20 SPNOI growthwas -5.5%. With broad-based re-openings, rent collection in Q3/20 was93%, up from 90% in Q2. October collections are at 95% to date. We expectan improvement in Q4/20 FFO/unit, with a levelling for several quartersthereafter, and an improvement again in the 2021 exit-rate.Development and asset management – The REIT’s active developmentpipeline has a total value of $1B, with $0.8B invested to date. By2022-23, this should deliver annualized NOI of $54MM (5.4% yield).Understandably, the pace of asset sales has slowed this year ($366MM,versus $0.9B in each of the two prior years). We believe portfolio-focusing/improving property sales could accelerate in 2021.Strong liquidity; steady leverage – Q3/20 corporate liquidity was strong,at $1.1B ($0.1B of cash + $1B of undrawn capacity in various lines). H&R'sD/GBV ratio (proportionate) was 50.8%, -80bps QoQ from Q2’s 51.6%.2021 debt maturities include the $196MM unsecured term loan #1 and$833MM of mortgage debt. The latter is secured by investment propertieshaving value of ~$2.2B, equating to sub-40% LTV ratio. In light of the REIT’sstrong liquidity position, its $3.5B unencumbered property pool, and themodest LTV on maturing 2021 mortgages, we believe H&R is in a positionof strength with respect to near-term debt maturities.Little change to estimates – Our 2020E-22E FFO/unit are effectivelyunchanged (+/-1%) at $1.67 (-$0.02), $1.81 (-$0.01), and $1.84 (+$0.03),respectively. Our NAV/unit estimate is steady at $22.