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H&R REIT Announces Fourth Quarter and 2016 Annual Results
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TORONTO, Feb 15, 2017
TORONTO, Feb 15, 2017 /CNW/ - H&R Real Estate Investment Trust ("H&R") and H&R Finance Trust (collectively, "the Trusts") (TSX: HR.UN; HR.DB.D; and HR.DB.H) today announced their combined financial results for the year ended December 31, 2016.
Financial Highlights
H&R undertook a strategic review of its assets and decided to sell certain investment properties to take advantage of the high demand for good quality assets. During 2015 and 2016, H&R sold $1.3 billion of real estate assets and acquired $757.5 million of real estate assets for a net decrease of $542.5 million, at H&R's ownership share.
| | 3 months ended December 31 | Year ended December 31 | ||||||
| 2016 ARIVA.DE Börsen-GeflüsterKurse
| 2015 | 2016 | 2015 | |||||
| Rentals from investment properties (millions) | $305.5 | $296.2 | $1,196.0 | $1,188.3 | ||||
| Property operating income (millions) | $202.4 | $202.1 | $764.7 | $773.5 | ||||
| Net income (loss) before income taxes (millions) | $182.6 | ($35.9) | $590.3 | $375.1 | ||||
| Funds from Operations ("FFO") (millions)(1) | $142.9 | $142.9 | $584.3 | $569.9 | ||||
| FFO per Stapled Unit (basic) | $0.48 | $0.48 | $1.96 | $1.95 | ||||
| FFO per Stapled Unit (diluted) | $0.47 | $0.48 | $1.93 | $1.92 | ||||
| Distributions per Stapled Unit | $0.34 | $0.34 | $1.35 | $1.35 | ||||
| Payout ratio per Stapled Unit (as a % of FFO) | 70.8% | 70.8% | 68.9% | 69.2% | ||||
| (1) | FFO is a non-GAAP measure. See "Non-GAAP Financial Measures" in this press release. The Trusts' combined MD&A includes a reconciliation of FFO to net income. Readers are encouraged to review the reconciliation in the combined MD&A. |
Operating Highlights
Occupancy as at December 31, 2016 was 95.7% compared to 95.9% as at December 31, 2015. Leases representing 3.7% of total rentable area will expire during 2017 and H&R's average remaining lease term to maturity as at December 31, 2016 was 9.5 years.
Development Highlights
Construction is progressing on the development of 1,871 luxury residential rental units for the LIC Project in which H&R has a 50% interest. The total budget at the 100% ownership level is expected to be approximately U.S. $1.2 billion with occupancy in the first tower scheduled to begin in early 2018. As at December 31, 2016, total costs incurred amounted to $655.3 million. The remaining costs are expected to be funded through the construction financing facility. Approximately 99.3% of total hard costs and 89.9% of total project costs have been fixed. Upon completion and stabilized occupancy, the contribution to FFO from the LIC Project at H&R's interest is projected to be U.S. $23.0 million, which equates to an approximate 8.8% year one yield on H&R's cash investment. During the year, the fair value of the LIC Project increased by U.S. $54.9 million, at H&R's interest. An independent third party appraisal was obtained for this property in 2016.
In Q1 2016, H&R entered into two separate 15-year build-to-suit leases for industrial properties to be developed in the Airport Road Business Park in Brampton, ON for Sleep Country Canada and Solutions 2 Go Inc. The total net leasable area for these properties will be approximately 341,775 square feet with occupancy of both projects expected to occur in Q3 2017. Upon completion, the contribution to FFO generated from these two projects is expected to be $1.7 million.
In August 2016, H&R acquired a 31.7% non-managing interest in 38.4 acres of land located in Hercules, California, adjacent to the San Pablo Bay, northeast of San Francisco, ("Hercules Project") for the future development of multi-family residential units. The initial investment to purchase the land was approximately U.S. $10.0 million (at H&R's interest).
Office Segment Highlights
On June 30, 2016, H&R sold its 33.3% freehold and leasehold interests in Scotia Plaza and 100 Yonge Street (collectively, "Scotia Plaza") for approximately $438.3 million. The purchaser assumed H&R's share of the existing financing on the properties. H&R recorded a gain on sale, net of related costs, of $15.0 million. Proceeds to H&R amounted to $227.0 million, which were primarily used to repay debt including the $180.0 million Series D Senior Debentures that matured in July 2016.
On November 17, 2016, H&R sold a non-managing 50% interest in the TransCanada Tower in Calgary, AB for gross proceeds of approximately $257.4 million. H&R built this property in 2001 for a total cost of $265.8 million, at the 100% level. H&R prepaid the entire mortgage on the property of $93.5 million upon closing. H&R recorded a loss on sale, net of related costs, of $7.4 million. Proceeds to H&R amounted to $163.9 million, which were primarily used to repay debt and acquire a multi-family residential property.
Alberta Office Exposure:
The weighted average lease term remaining in H&R's Alberta office portfolio is 17.2 years. The leases expiring between January 1, 2017 and December 31, 2018 in H&R's Alberta office portfolio total 18,507 square feet. As at December 31, 2016, H&R's Alberta office portfolio had approximately 184,000 square feet of vacant space, at H&R's ownership share, all of which is in F1RST Tower (formerly Telus Tower). Of this vacant space, 12,667 square feet has been leased for a six-year term commencing January 1, 2017.
Lantower Residential Highlights
H&R is continuing its expansion into the multi-family rental market in the United States. During 2016, Lantower Residential acquired four multi-family properties in the United States, all of which were built between 2012 and 2015. These properties comprise 1,246 units and were purchased for a total price of U.S. $232.2 million.
As at December 31, 2016, Lantower Residential has a portfolio of 12 properties, comprised of an aggregate of 3,832 units, an average age of 13 years and an average monthly rent of U.S. $1,081 per unit.
Industrial Segment Highlights
In February 2016, H&R acquired a 50% managing interest in a 264,802 square foot newly constructed industrial property in Calgary, AB for $15.5 million (at H&R's interest).
During 2016, H&R sold its 50% ownership interest in a 139,734 square foot industrial property in Montreal, QC for $4.2 million and its 50% ownership interest in a 52,792 square foot industrial property in Vaughan, ON for $3.0 million.
Retail Highlights
During 2016, H&R sold its 100% interest in five retail properties, totaling 490,839 square feet, all of which were located in the U.S. for U.S. $61.8 million.
Primaris Highlights and Target Update
In November 2016, H&R entered into a conditional agreement to sell a 50% non-managing interest in two enclosed shopping centres for $211.6 million which closed in January 2017. The purchaser assumed 50% of the existing financing on the properties of approximately $126.6 million. The net proceeds of approximately $81.0 million have been used to repay debt.
Redevelopment of the former Target stores has commenced, however, the space has not been transferred to properties under development because the space is part of an existing, already developed property. For the year ended December 31, 2016, H&R spent approximately $31.0 million in redevelopment and, in addition, capitalized $2.4 million of the property operating and finance costs attributable to this space. The following table is a summary of H&R's leasing progress on the former Target space:
| | Square Feet at | Square Feet at | Annual Base Rent |
| Former Target Canada space(1) | 1,062,676 | 774,035 | $4.0 |
| Backfill progress: | | | |
| Committed space | 583,989 | 404,270 | 6.4 |
| Conditional agreements | 191,364 | 176,364 | 1.5 |
| Advanced discussions | 44,215 | 25,645 | 0.8 |
| Total backfill progress | 819,568 | 606,279 | 8.7 |
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