H&R REIT Announces Third Quarter 2020 Results

H&R REIT Announces Third Quarter 2020 Results

Canada NewsWire

TORONTO, Nov. 12, 2020 /CNW/ - H&R Real Estate Investment Trust ("H&R" or "the REIT") (TSX: HR.UN) announces its financial results for the three and nine months ended September 30, 2020.



The COVID-19 pandemic has dramatically disrupted society and the economy and significantly impacted the commercial property industry. A strong focus on risk management has been and continues to be core to H&R, as reflected by the REIT's long-term leases, high credit quality tenants and conservative balance sheet.   

H&R is pleased to report that all of the REIT's properties are currently open and fully operational, including all retail properties, some of which were impacted by mandated closures during Q2 2020.  Management has been working closely with all of the REIT's tenants, and particularly retailers at H&R's enclosed shopping centres where same-store sales volume (comprised of commercial retail units smaller than 15,000 square feet) recovered in Q3 2020 to 86% of prior year levels, up from the low 31% average in Q2 2020.  Tenant sales have been trending higher since April lows, reaching 88% in September.

Tom Hofstedter, President & CEO of H&R REIT said "We are pleased with our third quarter results given the challenging operating environment, which reflect the following:

  • Overall rent collection improved to 93% from 90% in Q2 2020
  • FFO(1) increased 8% over Q2 2020
  • AFFO(1) increased 21% over Q2 2020
  • Our AFFO payout ratio(1) was a conservative 49% and our available liquidity remained at over $1 billion
  • Our debt to total assets decreased to 47.2% at the end of Q3 2020 from 48.1% at the end of Q2 2020
  • Residential properties in the U.S. Sun-Belt cities have seen increased investment demand

While we are mindful that there may be further COVID related bumps along the way, we believe we will see continued improvement in our future results".


3 months ended September 30

9 months ended September 30





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 income (loss) (millions)





Funds from operations ("FFO") (millions)(1)





FFO per Unit (basic)(1)





Adjusted Funds from Operations ("AFFO") (millions)(1)





AFFO per unit (basic)(1)





Distributions per Unit





Payout ratio per Unit (as a % of AFFO)(1)





Net Asset Value ("NAV") per Unit as at September 30(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 and nine months ended September 30, 2020 includes a reconciliation of property operating income to Same-Asset property operating income (cash basis) and net income (loss) to FFO and AFFO as well as the calculation of NAV per Unit.  Readers are encouraged to review the reconciliations and calculation in H&R's MD&A.

The primary reason for the decrease in rentals from investment properties is net disposition activity over the previous 21 months. The REIT completed approximately $1.0 billion of asset sales compared to $206.6 million of acquisitions since January 1, 2019, substantially repositioning its portfolio and enhancing its internal growth profile. H&R continues to actively reallocate capital through property dispositions to fund value-creating developments, expand its residential rental platform and strengthen its balance sheet.

Property operating income and Same-Asset property operating income (cash basis) decreased for the three and nine months ended September 30, 2020 compared to the respective 2019 periods primarily due to a provision for bad debts taken as a result of the impact of COVID-19, which predominantly impacted H&R's retail segment.

Net income increased by $178.5 million for the three months ended September 30, 2020 compared to the respective 2019 period primarily due to fair value adjustments on real estate assets and financial instruments.

Net income decreased by $913.1 million for the nine months ended September 30, 2020 compared to the respective 2019 period primarily due to the fair value adjustment of certain office and retail properties of approximately $1.3 billion and an increase in the provision for bad debts.

FFO per Unit in Q3 2020 was $0.41 compared to $0.38 in Q2 2020 and $0.43 in Q3 2019.  Excluding the Q3 2020 provision for bad debts of $13.4 million, Q3 2020 FFO would have been $0.46 per Unit, an increase of $0.03 per Unit compared to Q3 2019.  AFFO per Unit was $0.35 in Q3 2020 compared to $0.29 in Q2 2020 and $0.35 in Q3 2019.  Distributions paid as a percentage of AFFO was 49.0% in Q3 2020, resulting in significant retained cash flow. 

Fair Value Adjustments on Real Estate Assets

The financial results for the nine months ended September 30, 2020 include significant fair value adjustments recorded in Q1 2020. These adjustments are a result of H&R's regular quarterly IFRS fair value process, and include the following impacts of COVID-19: (i) an acceleration of challenging conditions in the retail landscape impacting the valuation assumptions 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. 

Given the rapidly changing dynamics within these industries and the broader economy, management and the Board strongly supported taking a more proactive approach to updating fair market values in Q1 2020.  While the strong recovery in same-store sales at the REIT's shopping centres and the improved cost and access to credit enjoyed by energy sector tenants are encouraging, there have not been a sufficient number of transactions in the direct property market to warrant changes to valuations in these sectors in Q3 2020. 

Fair Value Adjustment on Real Estate Assets
(in thousands of Canadian dollars)

3 months ended
March 31, 

3 months ended
June 30,

3 months ended
September 30,

9 months ended
September 30,

Operating Segment:





















Total fair value adjustment on real estate assets





Residential properties in U.S. Sun-Belt cities have seen increased investment demand since the start of COVID-19 and this has resulted in a decrease in the capitalization rates used as part of H&R's regular quarterly IFRS fair value process in Q3 2020. 

Provision for Bad Debts

The provision for bad debts is classified as an expense and is grouped together with other expenses in property operating costs. The following tables disclose H&R's provision for bad debts as a result of the impact of COVID-19. H&R's retail segment was impacted the most due to government mandated closures primarily affecting the REIT's enclosed shopping centres.

Provision for Bad Debts

(in thousands of Canadian dollars)

Three months ended
September 30, 2020

Nine months ended
September 30, 2020

Expected rent abatements and general provision for bad debts



Bankruptcies - tenants who have filed for creditor protection



CECRA application related abatements - April - September 2020



Provision for bad debts per the REIT's proportionate share



Less: equity accounted investments



Provision for bad debts per the REIT's Financial Statements




Provision for Bad Debts

Three months ended
September 30

Nine months ended
September 30

(in thousands of Canadian dollars)







Bad debts by Same-Asset operating segment:





























Total Same-Asset bad debts














Provision for bad debts per the REIT's proportionate share







Less:  equity accounted investments







Provision for bad debts per the REIT's Financial Statements







H&R has recorded a provision for bad debts as at September 30, 2020 of $36.5 million.  The provision for bad debts of $23.9 million as at June 30, 2020 was increased by $12.6 million in Q3 2020.  Management anticipates that the increase to the provision for bad debts in Q4 2020 will be smaller than the increase in Q3 2020.  Early 2021 may bring further retailer distress, which is difficult to predict in advance. Management is committed to working together with its tenants to ensure the vitality of H&R's shopping centres.

The financial impact of bad debts is one-time in nature, while continuing impacts on rental revenues is covered in the next section addressing tenant closures and lease amendments.  These bad debts relate to rental revenues billed but not paid for the reporting period but not future periods.  These bad debts include rental abatements agreed to under both the Canada Emergency Commercial Rent Assistance ("CECRA") program and abatements agreed to by management with tenants in distress, as well as unpaid rent from tenants that have filed for protection under Canada's Companies' Creditors Arrangement Act ("CCAA"). 

Tenant Closures

Many retailers have faced very challenging conditions in recent months.  Several have filed for CCAA creditor protection and several have announced store closures.  The REIT's focus on maintaining affordable cost structures for its mall-based retailers has resulted in above average rent collections as compared to other large mall owners, and high retention of store locations by tenants planning store closures elsewhere.  To date, tenants occupying 136 stores and totalling 328,666 square feet have filed for creditor protection under the CCAA.  H&R expects to retain 89 of these stores totalling 219,524 square feet.

H&R REIT continues to work collaboratively with its tenants that have been significantly affected by the pandemic.  Retailers undergoing CCAA restructuring has been an area of particular focus for management, where retention of stores has exceeded 65%.  Management expects no closures from GAP, H&M, or L Brands in the REIT's portfolio, and the REIT does not have any locations with Brooks Brothers, Lucky Brands, J. Crew, Mendocino, Frank & Oak, Lole or Microsoft Corporation, each of which has announced plans for store closures.

In relation to the REIT's initial 2020 budget of approximately $1.1 billion of gross revenue, Primaris accounted for approximately $285 million.  Of that amount, approximately $21.1 million of gross rent is attributable to tenants undergoing restructurings or liquidations. H&R has committed to an annualized rental revenue reduction of approximately $12.2 million as a result of both store closures and lease amendments, at the REIT's share.  Store closures, which provide the opportunity to re-lease space to new tenants, account for $6.0 million of this amount, while temporary lease amendments to rental rates for retained tenancies accounts for $6.2 million of this amount. 

In restructuring existing leases to accommodate rental rate reductions, while each situation is unique, typical lease amendments include the following characteristics:

  1. a limited period of three months to as much as 24 months of reduced gross rent, after which tenants revert to previous lease terms;

  2. a lower percentage rent breakpoint during the period of reduced rent, which provides H&R the opportunity to earn additional revenue as sales volumes recover; and

  3. no change to all other lease terms, including term, renewal rights and renewal rental rates, with the exception of some instances where H&R secured certain lease amendments, to the benefit of the REIT.

Among the 47 store closures for tenants that have filed for creditor protection under the CCAA aggregating 109,142 square feet across H&R's 13,183,000 square feet retail portfolio, leases have been signed with replacement tenants for 23 stores aggregating 35,672 square feet, with many having commenced occupancy.  The rental revenues from these new tenancies are expected to partially offset the annualized $6.0 million reduction in gross revenues relating to store closures, though the magnitude of that offset depends significantly on tenants sales and percentage rent participation.  Similarly, the annualized $6.2 million of gross revenue reduction due to temporary lease amendments assumes no percentage rent is collected under the temporary lease terms. In September, average same-store sales from tenants across the Primaris portfolio reached 88% of prior year levels.

Rent Collection

Rent collection has been a key focus during the pandemic, and one where H&R believes it has performed well while also accommodating the needs of its tenants. As of November 9, 2020,  H&R's rent collections since the onset of COVID-19 are as follows:

Tenant Type(1)

Share of

Q2 2020

Q3 2020


















Total Retail





















Retail tenants in an office property for the purpose of this table have been classified as retail


The average share of rent and collections include monthly billings for base rent and property operating costs


April to September collections include an aggregate amount of $11.8 million received from the Government of Canada under the Canada Emergency Commercial Rent Assistance ("CECRA") program

H&R's high-quality, long-term leased office portfolio delivered strong rent collection consistent with the profile of the tenant base, as 85.3% of revenues come from investment-grade rated tenants.  Rent collection was also strong in H&R's industrial and residential portfolios, reflecting the stronger-than-average credit profile of the REIT's tenant base across both of these portfolios.

H&R achieved an overall rent collection of 95% in October, compared to 93% in Q3 2020 and 90% in Q2 2020.

The tenants that have been impacted the most by the COVID-19 pandemic have been retailers. Rent collection in H&R's retail portfolio reflects 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.  By the end of June all properties, including most stores at enclosed shopping centres, were re-opened, which is reflected in the retail rent collections trending upwards from 72% in Q2 to 80% in Q3.  October's collections from the retail portfolio of 88% is without any CECRA subsidies.

The CECRA program for small businesses implemented by the Government of Canada provided forgivable loans to qualifying landlords to cover 50% of six monthly rent payments that were payable by eligible small business tenants who were experiencing financial hardship during April to September. Tenants were responsible for contributing 25% of the rent payments with the landlords abating the remaining 25% share.

H&R filed CECRA applications for 39 properties covering approximately $23.5 million of gross rent at H&R's ownership interest cumulatively for the six month period from April to September.  H&R's 25% abatement was approximately $5.9 million and the Government of Canada's 50% received was approximately $11.8 million

In October 2020, the Government of Canada introduced the Canada Emergency Rent Subsidy ("CERS") which will provide tenants with direct access (without landlord participation) to rent support until June 2021 for qualifying organizations affected by COVID-19. The REIT expects its tenants who qualify will participate in this program which should cover up to 65% of such tenants' eligible expenses. 


As at September 30, 2020, H&R had $1.0 billion of unused borrowing capacity available under its lines of credit, $54.4 million of cash on hand and an unencumbered asset pool of approximately $3.5 billion.  As at September 30, 2020, H&R had approximately $39.0 million of mortgages maturing during the remainder of 2020.



H&R's active development pipeline in the United States currently comprises five residential developments and one mixed-used development with a total development budget of U.S. $679.3 million.  As at September 30, 2020, U.S. $577.8 million had been spent on properties under development with U.S. $101.5 million of budgeted costs remaining to complete of which U.S. $58.9 million will be funded through secured construction facilities, in each case at the REIT's proportionate share.

The largest current development project is River Landing, an urban in-fill mixed use development site in Miami, FL, which is adjacent to the Health District with approximately 1,000 feet of waterfront on the Miami River, two miles from downtown Miami. River Landing includes approximately 346,000 square feet of retail space, approximately 149,000 square feet of office space and 528 residential rental units. Retail occupancy has commenced and as at November 6, 2020, eight stores were opened including Hobby Lobby, Burlington, Publix Super Markets Inc., Ross Stores Inc., Five Below, Chase Bank, AT&T and Old Navy totalling 206,365 square feet. The centre will also welcome TJ Maxx, Planet Fitness, Ulta Cosmetics, Chick-fil-A, Ficelle Patisserie & Boulangerie, Sapphira Prive Med-Spa, and The Pediatric Dental Center of River Landing, whose stores are all expected to open in Q1/Q2 2021. The remaining retail and office lease-up is expected to occur during the balance of 2020 and 2021. The retail component of this development is expected to be transferred from properties under development to investment properties in Q4 2020.  As at November 6, 2020, 91 residential leases have been entered into exceeding management's expectations on leasing velocity. The total cost of the project is expected to be approximately U.S. $495.9 million. Construction is nearing completion and as at September 30, 2020, approximately U.S. $446.9 million has been included in properties under development. 

Construction continued on the first phase of a 2.7 million square foot industrial development in Caledon, ON. The first phase consists of three buildings, which will total approximately 526,000 square feet upon completion. In January 2020, H&R completed a 10-year lease with Deutsche Post AG to occupy the largest of the three buildings totalling 342,821 square feet. Rent payments are expected to commence on November 14, 2020. The total budget for this building is $54.6 million. As a result of COVID-19, H&R has temporarily suspended construction of the second and third buildings.

In July 2020, H&R purchased 15.4 acres of land in Mississauga, ON for $18.7 million which is expected to be developed into two industrial buildings totalling approximately 329,000 square feet.


Same-Asset property operating income (cash basis) from office properties increased by 2.0% for the three months ended September 30, 2020 compared to the respective 2019 period, primarily due to contractual rental escalations and an increase in occupancy.


Same-Asset property operating income (cash basis) from industrial properties increased by 7.4% for the three months ended September 30, 2020 compared to the respective 2019 period, primarily due to an increase in occupancy and rental rates.


Same-Asset property operating income (cash basis) from residential properties in U.S. dollars decreased by 12.7% for the three months ended September 30, 2020 compared to the respective 2019 period, primarily due to Jackson Park in New York, which has been negatively impacted by lower than average lease renewals and apartment traffic due to COVID-19. H&R believes this decline is temporary and expects operating fundamentals to improve in the upcoming quarters. Excluding Jackson Park, Same-Asset property operating income (cash basis) from residential properties in U.S. dollars increased by 4.1% for the three months ended September 30, 2020 compared to the respective 2019 period.


Same-Asset property operating income (cash basis) from retail properties decreased by 15.7% for the three months ended September 30, 2020 compared to the respective 2019 period, primarily due to the provision for bad debts as a result of the impact of COVID-19. Excluding the provision for bad debts, Same-Asset property operating income increased by 5.3% which was primarily due to an increase in occupancy due to the re-leasing of the former Target and Sears premises.

Debt Highlights

As at September 30, 2020, debt to total assets was 47.2%, an improvement from 48.1% last quarter but an increase compared to 44.4% as at December 31, 2019.  This is primarily due to the fair value adjustment of certain office and retail properties recognized in Q1 2020 of approximately $1.3 billion. The weighted average interest rate of H&R's debt as at September 30, 2020 was 3.6% with an average term to maturity of 3.7 years. 

Monthly Distributions Declared

H&R today declared a distribution for the month of December scheduled as follows:



Record date

Distribution date

December 2020



December 22, 2020

January 6, 2021

Conference Call and Webcast

Management will host a conference call to discuss the financial results for the REIT on Friday, November 13, 2020 at 9.30 a.m. Eastern Time.  Participants can join the call by dialing 647-427-7450 or 1-888-231-8191. 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 416-849-0833 or 1-855-859-2056 and enter the passcode 3989711 followed by the pound key.  The telephone replay will be available until Friday, November 20, 2020 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 $13.3 billion at September 30, 2020. 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 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 "Business Update" and "Summary of Significant Q3 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 transfer from properties under development to investment properties, the timing of occupancy, the timing of lease-up and the expected total cost from development properties, the impact of the COVID-19 virus on the REIT's retail tenants, management's expectations regarding future rent collections, including as a result of CECRA, as well as associated abatement expenses and recoveries, including tenants' participation in the Canada Emergency Rent Subsidy, the REIT's provisions for and incurrences of bad debt, expectations regarding tenant retention and closures, the expected rental revenues from leases with replacement tenants, including any offset of a reduction in gross revenues relating to store closures, capitalization rates and other assumptions used to estimate fair values, 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, 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, U.S. tax reform and tax consequences to U.S. holders. H&R cautions that these lists of factors, risks and uncertainties are not exhaustive. Although the forward-looking statements contained in this press 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 press release.  All forward-looking statements in this press release are qualified by these cautionary statements.  These forward-looking statements are made as of November 12, 2020 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, 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 and nine months ended September 30, 2020, available at www.hr-reit.com and on www.sedar.com.

SOURCE H&R Real Estate Investment Trust

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