FINANCIAL HIGHLIGHTS
3 months ended | ||
2020 | 2019 | |
Rentals from investment properties (millions) | ||
Property operating income (millions) | ||
Same-Asset property operating income (cash basis) (millions)(1) | ||
Fair value adjustment on real estate assets (millions) | ( | ( |
Net loss (millions) | ( | ( |
Funds from operations ("FFO") (millions)(1) | ||
FFO per Unit (basic)(1) | ||
Adjusted Funds from Operations ("AFFO") per unit | ||
Distributions per Unit | ||
Payout ratio per Unit (as a % of FFO)(1) | 76.5% | 75.8% |
Net Asset Value ("NAV") per Unit as at |
(1) | These are non-GAAP measures. See "Non-GAAP Financial Measures" in this press release. H&R's management discussion and analysis ("MD&A") for the three months ended |
H&R continued to actively reallocate capital through property dispositions to fund value-creating developments, expand its residential rental platform and strengthen its balance sheet. The REIT has completed approximately
Same-Asset property operating income (cash basis) increased by 0.9% for the three months ended
The net loss for the three months ended
BUSINESS UPDATE
COVID-19
The COVID-19 pandemic has brought dramatic and unprecedented challenges to nearly every corner of society and the global economy. The commercial property industry has been impacted significantly. Risk management has been and continues to be a core component of H&R REIT since the time of its IPO, most evident in a focus on long-term leases, high credit quality tenants and a conservative balance sheet.
We have facilitated the transition of large numbers of staff to work-from-home, and engaged with residential tenants to provide more payment methods, payment plans, and early renewal options at unchanged rents. Certain retail properties were closed to comply with government mandates while providing for certain essential service tenants to continue to operate out of these otherwise closed properties, and we have engaged with tenants across all of our properties to work together to reach customized operating and financial arrangements. We have also undertaken detailed reviews of operations to reduce expenses, mitigating the financial impact of economic disruptions and property closures on our tenants and on our unitholders.
Liquidity
Management has taken precautionary steps to further bolster the REIT's liquidity as a result of the severity of the pandemic's impact on economic conditions. In April the REIT secured a new
H&R has a number of development projects underway, in various stages of planning and construction. The REIT has postponed certain of these development projects where construction had not yet commenced, reducing near-term capital commitments. The REIT's largest development project,
Rent Collection
Rent collection has been a key focus for the REIT during the pandemic, and one where we believe we have performed well while also accommodating the needs of our tenant partners. As of
Tenant Type(2) | Share of Rent | April Collection(1) | May Collection(1)(3) |
Office | 44% | 99% | 99% |
Retail: | |||
Enclosed malls | 20% | 40% | 30% |
Other | 13% | 88% | 80% |
Total Retail | 33% | 59% | 50% |
Residential | 17% | 97% | 92% |
Industrial | 6% | 98% | 90% |
Total | 100% | 85% | 80% |
(1) | These collections include monthly billings for base rent and property operating costs. |
(2) | Retail tenants in an office property for the purpose of this table have been classified as retail. |
(3) | Includes Government tenancies whose rent is only due at the end of May. |
Our high-quality, long-term leased office portfolio delivered strong rent collection in April and in May, consistent with the profile of the tenant base, where 87.4% of tenants are investment grade-rated. Rent collection was also strong in our industrial and multi-residential portfolios, reflecting the stronger-than-average credit profile of our tenant base across both of these portfolios.
The tenants that have experienced the greatest impact in the COVID-19 pandemic have been retailers. Rent collection in our retail portfolio was 59% in April (50% May to date), reflecting a blend of grocery-anchored centres, single tenant and enclosed mall properties. Non-essential stores across the country were closed by government mandates in March and are beginning to reopen in some parts of the country.
While visibility remains limited as to when operating conditions might return to a more normal state, and government rent assistance programs have yet to become effective in providing significant relief to retailers, we remain committed to working with our tenants and all levels of government to ensure the most timely and efficient resumption of operations, while preserving the safety and security of all stakeholders.
IFRS Fair Value Adjustments
The Q1 2020 financial results include fair value adjustments that are more significant than previous periods. These adjustments are a result of our regular quarterly IFRS fair value process and include the impact of COVID-19 reflecting two trends: i) an acceleration of challenging conditions in the retail landscape impacting the market pricing of retail properties; and ii) energy sector challenges that have impacted the credit quality of many companies operating in this industry, and the related impacts on property market fundamentals in markets significantly influenced by energy industry employment and profitability.
The IFRS fair value of H&R's retail portfolio has been reduced by an aggregate of
The IFRS fair value of H&R's office portfolio with significant energy sector tenancies has been reduced by an aggregate of
Management and the Board strongly supported taking a more proactive approach to updating fair market values to ensure prudent financial reporting practices. Should the retail industry recover, and energy industry conditions improve, H&R will have the opportunity to update fair values as market conditions evolve.
OUTLOOK
In the midst of the economic disruption and uncertainty caused by the COVID-19 pandemic, forecasts and guidance are inherently more challenging and less reliable, given the wide range of potential pandemic and economic outcomes. Over the past few years, H&R has made significant progress, as detailed in our 2019 annual report, towards the strategic goals outlined in our 2017 annual report of streamlining and simplifying our portfolio, recycling capital into higher growth assets, and improving the profile of an investment in H&R REIT. Since the beginning of 2018, H&R has executed approximately
Change in Distribution
Management and the Board have spent considerable time in recent years reviewing the REIT's strategy, capital structure and operations, which has led to many of the changes outlined above. In light of current operating and capital market conditions, and consistent with the prior conclusions management and the Board reached in the above reference review, management has recommended and the Board approved a 50% reduction of monthly distributions effective
This new distribution rate provides additional financial flexibility to absorb any income interruption related to the pandemic in the near term, and allows for significant capital reinvestment into our properties to address tenant turnover without increasing the REIT's financial leverage. The new distribution rate is also expected to satisfy the REIT's requirement to distribute all of its taxable income.
The Board and management have not taken this decision lightly, and are hopeful conditions will improve to result in this decision appearing to have been overly cautious. However, as unitholders with significant holdings, and reflecting an abundance of caution, the trustees and management believe this action is prudent and conservative in light of the economic uncertainty that currently exists. We believe unitholders are best served by a well capitalized REIT, supporting the capital maintenance of its existing portfolio and providing opportunities for the REIT to enhance its investment profile.
SUMMARY OF SIGNIFICANT Q1 2020 ACTIVITY
Developments
H&R's active development pipeline in
The largest current development project is
Construction continued on the first phase of a 2.7 million square foot industrial development in
Office
In
Industrial
In
In
Same-Asset property operating income (cash basis) from industrial properties increased by 2.8%.
Residential
In
Same-Asset property operating income (cash basis) from residential properties in
Retail
Committed occupancy for the Retail segment was 93.8% compared to actual occupancy of 91.1% as at
Debt Highlights
As at
In
Monthly Distribution Declared
As mentioned above, H&R today declared a distribution for the month of May scheduled as follows:
Distribution/Unit | Annualized | Record date | Distribution date | |
Conference Call and Webcast
Management will host a conference call to discuss the financial results for the REIT on
A live audio webcast will be available through http://hr-reit.com/Investor-Relations/InvestorEvents.aspx. 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 www.hr-reit.com/Investor-Relations/Investorinformation.aspx.
About H&R REIT
H&R REIT is one of
Forward-Looking Disclaimer
Certain information in this press 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 "COVID-19 Update" and "Summary of Significant Q1 2020 Activity" including with respect to H&R's future plans, including 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 the expected total cost from development properties, the impact of the COVID-19 virus on the REIT's retail tenants, capitalization rates and other assumptions used to estimate fair values, management's expectations regarding the REIT's leverage and portfolio quality, and management's expectations regarding future distributions. 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 described below under "Risks and Uncertainties" and those discussed 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 press 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 currently volatile and in an economic downturn as a result of the COVID-19 pandemic and low oil and gas prices, the extent and duration of which is unknown; interest rates are volatile as a result of general economic conditions; and 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,
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 press release. All forward-looking statements in this press release are qualified by these cautionary statements. These forward-looking statements are made as of
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, FFO, AFFO, Payout Ratio per Unit, Same-Asset property operating income (cash basis) and the REIT's proportionate share as well as other non-GAAP measures discussed elsewhere in this 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 for the three months ended
SOURCE
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