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

Scotia comments

[incomedreamer11]

Q3 Glance: In-Line Recurring; Progressing on $600M Disposition Target for 2023

OUR TAKE: Neutral. Reported FFOPU was $0.42. Ex. a $31M gain on disposal of a U.S. land purchase option ($0.11/un), $0.7M of net lease termination fees (net of $1.8M straight-line write-off) and $0.3M of bad debt, we est. recurring FFOPU was $0.306, flat q/q and +9% y/y, in line with our $0.307 and $0.308 consensus (range = $0.29-$0.32)

IFRS NAVPU increased 2% to $21.49 (Q2 = -4.1%) vs. our $18.25 as a $140M IPP FV loss or 5.5% of unit price (Q2 = $274M loss or 9%) was offset by the $31M gain; we’re still trying to figure out the rest (cash retention is one item). Equity value per unit (i.e., incl. the DTL in NAV like we do = $20.62 vs. $20.09 q/q). Total portfolio IFRS cap rate was +8bp q/q to 5.59% (Q2 = +11bp q/q) vs. our ~6.1%.

H&R reiterated its 2023 Target dispositions of $600M (vs. $432M completed YTD; +$45M q/q); nothing new in Q3 but another ~$45M sold post-Q (i.e. ~$500M YTD).

Same-asset (SA) cash NOI was +12.6% y/y (Q2 = +11.7%). In local currency, Canada was +11.0% y/y (Q2 = +3.6%) and U.S. was +9.4% y/y (+9.9%); we think Canada was closer to 3%-5% ex. one-time Office termination fees.

Full update post c/c tomorrow, November 15, at 9:30 a.m. ET (1-888-886-7786).

Capital recycling update. Two smaller U.S. assets were sold (single-tenant office in Florida and an automotive centre in Georgia) for ~US$17M, both of which were listed as subsequent events in the Q2 statements. H&R noted selling an Office and Industrial property in the U.S. for US$33M so far in Q4 (were the only HFS assets as at Q3). No update on expected quantum of Q4/23 special distribution. H&R repurchased 1.3M units at an avg. $10.38 (vs. 2.8M YTD as of Q2 at $10.26/un) with no mention of post-Q3 activity (that we saw). Regarding intensifications, expected residential zoning at 53/55 Yonge Street was pushed into Q1/24 (from Q3/23; 511 resi units + 0.17Msf commercial), while residential rezoning at 310 Front St. (578 resi suites + 0.12Msf commercial) was obtained in August.

Operations update. Total and SP occupancy +40bp q/q to 97.0%-97.1% (Q2 = -40bp q/q), with Residential, Industrial, and Retail all +70bp q/q (Residential to 95.2%) offset by 70bp of Office erosion (to 98.1%). The 12.6% y/y SANOI growth (Q2 = +11.7%) was driven by 19.5% and 11.1% y/y growth in Residential and Industrial, respectively, along with 9.9% in Retail and 8.8% in Office.

Financial leverage falls on asset sales (liquidity increases). Liquidity was +$118M q/q to $1,064M (Q2 = -$3M), including $146M in cash and $918M in credit facilities. H&R unencumbered assets of $4.1B = 109% of total debt (Q2 = 82%). Debt/GBV fell 90bp q/q to 43.9% (at HR share; Q2 = +90bp) with Debt-to-EBITDA 0.7x lower to 8.7x (Q2 = -0.2x). The 8bp higher IFRS cap rate to 5.59% (Q2 = +11bp) included a 29bp jump in Office to 6.87% (Q2 = +26bp) and a 12bp increase in Retail to 6.47%. Residential and Industrial were flat q/q at 4.49% and 5.28%, respectively. During the quarter, HR repaid $125M unsecured loan maturing in Nov/2024 and extended a $250M unsecured loan from Mar/2024 to Mar/2025, a $150M LoC from Sep/2023 to Sep/2024 and a $750M LoC from Dec/2026 to Dec/2027.