H&R REIT Reports Second Quarter 2021 Results

TORONTO, Aug. 12, 2021 /CNW/ - H&R Real Estate Investment Trust ("H&R" or "the REIT") (TSX: HR.UN) announces its financial results for the three and six months ended June 30, 2021.

"I am very pleased to report H&R's second quarter financial results, reflecting the quality of our portfolio and strength of our balance sheet" said Tom Hofstedter, President and CEO. "Our announcement earlier this week of the $1.5 billion sale of the Bow Office Tower in Calgary and the Bell Office Campus in Mississauga will notably improve our tenant concentration profile, reduce our exposure to the Calgary office market, and most importantly, will enhance our financial flexibility allowing us to advance our strategic initiatives."

FINANCIAL HIGHLIGHTS

Properties in Lease-up

River Landing, Miami, FL

At June 30, 2021, retail occupancy was 77.2%. Committed occupancy was 87.8% as of August 2, 2021. The remaining retail lease-up is expected to occur during 2021.

During Q2 2021, the REIT signed a lease with the Office of the State Attorney – Miami-Dade County to occupy approximately 50,000 square feet of office space, bringing committed office occupancy to approximately 34.9% as of August 2, 2021. The REIT is continuing negotiations with multiple parties on the remaining office space.

In Q2 2021, the second residential tower at River Landing reached substantial completion and was transferred from properties under development to investment properties. The total amount transferred for the two residential towers was U.S. $201.6 million. As at June 30, 2021, occupancy was 59.1% and committed occupancy was 86.6% as of August 2, 2021, exceeding management's expectations on leasing velocity.

Jackson Park, Long Island City, NY

As at June 30, 2021, occupancy was 61.6%. Committed occupancy was 96.8% as at August 2, 2021.

SUMMARY OF SIGNIFICANT Q2 2021 ACTIVITY

Office

In June 2021, H&R repaid the first series of first mortgage bonds secured by The Bow office complex in Calgary, AB totalling $250.0 million at an interest rate of 3.69%, upon maturity. The repayment was funded using H&R's lines of credit.

Same-Asset property operating income (cash basis) (a non-GAAP measure - see "Non-GAAP Financial Measures" in this press release) from office properties decreased by 9.9% and 10.0%, respectively for the three and six months ended June 30, 2021 compared to the respective 2020 periods, primarily due to Hess Corporation ("Hess") receiving a seven-month free rent period (commencing December 2020) as part of a lease extension and amending agreement completed in November 2020 for its premises in Houston, TX, (the "Hess Lease Amendment") under which Hess agreed to extend the term of its lease on two-thirds of the building for an additional term of 10 years beyond its current expiry of June 30, 2026. Excluding the impact of the Hess Lease Amendment, Same-Asset property operating income (cash basis) increased by 2.5% and 2.2%, respectively.

Subsequent to June 30, 2021, H&R entered into agreements to sell the Bow office tower and Bell office campus (see "Subsequent Event – Offices Sales" in this press release) for $1.5 billion.

Industrial

In June 2021, H&R sold its 50% ownership interest in a portfolio of five single tenanted properties totalling 215,079 square feet located throughout Atlantic Canada for approximately $21.3 million. In addition, H&R sold its 50% ownership interest in a 36,562 square foot multi-tenanted property located in Kitchener, ON for $12.0 million.

Subsequent to June 30, 2021, H&R sold its 50% ownership interest in a portfolio of nine single tenanted cold storage properties located across Canada for $117.5 million.

The above transactions resulted in H&R disposing of a 50% ownership interest in 15 industrial properties for total proceeds of approximately $150.8 million, compared to H&R's IFRS fair value of $121.3 million as at March 31, 2021. The weighted average overall capitalization rate for these dispositions was approximately 4.1%.

Same-Asset property operating income (cash basis) from industrial properties decreased by 3.4% and 2.8%, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods, primarily due to the decrease in same-asset occupancy from 98.9% as at June 30, 2020 to 97.6% as at June 30, 2021.

Residential

Same-Asset property operating income (cash basis) from residential properties in U.S. dollars decreased by 17.5% and 18.1%, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods, primarily due to Jackson Park in New York which has been negatively impacted by COVID-19 with higher vacancy and lower than average lease renewals. Recent leasing data has confirmed this decline is temporary and H&R expects operating fundamentals to improve in the second half of 2021. Excluding Jackson Park, Same-Asset property operating income (cash basis) from residential properties in U.S. dollars increased by 5.7% and 4.9%, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods, primarily due to an increase in revenue.

Retail

Same-Asset property operating income (cash basis) from retail properties increased by 39.9% and 7.4%, respectively, for the three and six months ended June 30, 2021 compared to the respective 2020 periods, primarily due to higher bad debt expenses recorded during the onset of COVID-19 in Q2 2020.

Development Activity

In April 2021, H&R entered into a 10-year lease with an industrial tenant to occupy 105,014 square feet at 34 Speirs Giffen Ave., Caledon, ON, a single-tenant property currently under development. The total development budget for this property is approximately $16.3 million and the expected yield on budgeted cost is approximately 7.0%. Occupancy is expected to commence in Q2 2022. This will be the second property constructed at H&R's industrial business park in Caledon, ON. In addition, 140 Speirs Giffen Ave., Caledon, ON, a 77,875 square foot industrial building is also under construction which is expected to be completed in Q2 2022, completing the first phase of H&R's Caledon industrial development. There is approximately 117.6 acres of remaining land which is held for future development.

H&R's active development pipeline in the United States currently comprises four residential developments with a total development budget of U.S. $159.7 million. As at June 30, 2021, U.S. $143.3 million had been spent on properties under development with U.S. $16.4 million of budgeted costs remaining to be spent. The REIT has U.S. $19.6 million available to be funded through secured construction facilities, in each case at the REIT's proportionate share.

Funds from Operations and Adjusted Funds from Operations

FFO per Unit in Q2 2021 was $0.38 compared to $0.40 in Q1 2021 and $0.38 in Q2 2020. AFFO per Unit was $0.30 in Q2 2021 compared to $0.32 in Q1 2021 and $0.30 in Q2 2020. Distributions paid as a percentage of AFFO was 57.7% in Q2 2021, resulting in significant retained cash flow.

Liquidity

As at June 30, 2021, H&R had ample liquidity including cash on hand of $59.4 million, $989.5 million available under its unused lines of credit and an unencumbered property pool of approximately $4.0 billion.

Debt Highlights

As at June 30, 2021, debt to total assets was 46.3% compared to 47.7% as at December 31, 2020. The weighted average interest rate of H&R's debt as at June 30, 2021 was 3.5% with an average term to maturity of 3.9 years.

Mortgages:
During Q2 2021, H&R secured three new mortgages totalling $237.0 million and repaid five mortgages totalling $489.4 million.

Lines of Credit:
In April 2020, at the onset of COVID-19, H&R bolstered its liquidity by securing a $500.0 million unsecured line of credit for a one-year term. With the vaccine rollout expanding throughout Canada and the United States and the Canadian economy slowly reopening, H&R believes it has sufficient liquidity to withstand the remainder of the pandemic and opted to reduce the amount of this facility. Therefore, in April 2021, the REIT secured a one-year extension on the unsecured line of credit from a syndicate of five Canadian banks for $300.0 million. The maturity date was extended to April 17, 2022.

SUBSEQUENT EVENT - OFFICE SALES

H&R has been executing on its strategic plan to better align the REIT's business model with investor preferences. On August 3, 2021, the REIT announced it had entered into agreements to sell a $1.5 billion office portfolio, comprised of the Bow office tower (the "Bow") located in Calgary, AB, and the Bell office campus (the "Bell Campus") located in Mississauga, ON. This transaction ("Transaction") is a critical step forward for H&R in achieving a more simplified structure and is evidence of the REIT's commitment to its strategic repositioning.

Highlights:

• Significantly reduces Calgary office exposure from 9% to 3% on a fair value basis.
• Reduces tenant concentration to Ovintiv Inc. ("Ovintiv") from 12% to 2%.
• Provides approximately $800 million of cash proceeds, net of associated mortgage repayments and closing costs.
• Reduces debt to total assets from 50.0% to 43.7%.
• Enhances financial flexibility to facilitate the potential for further significant strategic changes.

Transaction overview:

• Sale of 100% ownership of the land and building of the Bow, together with a 40% interest in the net rent payable under the Ovintiv lease to expiry in May 2038, to Oak Street, for gross proceeds of approximately $613 million.
• Effective sale of a 45% interest in the net rent payable under the Ovintiv lease to expiry in May 2038, to Deutsche Bank Credit Solutions and Direct Lending through a secured lease financing structure for gross proceeds of $418 million.
• Sale of 100% of the Bell Campus to Oak Street for gross proceeds of approximately $439 million.
• H&R retains an option to repurchase 100% ownership interest in the land and building of the Bow for $368 per sq. ft., being 60% of the total Bow transaction value.
• H&R retains management contracts for both the Bow and Bell Campus properties until lease expiries.

For more information on the Transaction, please refer to the REIT's press release dated August 3, 2021, available at www.hr-reit.com and on www.sedar.com.

Environmental, Social and Governance "ESG" Update

In August 2021, H&R released its Second Annual Sustainability Report for the 2020 calendar year. The REIT continues to embed sustainability in every facet of its business and advance its long-term ESG strategy. In 2020, H&R reduced use of resources and promoted energy efficiency at properties through building operations, management and fostering cooperative tenant relationships.

H&R is progressing on increasing utility data coverage for its portfolio, and in 2020, the REIT expanded its reporting boundary to report utility consumption and emissions wherever H&R has control over utility use, and/or is able to access utility data. The result was an increase in data coverage from 22% of 2018 usage, to 62% of 2019 usage. In 2020, data coverage has been further increased to 65%. H&R REIT's like-for-like Greenhouse Gas (GHG) market-based emissions decreased by over 10% in 2020 compared to 2019.

Monthly Distributions Declared

H&R today declared distributions for the months of August and September scheduled as follows:

Conference Call and Webcast

Management will host a conference call to discuss the financial results for H&R REIT on Friday, August 13, 2021 at 9.30 a.m. Eastern Time. Participants can join the call by dialing 1-888-510-2507 or 1-289-514-5065. 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 1-647-362-9199 or 1-800-770-2030 and enter the passcode 3504623 followed by the pound key. The telephone replay will be available until Monday, September 13, 2021 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

About H&R REIT

H&R REIT is one of Canada's largest real estate investment trusts with total assets of approximately $13.1 billion at June 30, 2021. H&R REIT has ownership interests in a North American portfolio of high quality office, retail, industrial and residential properties comprising over 40 million square feet.

Forward-Looking Disclaimer

Certain information in this news release contains forward-looking information within the meaning of applicable securities laws (also known as forward-looking statements) including, among others, statements made or implied relating to H&R's objectives, beliefs, plans, estimates, projections and intentions and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts, including the statements made under the headings "Financial Highlights" and "Summary of Significant Q2 2021 Activity" including with respect to H&R's future plans, including future property dispositions and significant strategic changes, significant development projects, H&R's expectation with respect to the activities of its development properties, including the building of new properties, the timing of construction, the timing of occupancy and lease-up, the expected total cost and yield on cost from development properties and the timing of transfer from properties under development to investment properties, expected stabilized property operating income and increases in property operating income from River Landing and Jackson Park, management's expectations regarding the REIT's leverage and portfolio quality, management's belief that Jackson Park's decline is temporary and expectations regarding future operating fundamentals, the Transaction, including the closing thereof, the amount and use of proceeds, and the resulting changes to the REIT's operational and financial metrics, the REIT's strategic plans, including surfacing value for unitholders, management's expectations regarding future distributions, management's belief that H&R has sufficient funds and liquidity for future commitments and management's expectation to be able to meet all of the REIT's ongoing obligations. Forward-looking statements generally can be identified by words such as "outlook", "objective", "may", "will", "expect", "intend", "estimate", "anticipate", "believe", "should", "plans", "project", "budget" or "continue" or similar expressions suggesting future outcomes or events. Such forward-looking statements reflect H&R's current beliefs and are based on information currently available to management.

Forward-looking statements are provided for the purpose of presenting information about management's current expectations and plans relating to the future and readers are cautioned that such statements may not be appropriate for other purposes. These statements are not guarantees of future performance and are based on H&R's estimates and assumptions that are subject to risks, uncertainties and other factors including those risks and uncertainties in H&R's materials filed with the Canadian securities regulatory authorities from time to time, which could cause the actual results, performance or achievements of H&R to differ materially from the forward-looking statements contained in this news release. Material factors or assumptions that were applied in drawing a conclusion or making an estimate set out in the forward–looking statements include that the general economy is gradually recovering as a result of the COVID-19 pandemic, the extent and duration of which is unknown; debt markets continue to provide access to capital at a reasonable cost, notwithstanding the ongoing economic downturn. Additional risks and uncertainties include, among other things, risks related to: real property ownership; the current economic environment; COVID-19; credit risk and tenant concentration; lease rollover risk; interest and other debt-related risk; construction risks; currency risk; liquidity risk; financing credit risk; cyber security risk; environmental and climate change risk; co-ownership interest in properties; joint arrangement and investment risks; Unit price risk; availability of cash for distributions; ability to access capital markets; dilution; unitholder liability; redemption right risk; risks relating to debentures and the inability of the REIT to purchase senior debentures on a change of control; tax risk, and additional tax risk applicable to unitholders. H&R cautions that these lists of factors, risks and uncertainties are not exhaustive. Although the forward-looking statements contained in this news release are based upon what H&R believes are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward-looking statements.

Readers are also urged to examine H&R's materials filed with the Canadian securities regulatory authorities from time to time as they may contain discussions on risks and uncertainties which could cause the actual results and performance of H&R to differ materially from the forward-looking statements contained in this news release. All forward-looking statements in this news release are qualified by these cautionary statements. These forward-looking statements are made as of August 12, 2021 and the REIT, except as required by applicable Canadian law, assumes no obligation to update or revise them to reflect new information or the occurrence of future events or circumstances.

Non-GAAP Financial Measures

The REIT's financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS"). H&R's management uses a number of measures which do not have a meaning recognized or standardized under IFRS or Canadian Generally Accepted Accounting Principles ("GAAP"). The non-GAAP measures NAV per Unit, FFO, AFFO, Payout Ratio per Unit, property operating income (cash basis), Same-Asset property operating income (cash basis) and the REIT's proportionate share as well as other non-GAAP measures discussed elsewhere in this news release, should not be construed as an alternative to financial measures calculated in accordance with GAAP. Further, H&R's method of calculating these supplemental non-GAAP financial measures may differ from the methods of other real estate investment trusts or other issuers, and accordingly may not be comparable. H&R use these measures to better assess H&R's underlying performance and provide these additional measures so that investors may do the same. These non-GAAP financial measures are more fully defined and discussed in H&R's MD&A as at the three and six months ended June 30, 2021, available at www.hr-reit.com and on www.sedar.com.

Additional information regarding H&R is available at www.hr-reit.com and on www.sedar.com.

SOURCE H&R Real Estate Investment Trust

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