H&R Real Estate Investment Trust and H&R Finance Trust
2015 Annual Report
Including Combined MD&A and Financial Statements
The Bow, Calgary Dufferin Mall, Toronto
Airport Road, Brampton
H&R Profile
H&R REIT is Canada’s largest diversified real estate investment trust with total assets of approximately
$14.0 billion as at December 31, 2015. H&R REIT is a fully internalized real estate investment trust and
has ownership interests in a North American portfolio of high quality office, retail, industrial and residential
properties comprising over 47 million square feet.
H&R Finance Trust is an unincorporated investment trust, which primarily invests in notes issued by a
U.S. corporation which is a subsidiary of H&R REIT. The current note receivable balance is U.S. $220.4
million. In 2008, H&R REIT completed an internal reorganization which resulted in each issued and
outstanding H&R REIT unit trading together with a unit of H&R Finance Trust as a “Stapled Unit” on the
Toronto Stock Exchange.
Additional information regarding H&R REIT and H&R Finance Trust is available at www.hr-reit.com and
on www.sedar.com.
Fair Value
by Geographic region
Other
Canadian
Provinces 10%
Ontario
33%
Alberta
28%
Fair Value
by Type of Asset
H&R Retail
11%
ECHO 5%
Industrial
8%
Primaris
23%
Office 50%
United
States 29%
Residential
3%
Primary Objectives
H&R strives to achieve two primary objectives: to provide unitholders with stable and growing cash
distributions generated by revenues derived from a diversified portfolio of investment properties, and to
maximize the value of units through active management of H&R’s assets, acquisition of additional
properties, and the development of new projects which are pre-leased to creditworthy tenants. We are
committed to maximizing returns to unitholders while maintaining prudent risk management and
conservative use of financial leverage.
Stability and Growth through Discipline
Since inception in 1996, H&R has executed a disciplined and proven strategy that has provided stable
cash flow and adjusted funds from operations. We achieve our primary objectives and mitigate risks
through long-term property leasing and financing, combined with conservative management of assets
and liabilities.
PRESIDENT’S MESSAGE TO UNITHOLDERS
Global markets shifted dramatically in 2015 and the Canadian economy was particularly hard hit. After
several years of compounding growth, the economy slowed almost to a halt as global commodity prices
plummeted.
Despite the weakness in the overall economy, significant events such as Target Corporation’s (“Target”)
departure from Canada and the precipitous drop in oil and gas prices, we had a very solid year, reinforcing
the strength of our strategy of Stability, Security and Growth through Quality, Diversification and
Scale.
OFFICE
In 2015, we completed 90 leasing transactions:
• Extended to 2031 over 900,000 square feet of office space in Calgary;
• Extended over 240,000 square feet of office space in 160 Elgin Street, Ottawa with long-term
leases to high quality tenants and, we are well underway on our $40 million redevelopment of the
ground floor lobby and retail areas;
• Leased over 100,000 square feet in downtown Toronto at 145 Wellington Street West; and
• The Atrium in downtown Toronto is now over 99% leased and we are moving forward with plans
for a 250,000 square foot office expansion and renovation of the entire complex.
RETAIL - PRIMARIS
During 2015, the retail sector has been prominent in the news highlighted by the announcement in January
2015 that Target would be leaving Canada and closing all its stores. Approximately 90% of the gross
leasable area of the nine Target stores within our portfolio is either committed to, or in active negotiations
with, new retailers which will provide an enhanced shopping experience and increased value to our malls.
Throughout 2015, we have continued to pro-actively remerchandise and, where appropriate, redevelop our
shopping centres. As a result, average sales per square foot continued to increase with CRU sales growing
by 4.6% in 2015 to $545 per square foot.
INDUSTRIAL
As our strategic alliance with Public Sector Pension Investment Board (“PSP”) gains momentum, together
we successfully completed over 31 lease transactions within our industrial portfolio in 2015. Some
highlights of these were:
• Extended over 738,000 square feet in Toronto to a national retailer for a term now expiring late
2025;
• Extended over 458,700 square feet in Atlanta, Georgia for a term expiring November 30, 2028 to
a creditworthy tenant;
• Extended over 263,000 square feet in Eastern Canada with a strong national tenant in multiple
buildings; and
• Successfully sold three non-strategic assets in Toronto.
RESIDENTIAL - LANTOWER
Our residential platform is growing both strategically and opportunistically. In 2015, we acquired six
apartment communities, located in Texas and Florida and as a result, our residential portfolio currently
stands at 2,586 rental apartment units.
Headquartered in Dallas Texas, our Lantower residential team is led by Philippe Lapointe, Chief Operating
Officer.
We continue to see opportunities in the United States multi-family sector and through our disciplined
approach, we will seek to expand our portfolio further through select accretive acquisitions and
development.
Construction, with our Joint Venture partner Tishman Speyer, has recently commenced on our 1,871 unit
luxury rental project in Long Island City, NY. The total budget for the Project is expected to be approximately
U.S. $1.2 billion with occupancy scheduled to begin in late 2017. Construction financing for up to U.S. $640
million has been secured through a syndicate of lenders.
ECHO REALTY
In 2015, through our investment in ECHO Realty LP, we completed $172 million of property acquisitions of
grocery-anchored retail real estate in the United States, contributing to our 10.4% growth in NOI last year.
STRENGTH OF OUR BALANCE SHEET
In 2015, we improved our liquidity by replacing our $300 million secured operating line with a new $500
million senior unsecured revolving credit facility maturing in December 2018. We also amended our senior
secured credit facility for Primaris by increasing our line of credit from $200 million to $300 million and
extending the maturity date to December 2017. As of December 31, 2015, $433.8 million was available to
be drawn under these facilities.
HIGHLIGHTS OF Q1 2016
Activity levels in Q1 of 2016 remain strong:
• We completed three industrial lease renewals totaling 2,167,756 square feet for 10-year terms in
Atlanta, Dallas and Chicago;
• We signed two separate 15-year Build-to-Suit leases in our Airport Road Business Park adjacent
to our Unilever project, for Sleep Country Canada and Solutions 2 Go. Occupancy of both projects
is expected to occur in Q1 2017, which will conclude the development of these lands;
• With the completion of the bridge linking 310 and 330 Front Street West in Downtown Toronto, TD
Bank has commenced occupancy in their new premises at 310-330 Front Street;
• Completed a purchase of a fully leased single tenanted industrial building of approximately 265,000
square feet with PSP; and
• Entered into a new $200 million senior, non-revolving, unsecured credit facility for a term of five
years. We immediately drew down U.S. $140 million and entered into an interest rate swap on
U.S. $130 million that effectively locked the interest rate at 2.56% per annum for term of five years.
CLOSING REMARKS
This year marks our 20th anniversary as a publically traded REIT. We closed our IPO on December 23,
1996 with an equity raise of $172 million, with 27 properties and an asset base of $277 million. Since then
we have grown significantly in size, quality and diversity, and have become Canada’s largest diversified
REIT. Today we have a market cap of approximately $6 billion, 517 properties and total assets of close to
$15 billion dollars, and have provided our unitholders with an average annualized return of 14% throughout
the years.
For me personally, the past 20 years have been a tremendously enjoyable and rewarding experience. I
have truly appreciated working with our diverse and talented team who, along with the guidance and
counsel of our trustees, have been responsible for our incredible success.
I would like to thank our unitholders for their trust and support throughout these past two decades, and look
forward to continued success in the years to come.
Tom Hofstedter
President and Chief Executive Officer
March 29, 2016
COMBINED MANAGEMENT’S DISCUSSION
AND ANALYSIS OF H&R REAL ESTATE INVESTMENT
TRUST AND H&R FINANCE TRUST
For the Year ended December 31, 2015
Dated: February 17, 2016
TABLE OF CONTENTS
SECTION I
Basis of Presentation
Forward-Looking Disclaimer
Non-GAAP Financial Measures
Overview
SECTION II
Financial Highlights
Selected Annual Information
Summary of Quarterly Results
Key Performance Drivers
Portfolio Overview
Summary of Significant 2015 Activity
SECTION III
Financial Position
Assets
Liabilities and Unitholders’ Equity
Results of Operations
1
1
2
3
5
5
6
6
7
9
12
13
17
20
Property Operating Income
Segmented Information
Other Income and Expense Items
Funds from Operations
Adjusted Funds from Operations
Liquidity and Capital Resources
Off-Balance Sheet Items
Financial Instruments and Other Instruments
SECTION IV
Critical Accounting Estimates and Judgements
Internal Control over Financial Reporting
SECTION V
Risks and Uncertainties
Outstanding Unit Data
Additional Information
23
24
29
31
34
36
38
39
39
40
41
46
46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
SECTION I
BASIS OF PRESENTATION
Financial data included in this combined Management’s Discussion and Analysis (“MD&A”) of combined results of operations and combined
financial position of H&R Real Estate Investment Trust (the “REIT”) and H&R Finance Trust (“Finance Trust” and together with the REIT, the
“Trusts”) for the year ended December 31, 2015 includes material information up to February 17, 2016. Financial data provided has been prepared
in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). This
MD&A should be read in conjunction with the combined financial statements of the Trusts and appended notes for the year ended December 31,
2015 and 2014 (“Trusts’ Financial Statements”), as well as the Trusts’ MD&A for the year ended December 31, 2014. All amounts in this MD&A
are in thousands of Canadian dollars, except where otherwise stated. Historical results, including trends which might appear, should not be taken
as indicative of future operations or results. Certain prior period items have been reclassified to conform with the voluntary accounting policy
changes in the current period.
Certain properties, owned by the REIT through an investment in a joint venture or an associate are treated as equity accounted investments in the
Trusts’ Financial Statements. For the purposes of this MD&A, the Trusts have accounted for these equity accounted investments on a
proportionately consolidated basis, and have included reconciliations to the Trusts’ combined statements of comprehensive income and statements
of financial position per the financial statements on pages 12, 20 and 21, respectively. The Trusts refer to these proportionately consolidated
amounts as “The Trusts’ interests”. This non-GAAP measure is calculated as the sum of the applicable line item in the Trusts’ Financial Statements
in accordance with IFRS and the Trusts’ proportionate share of equity accounted investments for such line item. Management views this method
as relevant because it is consistent with how the REIT and its co-owners manage the net assets and assess operating performance of each of its
co-owned properties. See “Non-GAAP financial measures”.
On October 24, 2013, the Ontario Securities Commission (on its behalf and on behalf of the other provincial securities regulators) issued a decision
which permits the REIT and Finance Trust to file one set of combined financial statements rather than separate financial statements. The Trusts’
Financial Statements have been presented on a basis whereby the assets and liabilities of the REIT and Finance Trust have been combined in
accordance with the accounting principles applicable to both the REIT and Finance Trust in accordance with IFRS, to reflect the financial position
and results of the REIT and Finance Trust on a combined basis. This same decision permits the REIT and Finance Trust to file one combined
MD&A which has been done for the year ended December 31, 2015.
FORWARD-LOOKING DISCLAIMER
Certain information in this MD&A contains forward-looking information within the meaning of applicable securities laws (also known as forward-
looking statements) including, among others, statements made or implied under the headings “Results of Operations”, “Liquidity and Capital
Resources”, “Outlook”, “Risks and Uncertainties” and “Subsequent Events” relating to the Trusts’ objectives, strategies to achieve those objectives,
the Trusts’ beliefs, plans, estimates, projections and intentions and similar statements concerning anticipated future events, results, circumstances,
performance or expectations that are not historical facts. 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 the Trusts’ 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 the Trusts’ estimates and assumptions that are subject to risks and uncertainties, including those described
below under “Risks and Uncertainties” and those discussed in the Trusts’ materials filed with the Canadian securities regulatory authorities from
time to time, which could cause the actual results and performance of the Trusts to differ materially from the forward-looking statements contained
in this MD&A. Those risks and uncertainties include, among other things, risks related to: unit price risk; real property ownership; credit risk and
tenant concentration; interest and other debt-related risk; ability to access capital markets; lease rollover risk; joint arrangements risk; currency risk;
construction risks; availability of cash for distributions; environmental risk; tax risk; tax consequences to U.S. holders; dilution; unitholder liability;
redemption right risk and risks relating to debentures. 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 stable; local real estate conditions are stable; interest rates
are relatively stable; and equity and debt markets continue to provide access to capital. The Trusts caution that this list of factors is not exhaustive.
Although the forward-looking statements contained in this MD&A are based upon what the Trusts believe 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 the REIT and Finance Trust’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 the REIT and Finance
Trust to differ materially from the forward-looking statements contained in this MD&A. Neither Finance Trust nor any of its trustees or officers,
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H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
assumes any responsibility for the completeness of the information contained in the REIT’s materials filed with the Canadian securities regulatory
authorities or for any failure of the REIT or its trustees or officers to disclose events or facts which may have occurred or which may affect the
significance or accuracy of any such information. Neither the REIT nor any of its trustees or officers, assumes any responsibility for the
completeness of the information contained in Finance Trust’s materials filed with the Canadian securities regulatory authorities or for any failure of
Finance Trust or its trustees or officers to disclose events or facts which may have occurred or which may affect the significance or accuracy of
any such information.
All forward-looking statements in this MD&A are qualified by these cautionary statements. These forward-looking statements are made as of
February 17, 2016 and the Trusts, except as required by applicable law, assume no obligation to update or revise them to reflect new information
or the occurrence of future events or circumstances.
NON-GAAP FINANCIAL MEASURES
The Trusts’ Financial Statements are prepared in accordance with IFRS. However, in this MD&A, a number of measures which do not have a
meaning recognized under IFRS or Canadian Generally Accepted Accounting Principles (“GAAP”) are presented. These measures, as well as the
reasons why management believes these measures are useful to investors, are described below.
None of these non-GAAP financial measures should be construed as an alternative to financial measures calculated in accordance with GAAP.
Further, the Trusts’ 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.
The Trusts’ Interests
The Trusts apply the equity method of accounting to investments in joint ventures and associates in the Trusts’ Financial Statements as prescribed
under IFRS. Throughout this MD&A, any references to the “Trusts’ Financial Statements” refer to amounts as reported under IFRS and any
references to “The Trusts’ interests” are non-GAAP measures which include amounts per the Trusts’ Financial Statements plus the Trusts’
proportionate share of equity accounted investments.
Property Operating Income, Same-Asset Property Operating Income and Adjusted Property Operating Income
Property operating income is the rental revenue generated from the REIT’s investment properties, net of the property operating expenses incurred.
Management believes that this is a useful measure for investors as it provides a snapshot of how the REIT’s properties are performing before
financing costs and other sources of income and expenditures which are not directly related to the day-to-day operations of a property. Property
operating income should not be construed as an alternative to net income calculated in accordance with IFRS. Same-asset property operating
income is a non-GAAP financial measure used by the REIT which management believes is a measure useful for investors as it reports period-over-
period performance for properties owned by the REIT throughout both periods. This typically excludes acquisitions, business combinations,
dispositions and transfers of properties under development to investment properties. Adjusted property operating income is also a non-GAAP
measure. Effective January 1, 2014, the REIT adopted IFRS Interpretations Committee 21, Levies (“IFRIC 21”). Adjusted property operating
income excludes the impact of this change in accounting policy which relates to the timing of the liability recognition for U.S. realty taxes.
Management believes that adjusted property operating income is an important non-GAAP measure as, by excluding the impact of IFRIC 21, it
evenly matches U.S. realty tax expense with realty tax recoveries throughout the period.
Funds from Operations (“FFO”)
FFO is a non-GAAP financial measure widely used in the real estate industry as a measure of operating performance. The Trusts present their
combined FFO calculations in accordance with the Real Property Association of Canada (REALpac) guidelines however, this method of calculating
FFO may differ when comparing to other issuers. Management believes this to be a useful measure for investors as it adjusts for items included
in net income that are not recurring including gain (loss) on sale of real estate assets, as well as non-cash items such as the fair value adjustments
on investment properties. FFO should not be construed as an alternative to net income or cash flows provided by operating activities calculated in
accordance with IFRS. See “Funds from Operations” for a reconciliation of property operating income to FFO and see Adjusted Funds from
Operations for a reconciliation of FFO to AFFO and AFFO to Cash Provided by Operations.
Adjusted Funds from Operations (“AFFO”)
AFFO is also a widely used measure in the real estate industry to assess the sustainability of cash distributions. AFFO is calculated by adjusting
FFO for non-cash items such as: straight-lining of contractual rent, rent amortization of tenant inducements, effective interest rate accretion and
unit-based compensation. Capital and tenant expenditures incurred and capitalized in the period by the Trusts are deducted. There is no standard
industry definition of AFFO, and as a result, the Trusts’ calculation of combined AFFO may differ from other issuers’ calculations. AFFO should
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H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
not be construed as an alternative to net income or cash provided by operations calculated in accordance with IFRS. See “Adjusted Funds from
Operations” for a reconciliation of AFFO to cash provided by operations.
Adjusted Cash provided by Operations
The Trusts have elected to present interest paid with cash provided by financing activities in the combined statement of cash flows per the Trusts’
Financial Statements. As a comparison to total distributions, the Trusts are of the view that cash provided by operating activities should be shown
net of interest paid. Adjusted cash provided by operations is a non-GAAP measure which deducts interest paid from cash provided by operations.
Management believes this to be a useful measure as it provides investors with an indication of how much cash is available for distributions.
Interest Coverage Ratio
The interest coverage ratio is calculated at the Trusts’ interests by dividing the sum of adjusted property operating income plus finance income,
less trust expenses (excluding unit-based compensation) by finance costs from operations (excluding effective interest rate accretion and
exchangeable unit distributions). Management uses this ratio to evaluate its ability to service the interest requirements of its outstanding debt.
Debt to Total Assets Ratios
The REIT’s Declaration of Trust limits the indebtedness of the REIT (subject to certain exceptions) to a maximum of 65% of the total assets of the
REIT, based on the Trusts’ Financial Statements. The Trusts also present this ratio at the Trusts’ interests including for each geographic segment.
Debt includes mortgages payable, the face value of debentures payable, bank indebtedness and loan payable. Management uses this ratio to
determine its flexibility to incur additional debt and ensure it is in compliance with the REIT’s Declaration of Trust.
OVERVIEW
The REIT is an unincorporated open-ended trust created by a declaration of trust (the “REIT Declaration of Trust”) and governed by the laws of the
Province of Ontario. Unitholders are entitled to have their REIT units comprising part of the Stapled Units (as defined below) redeemed at any time
on demand payable in cash (subject to monthly limits) and/or in specie, provided that the corresponding Finance Trust units are being
contemporaneously redeemed.
Finance Trust is an unincorporated investment trust. Finance Trust was established pursuant to a Plan of Arrangement (the “Plan of Arrangement”)
on October 1, 2008, as described in the REIT’s information circular dated August 20, 2008, as an open-ended limited purpose unit trust pursuant
to its declaration of Trust (the “Finance Trust Declaration of Trust”). Each issued and outstanding Finance Trust unit is “stapled” to a unit of the
REIT on a one-for-one basis such that Finance Trust units and the REIT units trade together as stapled units (“Stapled Units”), and such Stapled
Units are listed and posted for trading on the Toronto Stock Exchange (“TSX”). Apart from provisions necessary to achieve such stapling, each
REIT unit and Finance Trust unit retains its own separate identity and is separately listed (but not posted for trading) on the TSX (unless there is
an event of uncoupling, in which case Finance Trust units will cease to be listed on the TSX).
The REIT has two primary objectives:
to provide unitholders with stable and growing cash distributions, generated by the revenue it derives from a diversified portfolio of income
producing real estate assets; and
to maximize unit value through ongoing active management of the REIT’s assets, acquisition of additional properties and the development
and construction of projects which are pre-leased to creditworthy tenants.
The REIT’s strategy to accomplish these two objectives is to accumulate a diversified portfolio of high quality investment properties in Canada and
the United States occupied by creditworthy tenants.
The REIT’s strategy to mitigate risk is diversification both by asset class and geographic location. The REIT invests in four real estate asset classes
which management views as comprising six separate operating segments. The REIT invests in office, retail, industrial and residential properties
and acquires properties both in Canada and the United States. The REIT’s retail asset class is further viewed by management as being comprised
of three different operating segments: (i) enclosed shopping centres and multi-tenant retail plazas throughout Canada managed by Primaris
Management Inc. (“Primaris”); (ii) other retail properties throughout Canada and the United States managed by H&R REIT Management Services
LP (“HRRMSLP”), a wholly-owned subsidiary of the REIT, (“H&R Retail”), and (iii) the REIT’s 33.6% interest in Echo Realty LP (“ECHO”), a privately
held real estate and development company which focuses on developing and owning a core portfolio of grocery anchored shopping centres in the
United States. The REIT therefore has six operating segments and management assesses the results of these operations separately.
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H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
The primary purpose of Finance Trust is to be a flow-through vehicle to allow the REIT to indirectly access the capital markets in a tax-efficient
manner by indirectly borrowing money from the REIT’s unitholders. Finance Trust’s primary activity is to hold debt issued by H&R REIT (U.S.)
Holdings Inc. (“U.S. Holdco”), a wholly-owned U.S. subsidiary of the REIT. As at December 31, 2015, Finance Trust holds U.S. $220.4 million of
aggregate principal amount of notes payable by U.S. Holdco (“U.S. Holdco Notes”) (December 31, 2014 - $220.4 million). Subject to cash flow
requirements, Finance Trust intends to distribute to its unitholders, who are also unitholders of the REIT, all of its cash flow, consisting primarily of
interest paid by U.S. Holdco, less administrative and other expenses and amounts to satisfy liabilities. The U.S. Holdco Notes are eliminated in
the Trusts’ Financial Statements, however the related foreign exchange difference is not eliminated upon combination as it flows through net
income (loss) on the Finance Trust financial statements and other comprehensive income (loss) on the REIT financial statements.
Mechanics of “Stapling” the Units of Finance Trust and the REIT
Pursuant to the provisions of the Declarations of Trust for Finance Trust and the REIT at all times each REIT unit must be ‘‘stapled’’ to a Finance
Trust unit (and each Finance Trust unit must be ‘‘stapled’’ to a REIT unit) unless there is an “event of uncoupling” (as described below). As part of
the Plan of Arrangement, the REIT and Finance Trust entered into a support agreement (the “Support Agreement”) which provided, among other
things, for the co-ordination of the declaration and payment of all distributions so as to provide for simultaneous record dates and payment dates;
for co-ordination so as to permit the REIT to perform its obligations pursuant to the REIT’s Declaration of Trust, Unit Option Plan, Incentive Unit
Plan, Distribution Reinvestment Plan and Unit Purchase Plan (“DRIP”) and Unitholder Rights Plan; for Finance Trust to take all such actions and
do all such things as are necessary or desirable to enable and permit the REIT to perform its obligations arising under any security issued by the
REIT (including securities convertible, exercisable or exchangeable into Stapled Units); for Finance Trust to take all such actions and do all such
things as are necessary or desirable to enable the REIT to perform its obligations or exercise its rights under its convertible debentures; and for
Finance Trust to take all such actions and do all such things as are necessary or desirable to issue Finance Trust units simultaneously (or as close
to simultaneously as possible) with the issue of REIT units and to otherwise ensure at all times that each holder of a particular number of REIT
units holds an equal number of Finance Trust units, including participating in and cooperating with any public or private distribution of Stapled Units
by, among other things, executing prospectuses or other offering documents.
In the event that the REIT issues additional REIT units, pursuant to the Support Agreement, the REIT and Finance Trust will coordinate so as to
ensure that each subscriber receives both REIT units and Finance Trust units, which shall trade together as Stapled Units. Prior to such event, the
REIT shall provide notice to Finance Trust to cause Finance Trust to issue and deliver the requisite number of Finance Trust units to be received
by and issued to, or to the order of, each subscriber as the REIT directs. In consideration of the issuance and delivery of each such Finance Trust
unit, the REIT (solely as agent for and on behalf of the purchaser) or the purchaser, as the case may be, shall pay (or arrange for the payment of)
a purchase price equal to the fair market value (as determined by Finance Trust in consultation with the REIT) of each such Finance Trust unit at
the time of such issuance. The remainder of the subscription price for Stapled Units shall be allocated to the issuance of REIT units by the REIT.
The proceeds received by Finance Trust from any such issuance shall be invested in additional notes of the same series as the U.S. Holdco Notes
or distributed to unitholders of Finance Trust.
An event of uncoupling (“Event of Uncoupling”) shall occur only: (a) in the event that unitholders of the REIT vote in favour of the uncoupling of
units of Finance Trust and units of the REIT such that the two securities will trade separately; or (b) at the sole discretion of the trustees, but only
in the event of the bankruptcy, insolvency, winding-up or reorganization (under an applicable law relating to insolvency) of the REIT or U.S. Holdco
or the taking of corporate action by the REIT or U.S. Holdco in furtherance of any such action or the admitting in writing by the REIT or U.S. Holdco
of its inability to pay its debts generally as they become due. The trustees of the Trusts shall use all reasonable efforts to obtain and maintain a
listing for the units of the REIT and, unless an Event of Uncoupling has occurred, the Stapled Units, on one or more stock exchanges in Canada.
Investment Restrictions
Under Finance Trust Declaration of Trust, the assets of Finance Trust may be invested only in:
(a) U.S. Holdco Notes; and
(b)
temporary investments in cash, term deposits with a Canadian chartered bank or trust company registered under the laws of a province of
Canada, short-term government debt securities, or money market instruments (including banker’s acceptances) of, or guaranteed by, a
Schedule 1 Canadian bank (“Cash Equivalents”), but only if each of the following conditions are satisfied: (a) if the Cash Equivalents have
a maturity date, the trustees hold them until maturity; (b) the Cash Equivalents are required to fund expenses of Finance Trust, a redemption
of units, or distributions to unitholders, in each case before the next distribution date; and (c) the purpose of holding the Cash Equivalents
is to prevent funds from being non-productive, and not to take advantage of market fluctuations.
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H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
The Finance Trust Declaration of Trust provides that Finance Trust shall not make any investment, take any action or omit to take any action which
would result in the units of Finance Trust not being considered units of a ‘‘mutual fund trust’’ for purposes of the Income Tax Act (Canada) (the
“Tax Act”) or that would disqualify Finance Trust as a “fixed investment trust” under the Internal Revenue Code of 1986 as amended (the “Code”)
and the applicable regulations. In order to qualify as a ‘‘fixed investment trust’’ under the Code, Finance Trust generally may not acquire assets
other than the U.S. Holdco Notes or certain investments in cash or cash equivalents.
SECTION II
FINANCIAL HIGHLIGHTS
December 31,
December 31,
December 31,
December 31,
(in thousands except per unit amounts)
Total assets(1)
Ratio of debt to total assets per the Trusts’ Financial
Statements(2)
Ratio of debt to total assets based on the Trusts’ interests(2)
Stapled Units outstanding
Exchangeable units outstanding
2015
$14,714,535
2014
$13,941,980
2013
$14,107,004
2012
$10,171,806
46.2%
48.4%
279,610
16,664
46.3%
48.1%
274,773
16,664
49.2%
50.8%
269,975
17,403
50.3%
51.6%
194,677
5,438
Three months ended
Three months ended
Year ended
Year ended
December 31,
December 31,
December 31,
December 31,
Rentals from investment properties(1)
Adjusted property operating income(1)
FFO(1)
Weighted average number of basic Stapled Units for FFO
FFO per basic Stapled Unit(1)
Distributions paid per Stapled Unit
Payout ratio per Stapled Unit as a % of FFO(1)
Interest coverage ratio(1)
2015
$331,331
217,273
142,879
294,944
$0.48
$0.34
70.8%
2.82
2014
$335,301
218,378
138,459
290,378
$0.48
$0.34
70.8%
2.70
2015
$1,320,287
865,447
569,943
293,026
$1.95
$1.35
69.2%
2.84
2014
$1,332,353
869,722
542,951
288,871
$1.88
$1.35
71.8%
2.65
Property operating income is reconciled to FFO which is reconciled to AFFO. AFFO is reconciled to cash provided by operations, being the most comparable GAAP financial measure
to these non-GAAP financial measures. See pages 31-35.
(1)
(2)
These are non-GAAP measures and are disclosed at the Trusts’ interests which include the proportionate share of equity accounted investments.
This is a non-GAAP measure.
SELECTED ANNUAL INFORMATION
The following table summarizes certain financial information of the Trusts per the Trusts’ Financial Statements for the years indicated below:
(in thousands of Canadian dollars except per unit amounts)
Rentals from investment properties
Finance income
Net income
Total comprehensive income
Total assets
Mortgages payable
Debentures payable
Cash distributions per unit
Year Ended
December 31,
2015
Year Ended
December 31,
2014
Year Ended
December 31,
2013
$1,188,314
3,770
340,148
567,609
13,990,315
4,537,278
1,550,769
$1.35
$1,227,803
901
424,655
515,190
13,368,380
4,318,136
1,535,838
$1.35
$1,137,017
2,108
323,635
377,097
13,583,027
4,897,726
1,532,130
$1.35
For a discussion of the changes between the periods noted above, please see the December 31, 2015 and 2014 MD&As of the Trusts.
Page 5 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
SUMMARY OF QUARTERLY RESULTS
The following tables summarize certain financial information of the Trusts per the Trusts’ financial statements for the quarters indicated below:
Q4
Q3
Q2
2015
2015
Q1
(in thousands of Canadian dollars)
Rentals from investment properties
Net income (loss) from equity accounted investments
Finance income
Net income (loss)
Total comprehensive income
2015
$296,236
(39,017)
1,225
(39,454)
15,342
2015
$297,055
20,884
986
165,949
249,903
Rentals from investment properties
Net income from equity accounted investments
Finance income
Net income
Total comprehensive income
2014
$308,597
12,222
223
137,708
175,772
2014
$302,394
13,020
250
136,452
183,430
$295,688
$299,335
9,493
811
119,554
102,995
9,481
748
94,099
199,369
$304,927
$311,885
9,702
204
37,348
2,945
9,179
224
113,147
153,043
Q4
Q3
Q2
2014(1)
2014
Q1
(1) The above amounts have been adjusted to reflect the final purchase equation of Primaris.
Fluctuations between quarterly results for all segments, excluding Primaris, are not reflective of seasonality or cyclicality but generally from new
property acquisitions, dispositions, changes in foreign exchange rates and changes in the fair value of real estate assets and the fair value of
liabilities. Primaris is impacted by seasonality as revenues are typically higher in the fourth quarter due to higher percentage rent and specialty
leasing. Revenues may also have significant fluctuations due to recoveries from tenants for changes to property operating costs depending on
when major maintenance projects are incurred.
KEY PERFORMANCE DRIVERS
OPERATIONS(1)
Occupancy as at December 31
Office
98.0%
96.5%
2015
2014
Primaris
87.1%
97.5%
H&R
Retail
98.7%
98.7%
ECHO
94.5%
97.1%
Industrial
99.0%
98.7%
Residential
93.8%
93.1%
Occupancy – same-asset as at December 31(2)
2015
2014
98.1%
96.8%
87.5%
97.4%
98.7%
98.7%
93.8%
98.5%
Average contractual rent per sq.ft. for the year
ended December 31-Canadian properties(3)
Average contractual rent per sq.ft. for the year
ended December 31-U.S. properties(4)
2015
2014
$26.20
$26.76
$24.32
$21.84
2015
2014
$34.03
$33.01
Average remaining term to maturity of leases Dec 31, 2015
13.1
(in years)
13.0
Dec 31, 2014
Average remaining term to maturity of mortgages
payable (in years))
Dec 31, 2015 5.9
6.8
Dec 31, 2014
$11.52
$12.14
$12.87
$12.79
N/A
N/A
$14.43
$13.58
7.5
8.3
5.0
5.4
11.7
12.2
11.2
10.5
N/A
N/A
4.5
4.7
5.6
4.8
99.0%
98.8%
$6.31
$6.14
$3.49
$3.48
7.8
7.9
6.9
6.8
N/A
N/A
N/A
N/A
$12.76
$10.88
N/A
N/A
9.3
9.9
Total*
95.9%
97.7%
96.2%
97.9%
$18.80
$17.93
$13.96
$11.78
9.9
9.8
6.2
6.4
*
(1)
(2)
(3)
(4)
Weighted average total.
Includes properties held within equity accounted investments and investment properties classified as assets held for sale.
Same-asset refers to those properties owned by the REIT for the two-year period ended December 31, 2015.
All amounts are stated in Canadian dollars and exclude properties sold.
All amounts are stated in U.S. dollars and exclude properties sold.
Page 6 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
PORTFOLIO OVERVIEW
The geographic diversification of the Trusts’ portfolio of properties and their related square footage, including those properties held in entities that
the Trusts account for as equity accounted investments as at December 31, 2015, are outlined in the charts below:
Number of Properties
Office
Primaris
H&R Retail
ECHO(2)
Industrial
Residential(3)
Total
Square Feet (in thousands)(1)
Office
Primaris
H&R Retail
ECHO(2)
Industrial
Residential(3)
Total
Canada
Alberta
5
18
2
-
17
-
42
Canada
Alberta
3,428
3,944
240
-
1,763
-
9,375
Ontario
23
6
35
-
39
-
103
Ontario
7,183
2,401
1,766
-
4,712
-
16,062
Other
4
7
7
-
31
-
49
Other
891
2,411
707
-
2,123
-
6,132
United
States
7
-
87
205
16
8
323
Total
39
31
131
205
103
8
517
United
States
2,023
-
5,155
2,867
3,188
2,358
15,591
Total
13,525
8,756
7,868
2,867
11,786
2,358
47,160
(1) Square feet (in thousands) is based on the Trusts’ interest in the net leasable area of properties.
(2) ECHO also has four development projects and six parcels of vacant land areas which are not included in the table above.
(3) The REIT’s residential properties in the United States contain 2,586 apartment units.
LEASE TO MATURITY PROFILE(1)
The following tables below disclose the REIT’s leases expiring in the next five years in Canada and the United States including equity accounted
investments but excluding residential properties.
Canadian Portfolio:
Office
Primaris
H&R Retail
Industrial
Total
LEASE
EXPIRIES
2016
2017
2018
2019
2020
Sq.ft.
Sq.ft.
Sq.ft.
Sq.ft.
Rent per
sq.ft. ($)
on expiry
24.08
19.40
20.33
28.96
26.03
Sq.ft.
812,895
1,037,020
1,028,088
1,209,427
1,123,138
Rent per
sq.ft. ($)
on expiry
28.11
22.07
23.72
16.27
20.81
28,278
77,252
163,718
1,012,116
131,877
Rent per
sq.ft. ($)
on expiry
14.20
11.41
11.12
10.47
14.76
27,096
203,637
1,001,382
826,553
680,541
Rent per
sq.ft. ($)
on expiry
6.39
6.26
5.05
5.88
8.30
1,283,247
1,564,963
2,698,647
3,618,481
2,110,160
Rent per
sq.ft. ($)
on expiry
26.04
19.07
15.39
14.27
16.83
414,978
247,054
505,459
570,385
174,604
1,912,480
24.12
5,210,568
21.72
1,413,241
11.07
2,739,209
6.21
11,275,498
17.02
Page 7 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
Lease to Maturity Profile (continued):
U.S. Portfolio:
Office
H&R Retail
ECHO
Industrial
Total
LEASE
EXPIRIES
2016
2017
2018
2019
2020
Sq.ft.
Sq.ft.
Sq.ft.
Sq.ft.
Rent per
sq.ft. ($)
on expiry
-
-
-
-
Rent per
sq.ft. ($)
on expiry
22.00
10.87
13.07
11.06
40.41
Sq.ft.
14,601
494,785
333,692
409,815
97,239
67,741
171,428
141,122
128,322
337,554
846,167
-
-
-
-
-
Rent per
sq.ft. ($)
on expiry
12.34
9.21
12.58
10.74
6.39
659,943
-
928,280
242,785
-
Rent per
sq.ft. ($)
on expiry
3.42
-
3.65
3.69
-
742,285
666,213
1,403,094
780,922
434,793
Rent per
sq.ft. ($)
on expiry
4.60
10.44
6.79
8.72
14.00
-
1,350,132
13.72
9.13
1,831,008
3.57
4,027,307
8.14
TOP TWENTY SOURCES OF REVENUE BY TENANT(1)
Tenant
Encana Corporation
Bell Canada
Hess Corporation
TransCanada PipeLines Limited
New York City Department of Health
Giant Eagle, Inc.
Canadian Tire Corporation(4)
Bank of Nova Scotia
Telus Communications
1.
2.
3.
4.
5.
6.
7.
8.
9.
10. Rona Inc.
11. Corus Entertainment Inc.
12. Canadian Imperial Bank of Commerce
13. Nestle Canada and USA
14. Ontario Realty Corporation and other Ontario
Agencies(5)
Shell Oil Products
Loblaw Companies Limited(6)
15.
16.
17. Marsh Supermarkets
Sobey’s Inc./Safeway
18.
19.
Public Works and Government Services, Canada
20. Royal Bank of Canada
Total
(1)
Includes the Trusts’ interests in equity accounted investments.
% of rentals from
investment
properties(2)
Number of
locations
REIT owned
sq.ft. (in 000’s)
Average lease
term to maturity
(in years) (3)
11.3%
7.7%
4.8%
3.7%
3.3%
3.2%
2.4%
2.2%
2.2%
1.8%
1.6%
1.6%
1.5%
1.2%
1.1%
0.9%
0.9%
0.9%
0.8%
0.8%
53.9%
2
26
1
1
1
185
21
7
18
15
1
9
4
3
17
21
9
15
3
3
362
2,059
2,542
845
931
660
1,925
2,625
478
619
1,914
472
550
1,266
360
223
299
548
554
283
230
19,383
22.0
9.6
(7)
15.3
14.9
13.8
9.3
9.0
4.9
4.1
17.2
8.3
2.7
3.9
6.4
9.7
10.9
5.5
4.2
8.6
12.4
Credit Ratings
(S&P)
BBB Stable
BBB+ Stable
BBB Stable
A- Stable
AA Stable
Not Rated
BBB+ Stable
A+ Stable
BBB+ Stable
BB+ Stable
BB+ Watch Negative
A+ Stable
AA Stable
A+ Stable
AA- Negative
BBB Stable
Not Rated
BBB- Stable
AAA Stable
AA- Stable
(2) The percentage of rentals from investment properties is based on estimated annualized gross revenue excluding straight-lining of contractual rent and capital expenditure
recoveries.
(3) Average lease term to maturity is weighted based on net rent.
(4) Canadian Tire Corporation includes Canadian Tire, Mark’s Work Warehouse, Sport Chek, Atmosphere and Sports Experts.
(5) Other Ontario agencies include: Legal Aid Ontario, Ontario Lottery and Gaming Corporation, Liquor Control Board of Ontario and Hydro One Networks.
(6) Loblaw Companies Limited includes Loblaws, No Frills and Shoppers Drug Mart.
(7) Due to the confidentiality under the tenant lease, the term is not disclosed.
Page 8 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
SUMMARY OF SIGNIFICANT 2015 ACTIVITY
During the two-year period ended December 31, 2015, the REIT has sold properties (including partial interest in properties) for approximately $1.4
billion while acquiring approximately $0.6 billion of assets. Through these partial interest dispositions, the REIT has formed strategic relationships
with its new partners and has significantly strengthened its balance sheet by reducing its debt to total asset ratio from 49.2% at January 1, 2014 to
46.2% at December 31, 2015. Despite the dilutive impact of these sales, the Trusts’ FFO per unit grew by 3.7% in 2015 primarily due to the
strengthening of the U.S. dollar.
Alberta Exposure
The REIT’s properties in Alberta comprise 28.3% of the REIT’s adjusted same-asset property operating income, which is further discussed by
segment below.
Alberta Office Segment:
The Alberta properties in the REIT’s office segment are listed in the table below. They collectively comprised 17.4% of the REIT’s same-asset
adjusted property operating income in 2015.
Address
5th Ave. at Centre St.
450-1st St., S.W.
411-1st St., S.E.(1)
2611-3rd Ave.
2767-2nd Ave.
Total
City
Calgary
Calgary
Calgary
Calgary
Calgary
Ownership
Interest
Total Property
Area (Sq.Ft.)
100%
100%
50%
50%
100%
2,024,182
931,187
709,877
95,225
69,793
3,830,264
(1)
411-1st St., S.E. is a multi-tenanted property.
% of the REIT’s
adjusted same-asset
property operating
income in 2015
Average
Remaining
Lease Term
(years)
12.6%
3.3%
1.2%
0.1%
0.2%
17.4%
22.2
15.3
2.1
10.8
6.0
19.4
Major Tenant
Encana Corporation
TransCanada PipeLines Limited
Telus Communications
Alta Link LP
Alta Link LP
S&P Tenant
Credit Rating
BBB Stable
A- Stable
BBB+ Stable
A- Stable
A- Stable
In 2016, Telus Communications will be vacating 173,456 square feet at 411-1st St., S.E. (at the REIT’s 50% ownership interest). The property has
recently completed a $14.6 million renovation including a new lobby and a connection through Calgary’s Plus 15 Skywalk system to the Bow.
Alberta Industrial Segment:
The REIT has a 50% ownership interest in 16 industrial properties in Alberta and a 100% ownership interest in one industrial property in Alberta
which, collectively, comprised 1.5% of the REIT’s adjusted same-asset property operating income in 2015. The REIT owns 1,762,937 square feet
of industrial space in Alberta, of which 1,413,866 square feet is leased to creditworthy tenants such as Canadian Tire Corporation, Finning
International Inc. and Purolator Inc. on a long-term basis. The weighted average remaining term to lease is 9.2 years and leases representing only
2,309 square feet will expire during 2016 and 2017.
Alberta Retail Segment:
The retail properties in Alberta comprise 9.4% of the REIT’s adjusted same-asset property operating income in 2015 and continue to show strong
sales performance with average store sales (excluding anchor tenants) at $563 per square foot for the rolling 12 months ended December 31, 2015
compared to the entire Primaris portfolio average at $534 per square foot. The weighted average remaining term to lease is 4.5 years.
Target Update
Primaris has an interest in nine malls where Target Canada Co. (“Target”) was a tenant: a 50% interest in four of these malls and a 100% interest
in the other five malls. Three of the leases are guaranteed by Target Corporation, the U.S. parent of Target, of which two of these three properties
are held in a joint venture. Primaris’s claims in respect of the Target leases are being handled through the Companies’ Creditors Arrangement Act
(Canada). The potential settlement has not been accrued for in the Trusts’ Financial Statements. These nine locations totalled 831,688 square
feet at the REIT’s ownership interest. The Target stores were well positioned in these malls and were leased at an average net rent of $5.58 per
square foot providing an opportunity to subdivide the premises and remerchandise at higher rents. It is currently expected that once the space has
been subdivided there will be approximately 709,000 square feet of leasable area at the REIT’s ownership interest. Primaris has entered into new
leases for 63,883 square feet and leases are in process for a further 367,804 square feet at the REIT’s ownership interest. Primaris is also in
active negotiations with potential tenants on a combined 199,653 square feet at the REIT’s ownership interest. The REIT expects most of these
leases will be binding, subject to development permits, by the end of Q1 2016 with occupancy occurring between the summer of 2016 and the end
of 2017. The cost of subdividing and re-leasing the premises is expected to be approximately $109.0 million at the REIT’s ownership interest. At
Page 9 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
December 31, 2015, occupancy in the Primaris segment was 87.1%. Excluding the Target space that has been returned to Primaris, occupancy
would have been 96.3% compared to 97.5% at December 31, 2014. As at December 31, 2015, the Target stores have not been transferred to
properties under development and no expenses have been capitalized for accounting purposes.
Industrial Segment
Following the sale to an affiliate of the Public Sector Pension Investment Board (“PSP”) and affiliates of Crestpoint Real Estate Investments Ltd.
(“Crestpoint”) (collectively, “CrestPSP”) of a 50% interest in 84 Canadian industrial properties on December 22, 2014 (“Tranche 1”), the REIT sold
a 49.5% interest in 16 U.S. properties to CrestPSP for a selling price of approximately U.S. $150.5 million on March 24, 2015. CrestPSP assumed
mortgages of approximately U.S. $56.2 million and received a mark-to-market adjustment on the assumed mortgages of approximately U.S. $3.5
million. The REIT provided CrestPSP with a vendor take-back mortgage of approximately U.S. $10.1 million. Equity accounting has been applied
to this joint venture arrangement for the U.S. properties. In addition, on March 24, 2015, the REIT sold a 50% interest in one Canadian industrial
property to CrestPSP for approximately $51.5 million and provided CrestPSP with a vendor take-back mortgage of approximately $23.2 million
(collectively, this one Canadian property and the 16 U.S. properties are referred to as “Tranche 2”). The REIT plans to build on this strategic
alliance with PSP and Crestpoint by expanding on this new industrial platform through acquisitions. The REIT has leases comprising 687,039
square feet expiring in 2016 and expects most of these leases to be renewed by the end of Q1 2016.
Lantower Residential
In accordance with the REIT’s strategy of diversification both by asset class and geography, the REIT is continuing to expand into residential rental
units in Texas and Florida under the branding of “Lantower Residential”. During the year ended December 31, 2015, Lantower Residential acquired
six residential properties in Texas and Florida comprising 1,890 units for U.S. $260.4 million at an average expected capitalization rate of 5.4%. At
the date of each respective acquisition, average occupancy for these six properties was 94.3% and average monthly rent was U.S. $1,086 per unit.
Including these acquisitions, Lantower Residential has a portfolio of 2,586 rental units.
Construction commenced on the development of 1,871 rental units in Long Island City, NY (“LIC Project”), in which the REIT has a 50% interest
and Tishman Speyer is the operating partner. The total budget at the 100% ownership level is expected to be approximately U.S. $1.2 billion with
occupancy scheduled to begin in late 2017. Construction financing for up to U.S. $640 million has been secured through a syndicate of lenders
co-led by two U.S. banks. As a condition to the financings, the REIT will have to contribute a further U.S. $64.4 million to the project which will
increase its total investment to U.S. $260.7 million. Trade contracts for approximately 73% of total hard costs have been awarded.
Office Segment:
During 2015, the REIT entered into new leases and/or renewed expiring leases totalling approximately 1.8 million square feet. Major tenants of
these leases include TransCanada PipeLines Limited, TD Bank, Gowlings, Ontario Realty Corporation and Public Works and Government Services,
Canada.
ECHO Segment
The REIT has a 33.6% ownership interest in ECHO. In July 2015, ECHO purchased a grocery anchored portfolio consisting of eight properties
located in the Southeastern United States totalling 546,462 square feet (REIT’s share – 183,461 square feet) for a total purchase price of U.S.
$124.8 million (REIT’s share – U.S. $41.9 million).
H&R Retail Segment
In September 2015, the REIT sold its 100% interest in a 314,033 square foot retail property located in Richmond, B.C., for $103.0 million at a
capitalization rate of 6.0%. Upon closing, the REIT repaid the mortgage on the property of $47.3 million which had an interest rate of 5.1%. This
segment only has a remainder of 42,879 square feet of leases expiring in 2016.
Debt Highlights
Debentures:
During the year ended December 31, 2015, the REIT issued: (i) U.S. $125.0 million Series J Senior Debentures maturing in February 2018 bearing
interest at a rate equal to the 3 month London Interbank Offered Rate plus 108 basis points and (ii) $200 million Series K Senior Debentures
maturing in March 2019 bearing interest at a rate equal to the 3 month Canadian Dealer Offered Rate plus 143 basis points. During the year ended
December 31, 2015, the REIT repaid: (i) $115.0 million Series A Senior Debentures which matured in February 2015 and had an interest rate of
5.2% and (ii) $235.0 million Series H Senior Debentures which matured in October 2015 and had an interest rate of 2.94%.
Page 10 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
Mortgages:
The current weighted average interest rate on existing mortgages is 4.6% with an average term to maturity of 6.2 years. During the year ended
December 31, 2015, the REIT (excluding ECHO) secured 14 mortgages totalling $446.5 million at a weighted average interest rate of 3.6% for an
average term of 10.3 years and repaid 15 mortgages upon maturity totalling $248.8 million which had a weighted average interest rate of 5.3%.
Unencumbered and Adjusted Unencumbered Pool:
As at December 31, 2015, the REIT (excluding ECHO) had 85 unencumbered properties with a fair value of approximately $2.1 billion. In addition,
the REIT had 40 properties valued at approximately $1.4 billion which are encumbered with mortgages totaling $247.4 million. In this pool of
assets, the average loan to value is 17.9%, the minimum loan to value is 5.2%, and the maximum loan to value is 29.7%.
Operating Lines of Credit:
In December 2015, the REIT increased its liquidity by replacing its $300.0 million secured operating line with a new $500.0 million senior unsecured
revolving credit facility with a syndicate of lenders which will mature in December 2018. The REIT also amended Primaris’s senior secured credit
facility by increasing the line from $200.0 million to $300.0 million and extending the maturity date to December 2017.
Page 11 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
SECTION III
FINANCIAL POSITION
The following is a reconciliation of the Trusts’ combined statement of financial position as presented in the Trusts’ Financial Statements to a
proportionate share basis which is used by management to provide commentary on the Trusts’ changes in assets, liabilities and owner’s equity
throughout this MD&A:
December 31, 2015
December 31, 2014
Amounts per
the Trusts’
Financial
Statements
Equity
accounted
investments
The Trusts’
interests
Amounts per
the Trusts’
Financial
Statements
Equity
accounted
investments
The Trusts’
interests
(in thousands of Canadian dollars)
Assets
Real estate assets
Investment properties
$12,576,075
$1,512,361
$14,088,436
$12,116,983
$1,140,757
$13,257,740
Properties under development
97,504
226,494
323,998
105,006
106,347
211,353
Equity accounted investments
1,117,786
(1,117,786)
-
703,019
(703,019)
-
12,673,579
1,738,855
14,412,434
12,221,989
1,247,104
13,469,093
Mortgages receivable
Assets classified as held for sale
Other assets
Cash and cash equivalents
Liabilities and Unitholders’ Equity
Liabilities
Mortgages payable
Debentures payable
Exchangeable units
Deferred tax liability
Liabilities classified as held for sale
Loan payable
Bank indebtedness
Accounts payable and accrued liabilities
Non-controlling interest
103,353
3,000
54,310
38,287
-
-
103,353
79,922
3,000
296,992
53,200
49,951
107,510
88,238
42,703
23,755
-
-
14,372
15,143
79,922
296,992
57,075
38,898
$13,990,315
$724,220
$14,714,535
$13,368,380
$573,600
$13,941,980
$4,537,278
$572,669
$5,109,947
$4,318,136
$472,535
$4,790,671
1,550,769
334,110
189,658
-
55,717
321,033
176,830
-
-
-
-
-
-
90,058
40,884
20,609
1,550,769
1,535,838
334,110
362,105
189,658
129,864
-
66,179
55,717
147,608
411,091
123,863
217,714
157,119
20,609
-
-
-
-
-
-
54,729
37,246
9,090
1,535,838
362,105
129,864
66,179
147,608
178,592
194,365
9,090
7,165,395
724,220
7,889,615
6,840,712
573,600
7,414,312
Unitholders’ equity
6,824,920
-
6,824,920
6,527,668
-
6,527,668
$13,990,315
$724,220
$14,714,535
$13,368,380
$573,600
$13,941,980
Page 12 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
ASSETS
Investment Properties:
2015 Acquisitions:
Property
8401 Memorial Lane, Plano, TX
12932 Mallory Circle, Orlando, FL
12101 Fountainbrook Blvd., Orlando, FL
105 Purcellville Gateway Dr., Purcellville, VA(1)
5920 Carolina Beach Rd., Wilmington, NC(1)
2800 Artic Ave., Virginia Beach, VA(1)
2012 S. Croatan Hwy., Kill Devil Hills, NC(1)
118 Argus Lane, Mooresville, NC(1)
5119 Washington Rd., Evans, GA(1)
5810 Highland Shoppes Dr., Charlotte, NC(1)
6990 Pendleton Pike, Indianapolis, IN(1)
SEC Rockville Rd. & Country Club Rd., Indianapolis, IN(1)
1251 N. Toledo Blade Blvd., North Port FL(1)
2338 E. Irlo Bronson Memorial Hwy., Kissimmee, FL(1)
10383 E. US Hwy 40, Plainfield, IN(1)
4927 East 146th St., Carmel, IN(1)
7756 Reynolds Rd., Mentor, OH(1)
3351 Center Rd., Brunswick, OH(1)
325 Murray Farm Rd., Fairview, TX
125 & 175 Fountain Crt., Fairview, TX
Total
(1) Square feet and cash purchase price are based on the REIT’s interests.
2014 Acquisitions:
Year
Built
Date
Square
Cash Purchase
Segment
Acquired
Feet
($ Millions)
2008
2004
2000
2012
2007
1998
2006
2007
2009
2000
-
-
2007
2012
Residential
Feb 10, 2015
Residential
Apr 15, 2015
Residential
Apr 21, 2015
ECHO May 15, 2015
ECHO
July 15, 2015
ECHO
ECHO
July 7, 2015
July 7, 2015
ECHO
July 15, 2015
ECHO
July 15, 2015
ECHO
July 15, 2015
ECHO-Land
July 17, 2015
ECHO-Land
July 17, 2015
362,976
351,052
379,600
29,708
25,558
16,844
17,985
26,798
27,813
22,331
-
-
ECHO
July 28, 2015
ECHO
July 28, 2015
24,108
22,024
-
ECHO-Land
Aug 26, 2015
ECHO-Land
Sept 28, 2015
-
-
ECHO-
Development
ECHO-
Development
Oct 19, 2015
-
Oct 23, 2015
2008
2008
Residential
Oct 28, 2015
Residential
Oct 28, 2015
2,056
278,146
104,908
Price
Anchor/Major
Tenants
$65.8
61.0
65.5
15.5
5.5
4.6
3.1
7.4
9.1
6.9
0.5
0.5
8.7
8.7
0.8
0.6
61.5
1.0
0.6
57.4
19.1
N/A
N/A
N/A
Harris Teeter
Harris Teeter
Harris Teeter
Harris Teeter
Harris Teeter
Publix
Harris Teeter
-
-
Publix
Publix
-
-
N/A
-
-
N/A
N/A
2,029,745
$403.8
Cash Purchase
1801 Warner Ranch Rd., Round Rock, TX
2001
Residential
Oct 8, 2015
337,838
Property/Acquisition
3621 Dufferin St., Toronto, ON
12975 Collier Blvd., Naples, FL
Long Island City, NY Development
Kildonan Place, Winnipeg, MB
12510 South Green Dr., Houston, TX
12601 South Green Dr., Houston, TX
Total
Year
Segment
Built
Office
-
H&R Retail
2009
- Residential-Development
Primaris
Residential
Residential
1980/2013
1984
1984
Date
Square
Acquired
Feb 6, 2014
Feb 19, 2014
June 16, 2014
Sep 17, 2014
Nov 25, 2014
Nov 25, 2014
Feet
(2)
65,941
-
228,261(3)
323,568
219,948
837,718
(1)
(2)
(3)
Average remaining lease term is based on net rent at the time of acquisition.
Approximately 4.2 acres of land adjacent to an office property was purchased.
Square footage and cash purchase price are based on the REIT’s interests.
Page 13 of 46
Price
Anchor/Major
Tenants
N/A
Publix
N/A
Target, Sears
N/A
N/A
($ Millions)
$14.3
15.3
70.3(3)
69.7(3)
31.5
18.7
219.8
Average
Remaining
Lease Term
(years)
N/A
N/A
N/A
12.3
7.7
15.2
17.2
6.8
9.4
4.0
-
-
8.8
11.2
-
-
N/A
-
-
N/A
N/A
Average
Remaining
Lease Term
(years)(1)
N/A
11.6
N/A
4.7
N/A
N/A
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
2015 Dispositions:
Property
1400 Church St., Pickering, ON
2800 Skymark Ave., Mississauga, ON
Industrial Portfolio - Tranche 2(1)
6315 Kenway Dr., Mississauga, ON(1)
75 Graham Rd., Cuyahoga Falls, OH(1)
1 Kenview Blvd., Brampton, ON
44285 Ice Rink Plaza, Ashburn, VA
46651 Algonkian Pkwy., Sterling, VA
4527 Losee Rd., Las Vegas, NV
17887 South Park Ctr., Strongsville, OH(1)
Date
Sold
Feet
Square
Gross
Proceeds
Ownership
($ Millions)
$70.2
5.3
Interest
Sold
100%
100%
Jan 29, 2015
Office Q1 and Q2 2015
716,261
11,098
Mar 24, 2015
3,497,440
239.6
49.5%-50%
Segment
Industrial
Industrial
Industrial
ECHO
Office
April 13, 2015
April 17, 2015
May 28, 2015
H&R Retail
June 25, 2015
H&R Retail
June 25, 2015
Industrial
June 26, 2015
ECHO
July 7, 2015
34,339
25,048
74,338
13,815
16,838
50,659
24,742
3.7
1.3
6.3
10.5
12.3
5.5
1.8
103.0
5.3
0.2
10.3
5.9
$481.2
50%
33.6%
100%
100%
100%
100%
33.6%
100%
75%
33.6%
100%
50%
14111-14300 Entertainment Blvd. & 14140 Triangle Rd., Richmond, BC
360 Spinnaker Way, Vaughan, ON(1)
5635 South Ave., Youngstown, OH(1)
7900 Airport Rd., Brampton, ON(2)
11 Kenview Blvd., Brampton, ON(1)
Total
H&R Retail
Sept 1, 2015
314,033
Industrial
Oct 9, 2015
ECHO
Oct 16, 2015
Development
Industrial
Dec 3, 2015
Dec 8, 2015
31,429
24,387
-
72,118
4,906,545
(1) Square feet and gross proceeds are based on the ownership interest disposed.
(2) Part of Block 2, Plan 43M-1939, designated as Parts 9-11, Plan 43R-35791 which consisted of approximately 11.8 acres of land.
2014 Dispositions:
Property
1618 Station St., Vancouver, BC
2780-2800 Skymark Ave., Mississauga, ON
Regent Mall, Fredericton, NB(1)
McAllister Place, Saint John, NB(1)
115 Belfield Rd., Toronto, ON
Grant Park Shopping Centre, Winnipeg, MB(1)
2928-16th St., N.E., Calgary, AB
3620-32nd St., N.E., Calgary, AB
3777 Kingsway St., Burnaby, BC(1)
50 Cambridge St., Worcester, MA
1628 Station St., Vancouver, BC
200 Chisholm Dr., Milton, ON
417 Blue Ridge St., Blairsville, GA
420 Market St., Dayton, TN
6951 Lee Hwy., Chattanooga, TN
819 W. Carolina Ave., Hartsville, SC
4248-14th Ave., Markham, ON
Industrial Portfolio - Tranche 1(1)
Total
Date
Sold
Square
Feet
($ Millions)
Gross
Proceeds
Segment
Office
Office
Primaris
Primaris
Mar 17, 2014
Q2 and Q3 2014
May 15, 2014
May 15, 2014
Industrial
May 27, 2014
Primaris
June 13, 2014
Industrial
Industrial
June 25, 2014
June 25, 2014
Office
June 30, 2014
H&R Retail
July 18, 2014
Office
July 28, 2014
Industrial
Sept 24, 2014
H&R Retail
H&R Retail
H&R Retail
H&R Retail
Industrial
Industrial
Sept 30, 2014
Sept 30, 2014
Sept 30, 2014
Sept 30, 2014
Dec 3, 2014
Dec 22, 2014
73,197
27,280
249,655
246,546
47,990
198,961
163,280
65,120
343,085
69,020
-(2)
91,828
36,524
45,983
48,261
32,998
32,708
$30.5
4.1
102.5
70.0
3.4
46.5
29.3
10.1
86.5
17.1
4.5
7.3
6.3
6.0
10.1
10.6
4.6
6,171,907
7,944,343
508.3
$957.7
Ownership
Interest
Sold
100%
100%
50%
50%
100%
50%
100%
100%
50%
100%
100%
100%
100%
100%
100%
100%
100%
50%
(1)
(2)
Square feet and gross proceeds are based on the ownership interest disposed.
Approximately 1.25 acres of land adjacent to 1618 Station St. in Vancouver, BC was sold.
Page 14 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
Investment Properties by Segment and Region:
The following tables below disclose the fair values of the Trusts’ interests in investment properties by operating and geographic segment,
excluding assets held for sale:
Segment (millions)
Office
Primaris
H&R Retail
ECHO
Industrial
Residential
Total portfolio
Fair Value
Fair Value
December 31, 2015(1)
December 31, 2014(1)
$7,043
3,205
1,621
734
1,062
423
$6,885
3,227
1,547
528
1,019
52
$14,088
$13,258
(1)
Please refer to note 3 of the Trusts’ Financial Statements for the assumptions and methods used in measuring the fair value of the portfolio.
Region (millions)
Ontario
Alberta
Other
Canada
United States
Total portfolio
Fair Value
Fair Value
December 31, 2015(1)
December 31, 2014(1)
$4,649
3,916
1,432
9,997
4,091
$4,591
4,120
1,499
10,210
3,048
$14,088
$13,258
(1)
Please refer to note 3 of the Trusts’ Financial Statements for the assumptions and methods used in measuring the fair value of the portfolio.
The Trusts have utilized the following weighted average overall capitalization rates in estimating the fair value of the investment properties:
Weighted Average Overall Capitalization Rates
Canada
United States
Weighted Average Overall Capitalization Rates
Canada
United States
December 31, 2015
Primaris
H&R Retail
ECHO
Industrial
Residential
5.56%
-
6.76%
7.36%
-
6.86%
6.79%
6.84%
-
5.82%
December 31, 2014
Primaris
H&R Retail
ECHO
Industrial
Residential
5.60%
-
6.57%
7.29%
-
7.00%
6.96%
7.05%
-
5.90%
Office
6.11%
6.34%
Office
5.96%
6.14%
Total
6.02%
6.68%
Total
5.97%
6.74%
The weighted average capitalization rates as at December 31, 2015 are calculated based on stabilized property operating income for the three
months ended December 31, 2015 (December 31, 2014 - based on the three months ended December 31, 2014).
Page 15 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
Properties under Development
Long Island City Project
In June 2014, the REIT purchased a 50% interest in the LIC Project. Tishman Speyer, a U.S. real estate company, is the developer and manager
of the project. The parcel is zoned for 1.3 million square feet of mixed-used development, potentially accommodating up to approximately 1,871
residential rental units and approximately 15,000 square feet of retail space. The site is located adjacent to the REIT’s 2 Gotham Center office
property. Construction commenced in Q1 2015 with occupancy expected to begin in late 2017. The REIT’s share of the total land cost was U.S.
$55.6 million. The total project cost of all phases at the 100% level is expected to be approximately U.S. $1.2 billion. As at December 31, 2015, the
REIT’s investment in the LIC Project was U.S. $196.3 million, of which U.S. $150.4 million was included in properties under development.
Construction financing for up to U.S. $640.0 million has been secured through a syndicate of lenders co-led by two U.S. banks. The REIT has U.S.
$64.4 million in remaining capital contributions prior to construction financing commencing in 2016. Trade contracts for approximately 73% of total
hard costs have been awarded.
ECHO
During the year ended December 31, 2015, there were 11 ECHO properties transferred from properties under development to investment
properties. The REIT’s share of square footage was 51,406 and the value transferred was $22.5 million.
Mortgages Receivable
Mortgages receivable increased by $23.5 million from $79.9 million as at December 31, 2014 to $103.4 million as at December 31, 2015 primarily
due to the REIT granting mortgages receivable of approximately $37.1 million as part of the sale of Tranche 2 of the Industrial Portfolio and a
mortgage receivable of approximately $26.5 million relating to a development project in Dallas, TX. This was offset by the repayment of mortgages
receivable of $40.1 million.
Assets and Liabilities Classified as Held for Sale
As at December 31, 2015, a 50% interest in one industrial property with a fair value of $3.0 million was classified as held for sale.
As at December 31, 2014, the REIT held a 49.5% ownership interest in 16 industrial properties, a 50% ownership interest in one industrial property
and a 100% ownership interest in one industrial property as held for sale. The total fair value of these properties was $297.0 million with mortgages
payable of $66.0 million as at December 31, 2014.
Other Assets
Other assets increased by $50.4 million from $57.1 million as at December 31, 2014 to $107.5 million as at December 31, 2015 primarily due to
the following: (i) an increase in prepaid expenses relating to the development of the Long Island City Project of $35.3 million; (ii) an increase in
restricted cash of $7.5 million, and (iii) an increase of accounts receivable of $3.3 million.
Page 16 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
LIABILITIES AND UNITHOLDERS’ EQUITY
The REIT’s Declaration of Trust limits the indebtedness of the REIT (subject to certain exceptions) to a maximum of 65% of the total assets of the
REIT. All ratios and amounts in the table below are non-GAAP measures.
Debt to total assets per the Trusts’ Financial Statements
Debt to total assets based on the Trusts’ Interests
Non-recourse mortgages as a percentage of total mortgages
Ratio of mortgages to fair market value of encumbered Canadian properties
Ratio of mortgages to fair market value of encumbered U.S. properties
December 31, 2015
December 31, 2014
46.2%
48.4%
55.6%
41.3%
48.9%
46.3%
48.1%
53.8%
41.3%
53.5%
Unencumbered assets(1) (in thousands of Canadian dollars)
$2,063,794
$1,657,865
Interest coverage ratio
Weighted average interest rate of outstanding debt(2)
Weighted average term to maturity of outstanding debt (in years)(2)
(1) Excludes ECHO.
(2) Outstanding debt includes mortgages and the face value of debentures payable.
Mortgages Payable
The following table shows the change in mortgages payable from January 1, 2015 to December 31, 2015:
2.84:1
4.4%
5.3
2.65:1
4.7%
5.7
(in thousands of Canadian dollars)
Opening balance - January 1, 2015
Principal repayments
Mortgages repaid
New mortgages
Effective interest rate accretion on mortgages
Foreign exchange difference
Closing balance – December 31, 2015
$4,790,671
(178,594)
(262,694)
484,608
(7,046)
283,002
$5,109,947
Page 17 of 46
MORTGAGES PAYABLE
2016
2017
2018
2019
2020
Thereafter
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
The following table below shows the Trusts’ 5-year mortgage maturity profile as at December 31, 2015:
Periodic
Amortized
Principal on
Principal
($000’s)
$178,206
Maturity
($000’s)
$316,285
($000’s)
$494,491
Total Principal
% of Total
Weighted
Average Interest
Rate on Maturity
5.4%
176,401
174,932
183,013
162,017
407,507
120,381
314,762
417,060
Principal
9.7%
11.5%
5.8%
9.8%
11.3%
51.9%
100%
4.7%
5.4%
3.5%
4.5%
583,908
295,313
497,775
579,077
2,645,769
5,096,333
13,614
$5,109,947
Financing costs and mark-to-market adjustments arising on acquisitions(1)
Total
(1) Mark-to-market adjustment represents the difference between the actual mortgages assumed on property acquisitions and the fair value of the mortgages at the date of purchase
and is recognized in finance cost over the life of the applicable mortgage using the effective interest rate method. Financing costs are deducted from the Trusts’ mortgages
payable balances and are recognized in finance costs over the life of the applicable mortgage.
The mortgages outstanding as at December 31, 2015 bear interest at a weighted average rate of 4.6% (December 31, 2014 - 4.7%) and mature
between 2016 and 2040. The weighted average term to maturity of the Trusts’ mortgages is 6.2 years (December 31, 2014 - 6.4 years). For a
further discussion of liquidity please see “Funding of Future Commitments”. For a further discussion of interest rate risk, please see “Risks and
Uncertainties”.
Debt related to certain Canadian properties is held by separate legal entities, where the rent received from each property is first used to satisfy the
related debt obligations with any balance then available to satisfy the cash flow requirements of the REIT.
Debentures Payable
Debentures payable increased by $15.0 million from $1,535.8 million as at December 31, 2014 to $1,550.8 million as at December 31, 2015
primarily due to the issuance of the U.S. $125.0 million Series J Senior Debentures in February 2015 and the $200.0 million Series K Senior
Debentures in July 2015. This was offset by the following: (i) the repayment upon maturity of the $115.0 million Series A Senior Debentures in
February 2015 and the $235.0 million Series H Senior Debentures in October 2015, and (ii) the decrease in fair value of Convertible Debentures.
Exchangeable Units
Certain of the REIT’s subsidiaries have issued exchangeable units which are puttable instruments where the REIT has a contractual obligation to
issue Stapled Units to participating vendors upon redemption. These puttable instruments are classified as a liability under IFRS and are measured
at fair value through net income. Holders of the exchangeable units are entitled to receive distributions on a per unit amount equal to a per Stapled
Unit amount provided to holders of Stapled Units.
The following number of exchangeable units are issued and outstanding:
As at December 31, 2015
As at December 31, 2014
Number of
Exchangeable
Units
16,663,816
16,663,816
Quoted Price of
Stapled Units
$20.05
$21.73
Amounts per the
Trusts’ Financial
Statements
($000’s)
$334,110
$362,105
A subsidiary of the REIT holds 0.4 million Stapled Units to mirror these exchangeable units. Therefore, when these exchangeable units are
exchanged for Stapled Units, the number of outstanding Stapled Units will only increase by 16.2 million. These 0.4 million exchangeable units have
been excluded from the weighting of exchangeable units used to calculate FFO and AFFO per unit amounts as they are already included in the
total Stapled Units outstanding.
Page 18 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
Deferred Tax Liability
The REIT has certain subsidiaries in the United States that are subject to tax on their taxable income at a rate of approximately 38%. The tax
effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
Deferred tax assets:
Net operating losses and deferred interest deductions
Accounts payable and accrued liabilities
Derivative instruments
Other assets
Deferred liabilities:
Investment properties
Equity accounted investments
Deferred tax liability
December 31,
December 31,
2014
2015
$84.9
2.1
-
0.9
87.9
254.2
23.4
277.6
$95.4
2.1
0.1
0.2
97.8
218.4
9.3
227.7
($189.7)
($129.9)
The deferred tax liability relating to the investment properties is derived on the basis that the US. Investment properties will be sold at their current
fair value. The tax liability will only be realized upon an actual disposition.
Loan Payable
The loan payable decreased by $91.9 million from $147.6 million as at December 31, 2014 to $55.7 million as at December 31, 2015 as the REIT
repaid the first of two installments of the loan payable to ECHO in February 2015 and in July 2015, the REIT repaid an additional U.S. $35.0 million
towards the final remaining installment. Since the REIT has a 33.6% interest in ECHO, 33.6% of the contractual loan payable amount has been
eliminated upon consolidation of the Trusts’ Financial Statements. In February 2016, the REIT repaid the remainder of the loan payable to ECHO
for a total cash payment of U.S. $60.8 million. The amount presented on the Trusts’ combined statements of financial position as at December 31,
2015 represents the loan payable amount net of the REIT’s interest in the equity accounted investment in ECHO.
Unitholders’ Equity
Unitholders’ equity increased by $297.2 million from $6,527.7 million as at December 31, 2014 to $6,824.9 million as at December 31, 2015. The
increase is primarily due to net income, other comprehensive income and the issuance of units under the DRIP, all of which was partially offset by
distributions paid to unitholders during the same period.
Other comprehensive income consists of the unrealized gain on translation of U.S. denominated foreign operations and the transfer of realized
losses on cash flow hedges to net income.
Normal Course Issuer Bid
On June 4, 2015, the Trusts received approval from the TSX for the renewal of its normal course issuer bid (“NCIB”), allowing the Trusts to purchase
for cancellation up to a maximum of 5.0 million Stapled Units on the open market until the earlier of June 8, 2016 or the date on which the Trusts
have purchased the maximum number of Stapled Units permitted under the NCIB. During the year ended December 31, 2015, the Trusts purchased
and cancelled 179,400 Stapled Units at a weighted average price of $21.94 per unit, for a total cost of approximately $3.9 million. During the year
ended December 31, 2014, under a previous NCIB, the Trusts purchased and cancelled 67,300 Stapled Units at a weighted average price of
$21.58 per unit, for a total cost of approximately $1.5 million.
Page 19 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
RESULTS OF OPERATIONS
Three months ended December 31
(in thousands of Canadian dollars)
Property operating income:
2015
Amounts per
the Trusts’
Financial
Statements
Equity
accounted
investments
The Trusts’
interests
Amounts per
the Trusts’
Financial
Statements
2014
Equity
accounted
investments
The Trusts’
interests
Rentals from investment properties
$296,236
$35,095
$331,331
$308,597
$26,704
$335,301
Property operating costs
Net income (loss) from equity accounted investments
Finance costs:
Finance income
(94,134)
202,102
(39,017)
(9,638)
(103,772)
(100,336)
(9,386)
(109,722)
25,457
227,559
208,261
17,318
225,579
39,413
396
12,222
(11,847)
375
1,225
162
1,387
223
60
283
Finance cost - operations
(74,202)
(6,960)
(81,162)
(79,247)
(5,283)
(84,530)
Gain (loss) on change in fair value
11,803
(186)
11,617
5,178
-
5,178
(61,174)
(6,984)
(68,158)
(73,846)
(5,223)
(79,069)
Trust expenses
(2,581)
(848)
(3,429)
Fair value adjustment on real estate assets
(148,086)
(57,023)
(205,109)
Gain (loss) on sale of real estate assets
Gain on foreign exchange
Net income (loss) before income taxes
Income tax expense
Net income (loss) attributable to the Trusts’ unitholders
1,665
11,212
(35,879)
(3,575)
(39,454)
(16)
-
(1)
146
145
1,649
11,212
(35,880)
(3,429)
(3,587)
10,134
(12,557)
9,011
149,638
(11,930)
(39,309)
137,708
Non-controlling interest
Net income (loss)
Other comprehensive income:
Unrealized gain on translation of U.S. denominated
foreign operations
Transfer of realized loss on cash flow hedges to net
income
-
(145)
(145)
-
(39,454)
54,788
8
54,796
-
-
-
-
(39,454)
137,708
54,788
37,990
8
74
54,796
38,064
219
(473)
5
-
(1)
(14)
(15)
15
-
-
-
-
(3,368)
9,661
(12,552)
9,011
149,637
(11,944)
137,693
15
137,708
37,990
74
38,064
Total comprehensive income all attributable to unitholders
$15,342
$ -
$15,342
$175,772
$ -
$175,772
The decrease in net income (loss) before income taxes for the three months ended December 31, 2015 as compared to the three months ended
December 31, 2014 is primarily due to the fair value adjustment on real estate assets. The large adjustment to fair value on real estate assets was
primarily due to a decrease in the fair value of properties in Alberta by $190.8 million in Q4 2015.
Page 20 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
RESULTS OF OPERATIONS
Year ended December 31
(in thousands of Canadian dollars)
Property operating income:
2015
Amounts per
the Trusts’
Financial
Statements
Equity
accounted
investments
The Trusts’
interests
Amounts per
the Trusts’
Financial
Statements
2014
Equity
accounted
investments
The Trusts’
interests
Rentals from investment properties
$1,188,314
$131,973
$1,320,287
$1,227,803
$104,550
$1,332,353
Property operating costs
(414,801)
(40,039)
(454,840)
(424,527)
(38,104)
(462,631)
Net income from equity accounted investments
841
(288)
553
44,123
(43,673)
450
773,513
91,934
865,447
803,276
66,446
869,722
Finance costs:
Finance income
3,770
447
4,217
901
184
1,085
Finance cost - operations
(295,010)
(24,863)
(319,873)
(323,955)
(19,956)
(343,911)
Gain (loss) on change in fair value
36,240
(1,122)
35,118
(8,029)
-
(8,029)
Trust expenses
(9,327)
(1,123)
(10,450)
(11,091)
(169)
(11,260)
Fair value adjustment on real estate assets
(178,868)
(61,763)
(240,631)
(42,523)
(2,424)
(44,947)
(255,000)
(25,538)
(280,538)
(331,083)
(19,772)
(350,855)
Gain (loss) on sale of real estate assets
Gain on foreign exchange
Net income before income taxes
Income tax expense
Net income attributable to the Trusts’ unitholders
Non-controlling interest
Net income
Other comprehensive income:
Unrealized gain on translation of U.S. denominated
foreign operations
Transfer of realized loss on cash flow hedges to net
income
(5,428)
49,375
375,106
(34,958)
340,148
(2,832)
(8,260)
(16,025)
583
(15,442)
-
49,375
22,602
-
22,602
390
375,496
(114)
(35,072)
469,279
(44,624)
991
470,270
(148)
(44,772)
276
340,424
424,655
-
(276)
(276)
-
340,148
227,430
31
227,461
-
-
-
-
340,148
424,655
227,430
90,140
31
395
227,461
90,535
843
(843)
-
-
-
-
425,498
(843)
424,655
90,140
395
90,535
Total comprehensive income all attributable to unitholders
$567,609
$ -
$567,609
$515,190
$ -
$515,190
The decrease in net income before income taxes for the year ended December 31, 2015 as compared to the year ended December 31, 2014 is
primarily due to the fair value adjustment on real estate assets offset by the gain (loss) on change in fair value, the gain on foreign exchange and a
decrease in finance costs - operations. The large adjustment to fair value on real estate assets was primarily due to a decrease in the fair values of
properties in Alberta by $176.6 million.
Page 21 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
Net Income (Loss), FFO and AFFO from Equity Accounted
Investments(1)
(in thousands of Canadian dollars)
Rentals from investment properties
Property operating costs
Net income from equity accounted investments
Finance income
Finance costs - operations
Loss on change in fair value
Trust expenses
Three months ended December 31
Year ended December 31
2015
2014
Change
2015
2014
Change
$35,095
$26,704
$8,391
$131,973
$104,550
$27,423
(9,638)
(9,386)
(252)
(40,039)
(38,104)
(1,935)
396
162
375
60
21
102
553
447
450
184
103
263
(6,960)
(5,283)
(1,677)
(24,863)
(19,956)
(4,907)
(186)
(848)
-
219
(186)
(1,067)
(1,122)
(1,123)
-
(1,122)
(169)
(954)
Fair value adjustment on real estate assets
(57,023)
(473)
(56,550)
(61,763)
(2,424)
(59,339)
Gain (loss) on sale of real estate assets
Income tax expense
Non-controlling interest
(16)
146
(145)
5
(14)
15
(21)
160
(160)
Net income from equity accounted investments
(39,017)
12,222
(51,239)
Realty taxes accounted for under IFRIC 21
(1,152)
(253)
Loss on change in fair value
Fair value adjustment on real estate assets
(Gain) loss on sale of real estate assets
Notional interest capitalization(2)
186
57,023
16
2,697
-
473
(5)
-
FFO from equity accounted investments
19,753
12,437
Straight-lining of contractual rent
Rent amortization of tenant inducements
Effective interest rate accretion
Unit-based compensation
Capital expenditures
Tenant expenditures
(189)
333
(210)
-
(1,124)
(837)
38
267
(290)
(301)
(899)
186
21
2,697
7,316
(227)
66
80
301
(2,832)
583
(3,415)
(114)
(276)
841
-
1,122
2,832
8,317
(148)
(843)
34
567
44,123
(43,282)
-
-
2,424
(583)
-
-
1,122
59,339
3,415
8,317
74,875
45,964
28,911
(1,054)
1,228
(730)
1,026
(1,016)
(1,352)
-
-
(324)
202
336
-
30
(1,154)
(10,470)
(3,461)
(7,009)
(273)
(564)
(2,161)
(1,690)
(471)
56,550
61,763
AFFO from equity accounted investments
$17,726
$11,908
$5,818
$61,402
$39,757
$21,645
(1)
(2)
These amounts are at the Trusts’ proportionate ownership share held through their equity accounted investments.
Represents an adjustment to add general or indirect interest incurred in respect of properties under development held in and through equity accounted investments.
FFO from equity accounted investments for the three months and year ended December 31, 2015 compared to the three months and year ended
December 31, 2014, increased by $7.3 million and $28.9 million primarily due to the following: (i) the REIT disposing of a 49.5% interest in 16
industrial properties in the U.S. in March 2015 with the remaining 50.5% interest being accounted for as a joint venture in 2015; (ii) ECHO acquiring
and completing the development of multiple properties throughout 2014 and 2015; (iii) strengthening of the U.S. dollar compared to the Canadian
dollar; and (iv) notional interest capitalization. ECHO reports its financial results to the REIT one month in arrears due to time constraints on its
reporting. The above amounts for the three months ended December 31, 2015 and 2014 include ECHO’s financial information from September 1,
to November 30 of the respective years. The above amounts for the years ended December 31, 2015 and 2014 include ECHO’s financial
information from December 1, 2014 to November 30, 2015, and from December 1, 2013 to November 30, 2014, respectively. In December 2015,
ECHO secured new mortgages on two properties for approximately $3.9 million (REIT’s share). The REIT is not aware of any other significant
transactions that ECHO was a party to in December 2015.
Page 22 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
PROPERTY OPERATING INCOME
Property operating income consists of rentals from investment properties (“rentals”) less property operating costs. Rentals include all amounts
earned from tenants related to lease agreements, including basic rent, parking income, operating costs and realty tax recoveries. Property
operating costs primarily consist of realty taxes, maintenance and utilities. Maintenance includes costs relating to items such as cleaning, interior
and exterior building repairs and maintenance, elevator, HVAC, security and wages and benefits. Adjusted property operating income adjusts
property operating income to exclude realty taxes accounted for under IFRIC 21. “Same-asset” refers to those properties owned by the REIT for
the 2-year period ended December 31, 2015. “Transactions” refers to property operating income earned related to properties acquired, disposed
of and transferred from properties under development to investment properties.
Three months ended December 31, 2015
Three months ended December 31, 2014
(in thousands of Canadian dollars)
Same-Asset
Transactions
Trusts’
interests
Same-Asset
Transactions
Trusts’
interests
Rentals
Percentage rent
Straight-lining of contractual rent
Total rentals
Property operating costs
Property operating income
Realty taxes accounted for under IFRIC 21
$312,876
$16,808
$329,684
$303,886
$26,797
$330,683
1,303
205
39
100
1,342
305
1,224
3,129
-
265
1,224
3,394
314,384
16,947
331,331
308,239
27,062
335,301
(98,301)
(5,471)
(103,772)
(102,523)
(7,199)
(109,722)
216,083
(9,142)
11,476
(1,144)
227,559
(10,286)
205,716
(6,672)
19,863
(529)
225,579
(7,201)
Adjusted property operating income
$206,941
$10,332
$217,273
$199,044
$19,334
$218,378
Adjusted same-asset property operating income increased by $7.9 million or 4.0% for the three months ended December 31, 2015 compared to
the three months ended December 31, 2014 primarily due to the strengthening of the U.S. dollar compared to the Canadian dollar.
Adjusted property operating income earned from Transactions decreased by $9.0 million for the three months ended December 31, 2015 compared
to the three months ended December 31, 2014 primarily due to the disposition of an interest in numerous properties throughout the last two years.
The total fair market value of all investment properties sold during 2014 and 2015 was approximately $1.4 billion.
Year ended December 31, 2015
Year ended December 31, 2014
(in thousands of Canadian dollars)
Same-Asset
Transactions
Trusts’
interests
Same-Asset
Transactions
Trusts’
interests
Rentals
Percentage rent
Straight-lining of contractual rent
$1,236,755
$63,016
$1,299,771
$1,196,270
$116,221
$1,312,491
3,539
16,265
100
612
3,639
16,877
2,900
16,263
55
644
2,955
16,907
Total rentals
1,256,559
63,728
1,320,287
1,215,433
116,920
1,332,353
Property operating costs
(433,570)
(21,270)
(454,840)
(427,357)
(35,274)
(462,631)
Property operating income
822,989
42,458
865,447
788,076
81,646
869,722
Realty taxes accounted for under IFRIC 21
-
-
-
-
-
-
Adjusted property operating income
$822,989
$42,458
$865,447
$788,076
$81,646
$869,722
Adjusted same-asset property operating income increased by $34.9 million or 4.4% for the year ended December 31, 2015 compared to the year
ended December 31, 2014 primarily due to the strengthening of the U.S. dollar compared to the Canadian dollar.
Adjusted property operating income earned from Transactions decreased by $39.2 million for the year ended December 31, 2015 compared to the
year ended December 31, 2014 primarily due to the disposition of an interest in numerous properties throughout the last two years. The total fair
market value of all investment properties sold during 2014 and 2015 was approximately $1.4 billion.
Page 23 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
Included in adjusted same-asset property operating income are the following items which although they occur regularly, can be a source of
significant variances between different periods:
Three Months ended December 31
Year ended December 31
(in thousands of Canadian dollars)
2015
2014
Change
2015
2014
Change
Additional capital expenditure recoveries net of capital expenditures
$6,898
$2,662
$4,236
$17,489
$10,485
Adjustments to straight-lining of contractual rent
(3,910)
-
(3,910)
Sundry income(1)
Effect on same-asset property operating income
320
(193)
$3,308
$2,469
513
$839
(1,684)
5,303
-
2,060
$21,108
$12,545
$7,004
(1,684)
3,243
$8,563
(1)
Sundry income includes lease termination payments and other one-time items.
Additional recoveries net of capital expenditures vary from period to period as many of the REIT’s properties are single-tenant buildings with triple
net leases, which allows for certain items to be recovered from tenants even if the cost of the work is capitalized to investment properties. Sundry
income typically includes one-time, non-recurring items such as lease termination payments.
Refer to the “Segmented Information” section of this MD&A for further details on property operating income.
SEGMENTED INFORMATION
Geographic Segments:
The Trusts have two geographic segments: Canada and the United States. Property operations for both Canada and the United States share the
same investment and operating policies as described above in the “Operating Segments” section of this MD&A. The Trusts have provided additional
disclosure for Ontario and Alberta but does not view these individual provinces as separate segments.
Same-asset property operating income for the
three months ended December 31, 2015
(in thousands of Canadian dollars)
Rentals from investment properties
Property operating costs
Same-asset property operating income
Realty taxes accounted for under IFRIC 21
Ontario
$117,105
(48,209)
68,896
-
Alberta
$91,465
(32,966)
58,499
-
Other
Canadian
Provinces
$34,881
(13,211)
21,670
-
Total -
Canada
United
States
The Trusts'
interests
$243,451
$70,933
$314,384
(94,386)
149,065
-
(3,915)
67,018
(9,142)
(98,301)
216,083
(9,142)
Adjusted same-asset property operating income
$68,896
$58,499
$21,670
$149,065
$57,876
$206,941
Same-asset property operating income for the
three months ended December 31, 2014
(in thousands of Canadian dollars)
Rentals from investment properties
Property operating costs
Same-asset property operating income
Realty taxes accounted for under IFRIC 21
Ontario
$117,495
(49,983)
67,512
-
Alberta
$92,657
(32,633)
60,024
-
Other
Canadian
Provinces
$34,920
(13,075)
21,845
-
Total -
Canada
United
States
The Trusts'
interests
$245,072
$63,167
$308,239
(95,691)
149,381
-
(6,832)
56,335
(6,672)
(102,523)
205,716
(6,672)
Adjusted same-asset property operating income
$67,512
$60,024
$21,845
$149,381
$49,663
$199,044
Page 24 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
Same-asset property operating income for the
year ended December 31, 2015
(in thousands of Canadian dollars)
Ontario
Alberta
Other
Canadian
Provinces
Total -
Canada
United
States
The Trusts'
interests
Rentals from investment properties
$470,063
$364,062
$134,346
$968,471
$288,088
$1,256,559
Property operating costs
(190,255)
(130,250)
(51,454)
(371,959)
(61,611)
(433,570)
Same-asset property operating income
279,808
233,812
82,892
596,512
226,477
822,989
Realty taxes accounted for under IFRIC 21
-
-
-
-
-
-
Adjusted same-asset property operating income
$279,808
$233,812
$82,892
$596,512
$226,477
$822,989
Same-asset property operating income for the
year ended December 31, 2014
(in thousands of Canadian dollars)
Ontario
Alberta
Other
Canadian
Provinces
Total -
Canada
United
States
The Trusts'
interests
Rentals from investment properties
$470,130
$362,427
$136,140
$968,697
$246,736
$1,215,433
Property operating costs
(193,638)
(128,918)
(51,875)
(374,431)
(52,926)
(427,357)
Same-asset property operating income
276,492
233,509
84,265
594,266
193,810
788,076
Realty taxes accounted for under IFRIC 21
-
-
-
-
-
-
Adjusted same-asset property operating income
$276,492
$233,509
$84,265
$594,266
$193,810
$788,076
Included in adjusted same-asset property operating income from Alberta for the three months and year ended December 31, 2015 is a one-time
adjustment to straight-lining of contractual rent of ($1.1 million). Excluding this adjustment, adjusted same-asset property operating income would
have changed by ($0.4 million) and $1.4 million, respectively, for the three months and year ended December 31, 2015 compared to the respective
2014 periods.
The average exchange rate for the three months ended December 31, 2015 was Canadian $1.34 for each U.S. $1.00 (Q4 2014 - $1.13). The
average exchange rate for the year ended December 31, 2015 was Canadian $1.28 for each U.S. $1.00 (December 31, 2014 - $1.10). Due to the
fluctuation of the foreign exchange rate, the Trusts have provided the table below to disclose the United States segment in U.S. dollars.
United States Same-Asset Property Operating Income
Three months ended December 31
Year ended December 31
(in thousands of U.S. dollars)
Rentals from investment properties
Property operating costs
Property operating income
2015
2014
Change
2015
2014
Change
$52,723
$55,889
($3,166)
$225,069
$224,250
$819
(2,343)
(5,827)
3,484
(48,134)
(48,115)
50,380
50,062
318
176,935
176,135
(19)
800
-
Realty taxes accounted for under IFRIC 21
(7,255)
(6,142)
(1,113)
-
-
Adjusted property operating income
$43,125
$43,920
($795)
$176,935
$176,135
$800
Included in the three months and year ended December 31, 2015 are one-time adjustments to straight-lining of contractual rent of ($1.4 million)
and ($0.5 million), respectively. Excluding these amounts, adjusted same-asset property operating income would have increased by $0.6 million
and $1.3 million, respectively, for the three months and year ended December 31, 2015 compared to the respective 2014 periods.
Operating Segments:
The REIT’s strategy to mitigate risk is diversification both by asset class and geographic location. The REIT invests in four real estate asset classes
which management views as comprising six separate operating segments. The REIT invests in office, retail, industrial and residential properties
both in Canada and the United States. The REIT’s retail asset class is further viewed by management as being comprised of three different
operating segments: (i) enclosed shopping centres and multi-tenant retail plazas throughout Canada managed by Primaris; (ii) other retail properties
throughout Canada and the United States managed by HRRMSLP (“H&R Retail”), and (iii) the REIT’s 33.6% interest in ECHO, a privately held
Page 25 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
real estate and development company which focuses on developing and owning a core portfolio of grocery anchored shopping centres in the United
States. The Primaris segment also includes four properties that were previously included in the H&R Retail segment but are now managed by
Primaris. These properties are: (i) 7500 Lundy’s Lane, Niagara Falls, ON (ii) Northpointe Town Centre, Calgary, AB (iii) 3619 61st Ave. S.E., Calgary,
AB and (iv) Sunridge Plaza, Calgary, AB. The REIT therefore has six operating segments and management assesses the results of these
operations separately. Management measures the performance of the REIT’s real estate assets on the basis of property operating income, and,
specifically, same-asset property operating income which highlights period-over-period changes in rental rates, occupancy, percentage rent and
sundry income. Further disclosure of segmented information by operating segment can be found in the Trusts’ Financial Statements.
Same-asset property operating income for the
three months ended December 31, 2015
(in thousands of Canadian dollars)
Office(1)
Primaris
H&R Retail
ECHO
Industrial
Residential
The Trusts’
interests
Rentals from investment properties
$169,271
$76,742
$34,008
$11,633
$22,730
$ -
$314,384
Property operating costs
(54,609)
(32,207)
(4,491)
(1,664)
(5,330)
Property operating income
114,662
44,535
Realty taxes accounted for under IFRIC 21
(4,601)
-
29,517
(3,407)
9,969
(554)
17,400
(580)
-
-
-
(98,301)
216,083
(9,142)
Adjusted property operating income
$110,061
$44,535
$26,110
$9,415
$16,820
$ -
$206,941
Same-asset property operating income for the
three months ended December 31, 2014
(in thousands of Canadian dollars)
Office(1)
Primaris
H&R Retail
ECHO
Industrial
Residential
The Trusts’
interests
Rentals from investment properties
$165,511
$79,259
$31,249
$9,522
$22,698
$ -
$308,239
Property operating costs
Property operating income
Realty taxes accounted for under IFRIC 21
(3,131)
-
(59,526)
(32,029)
(4,082)
(1,422)
(5,464)
105,985
47,230
27,167
(2,789)
8,100
(255)
17,234
(497)
-
-
-
(102,523)
205,716
(6,672)
Adjusted property operating income
$102,854
$47,230
$24,378
$7,845
$16,737
$ -
$199,044
Same-asset property operating income for the
year ended December 31, 2015
(in thousands of Canadian dollars)
Office(1)
Primaris
H&R Retail
ECHO
Industrial
Residential
The Trusts’
interests
Rentals from investment properties
$677,806
$302,274
$139,067
$44,580
$92,832
$ -
$1,256,559
Property operating costs
(241,893)
(126,610)
(32,051)
(8,760)
(24,256)
Property operating income
435,913
175,664
107,016
35,820
68,576
Realty taxes accounted for under IFRIC 21
-
-
-
-
-
-
-
-
(433,570)
822,989
-
Adjusted property operating income
$435,913
$175,664
$107,016
$35,820
$68,576
$ -
$822,989
(1) Property operating income relating to corporate entities has been included in the Office segment with the exception of Primaris and ECHO which have been reported in their
specific segment.
Page 26 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
Same-asset property operating income for the
year ended December 31, 2014
(in thousands of Canadian dollars)
Office(1)
Primaris
H&R Retail
ECHO
Industrial
Residential
The Trusts’
interests
Rentals from investment properties
$658,640
$303,687
$124,382
$38,455
$90,269
$ -
$1,215,433
Property operating costs
Property operating income
(241,893)
(125,823)
(28,522)
(7,730)
(23,389)
416,747
177,864
95,860
30,725
66,880
Realty taxes accounted for under IFRIC 21
-
-
-
-
-
-
-
-
(427,357)
788,076
-
Adjusted property operating income
$416,747
$177,864
$95,860
$30,725
$66,880
$ -
$788,076
(1) Property operating income relating to corporate entities has been included in the Office segment with the exception of Primaris and ECHO which have been reported in their
specific segment.
Adjusted same-asset property operating income from the Office segment increased by $7.2 million and $19.2 million, respectively, for the three
months and year ended December 31, 2015 compared to the respective 2014 periods primarily due to an increase of $4.0 million and $13.7 million
as a result of the strengthening of the U.S. dollar compared to the Canadian dollar and one-time items disclosed on page 24 of this MD&A.
Adjusted same-asset property operating income from the Primaris segment decreased by $2.7 million and $2.2 million, respectively, for the three
months and year ended December 31, 2015 compared to the respective 2014 periods primarily due to (i) a one-time adjustment to straight-lining
of contractual rent of ($1.1 million) in Q4 2015 and year ended December 31, 2015; and (ii) the disclaiming of leases by Target as a result of which
rent ceased being received in Q2 2015.
Adjusted same-asset property operating income from the H&R Retail segment increased by $1.7 million and $11.1 million, respectively, for the
three months and year ended December 31, 2015 compared to the respective 2014 periods primarily due to an increase of $2.8 million and $11.1
million as a result of the strengthening of the U.S. dollar compared to the Canadian dollar.
Adjusted same-asset property operating income from the ECHO segment increased by $1.6 million and $5.1 million, respectively, for the three
months and year ended December 31, 2015 compared to the respective 2014 periods primarily due to an increase of $1.5 million and $5.0 million
as a result of the strengthening of the U.S. dollar compared to the Canadian dollar.
Adjusted same-asset property operating income from the Industrial segment increased by $1.7 million for the year ended December 31, 2015
compared to the respective 2014 period primarily due to an increase of $2.1 million as a result of the strengthening of the U.S. dollar compared to
the Canadian dollar.
Page 27 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
For the 16 enclosed shopping centres within the Primaris segment, sales per square foot, on a same-tenant basis, for Commercial Retail Units
(“CRU”) have increased to $548 per square foot for the twelve months ended December 31, 2015 from $535 in the comparative period. For the
same 16 properties within the Primaris segment, all store sales increased by 1.8%. These figures only include enclosed shopping centres owned
by Primaris for the entire rolling 24-month period ending December 31, 2015.
All Store Sales
(in thousands of Canadian dollars)
Same Store Sales
(per square foot)
Rolling 12 month ended December 31
Rolling 12 month ended December 31
2014
% Change
Cataraqui Town Centre
Dufferin Mall
Grant Park(1)
McAllister Place(1)
Medicine Hat Mall
Northland Village(2)
2015
$88,194
107,495
26,079
56,498
63,583
32,227
$85,643
95,799
25,424
52,184
61,993
36,170
Orchard Park Shopping Centre
160,020
150,026
Park Place
Peter Pond Mall
Place d’Orleans(1)
Place du Royaume
Regent Mall(1)
Sherwood Park Mall
St. Albert(3)
Stone Road
Sunridge
Total(4)
88,682
88,046
96,915
82,731
99,476
96,330
104,941
106,915
79,338
53,696
31,445
111,540
108,450
73,641
55,387
36,223
107,299
108,528
$1,297,149
$1,273,769
3.0%
12.2
2.6
8.3
2.6
(10.9)
6.7
7.2
(11.5)
0.6
(1.8)
7.7
(3.1)
(13.2)
4.0
(0.1)
1.8%
2015
$489
2014
$460
619
460
500
521
518
639
590
802
435
420
578
493
499
614
535
577
439
454
526
533
598
551
923
425
421
531
507
509
589
531
$548
$535
% Change
6.3%
7.3
4.8
10.1
(1.0)
(2.8)
6.9
7.1
(13.1)
2.4
(0.2)
8.9
(2.8)
(2.0)
4.2
0.8
2.4%
(1) All store sales and same-store sales have been reported as if Primaris owned 100% of Place d’Orleans, McAllister Place, Grant Park and Regent Mall for the entire rolling 12
months ended December 31, 2015 and 2014.
(2) All store sales were negatively impacted by the departure of a single tenant, a travel agency, and excluding the impact of this one tenant, the decrease in all store sales would
have been (8.6%).
(3) All store sales were negatively impacted due to a CRU tenant expanding and becoming an anchor tenant in 2015. Excluding the impact of this one tenant, all store sales would
have decreased by (1.5%).
(4) The total same-store sales figures have been presented on a weighted average basis.
Page 28 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
OTHER INCOME AND EXPENSE ITEMS
The other income and expense items section of this MD&A provides management’s commentary on the Trusts’ Results of Operations for line items
below net income from equity accounted investments, including finance cost – operations, gain (loss) on change in fair value, trust expenses, unit-
based compensation, fair value adjustment on real estate assets, gain (loss) on sale of real estate assets, gain on foreign exchange and income
taxes expense.
Finance Cost - Operations
Three months ended December 31
Year ended December 31
(in thousands of Canadian dollars)
2015
2014
Change
2015
2014
Change
Contractual interest on mortgages payable
$58,317
$59,841
($1,524)
$230,134
$249,857
($19,723)
Contractual interest on debentures payable
15,730
17,161
(1,431)
64,715
68,077
(3,362)
Effective interest rate accretion
Bank interest and charges
Exchangeable unit distributions
Capitalized interest
Finance cost - operations
(804)
2,295
5,624
(1,208)
3,111
5,625
404
(816)
(5,353)
(5,656)
303
7,881
9,803
(1,922)
(1)
22,496
23,162
(666)
81,162
84,530
(3,368)
319,873
345,243
(25,370)
-
-
-
-
(1,332)
1,332
$81,162
$84,530
($3,368)
$319,873
$343,911
($24,038)
The decrease in contractual interest on mortgages payable for the three months and year ended December 31, 2015 compared to the respective
2014 periods is primarily due to mortgages being assumed or discharged upon the disposal of properties and the repayment of mortgages.
The decrease in contractual interest on debentures payable of $1.4 million and $3.4 million for the three months and year ended December 31,
2015 compared to the respective 2014 periods is primarily due to the repayment of the Series A Senior Debentures in February 2015 and Series
H Debentures in October 2015 offset by the issuance of the Series J Senior Debentures in February 2015 and Series K Senior Debentures in July
2015.
Finance Cost – Gain (loss) on Change in Fair Value
Three months ended December 31
Year ended December 31
(in thousands of Canadian dollars)
2015
2014
Change
2015
2014
Change
Gain (loss) on fair value of convertible debentures
$2,855
$2,940
($85)
$8,084
($1,559)
$9,643
Gain (loss) on fair value of exchangeable units
8,665
2,167
6,498
27,995
(6,859)
34,854
Net gain (loss) on derivative instruments
97
71
26
(961)
389
(1,350)
Finance cost – gain (loss) on change in fair value
$11,617
$5,178
$6,439
$35,118
($8,029)
$43,147
The REIT has elected to measure the outstanding convertible debentures at fair value. The REIT uses the quoted prices on the TSX to determine
the fair value of each series of convertible debentures as permitted under IFRS 13, Fair Value Measurement. The fluctuation in fair value between
each period is recorded as a gain (loss) on change in fair value.
Under IFRS, the exchangeable units are considered puttable instruments which are valued and classified as a financial liability. The gain (loss) on
fair value of exchangeable units is due to the change in the exchangeable unit fair value during the respective quarter. At the end of each quarter,
the fair value of each exchangeable unit is measured based on the quoted prices of the Stapled Units on the TSX. For the three months and year
ended December 31, 2015, the change in fair value is based on the quoted price of Stapled Units which was $20.05 as at December 31, 2015
(September 30, 2015 - $20.57, December 31, 2014 - $21.73). For the three months and year ended December 31, 2014, the change in fair value
is based on the quoted price of Stapled Units which was $21.73 as at December 31, 2014 (September 30, 2014 - $21.86 December 31, 2013 -
$21.40).
Page 29 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
Trust Expenses
(in thousands of Canadian dollars)
Other expenses
Three months ended December 31
Year ended December 31
2015
2014
Change
2015
2014
Change
$3,560
$2,266
$1,294
$11,147
$7,411
$3,736
Unit-based compensation - as reported under IFRS
(131)
1,102
(1,233)
(697)
3,849
(4,546)
Trust expenses
$3,429
$3,368
$61
$10,450
$11,260
($810)
Other expenses are primarily comprised of salaries, professional fees, trustee fees and corporate overhead expenses. Total other expenses
increased by $1.3 million and $3.7 million for the three months and year ended December 31, 2015 compared to the three months and year ended
December 31, 2014 primarily due to an increase in salaries, professional fees and corporate expenses relating to Primaris and ECHO.
The REIT’s Unit Option Plan is considered to be cash-settled under IFRS 2, Share-based Payments and as a result, is measured at each reporting
period and settlement date at its fair value as defined by IFRS 2. The impact of the fair value adjustment to unit-based compensation is as follows:
Unit-based Compensation
(in thousands of Canadian dollars)
Unit-based compensation
Fair value adjustment to unit-based compensation
Three months ended December 31
Nine months ended December 31
2015
$856
(987)
2014
Change
2015
2014
Change
$629
$227
$3,309
$4,277
($968)
473
(1,460)
(4,006)
(428)
(3,578)
Unit-based compensation - as reported under IFRS
($131)
$1,102
($1,233)
($697)
$3,849
($4,546)
Unit-based Compensation is comprised of the following two compensation plans; the Unit Option Plan and the Incentive Unit Plan. Unit-based
compensation decreased by $1.0 million for the year ended December 31, 2015 compared to the year ended December 31, 2014 primarily due to
a one-time catch up adjustment of $1.7 million in Q1 2014 relating to the calculation of how unit options vest over their three year period. At the
end of each quarter, the fair value adjustment to unit-based compensation is measured based on the quoted prices of the Stapled Units on the
TSX. The quoted price of Stapled Units was $20.05 as at December 31, 2015 (September 30, 2015 - $20.57, December 31, 2014 - $21.73). The
quoted price of Stapled Units was $21.73 as at December 31, 2014 (September 30, 2014 - $21.86, December 31, 2013 - $21.40).
Fair Value Adjustment on Real Estate Assets
Three months ended December 31
Year ended December 31
(in thousands of Canadian dollars)
2015
2014
Change
2015
2014
Change
Fair value adjustment on real estate assets
($205,109)
$9,661
($214,770)
($240,631)
($44,947)
($195,684)
The REIT records its real estate assets at fair value. The changes of $214.8 million and $195.7 million for the three months and year ended
December 31, 2015 compared to the respective 2014 periods are due to changes in the following: (i) market assumptions used in the property
valuations from quarter to quarter, (ii) realty taxes accounted for under IFRIC 21, (iii) capital and tenant expenditures, (iv) redevelopment costs and
(v) straight-lining of contractual rent. The fair value adjustment on real estate assets for the three months and year ended December 31, 2015
includes decreases to fair values of properties in Alberta of $190.8 million and $176.6 million, respectively. Refer to note 3 in the Trusts’ Financial
Statements for further details on the valuation of the portfolio.
Gain (Loss) on Sale of Real Estate Assets
Three months ended December 31
Year ended December 31
(in thousands of Canadian dollars)
Gain (loss) on sale of real estate assets
2015
2014
Change
2015
2014
Change
$1,649
($12,552)
$14,201
($8,260)
($15,442)
$7,182
The loss on sale of real estate assets for the years ended December 31, 2015 and 2014 of $8.3 million and $15.4 million, respectively, includes
the following: (i) mark-to-market adjustments on the purchasers’ assumption of mortgages of $4.5 million and $16.6 million, respectively, and (ii)
one-time mortgage prepayment penalties of $2.0 million to discharge two mortgages in 2015 and $3.1 million to discharge five mortgages in 2014.
Excluding these adjustments, the properties sold generated a gain (loss) on sale of ($1.8 million) and $4.3 million, respectively. For a list of
properties sold in 2015 and 2014, please refer to the “2015 Dispositions” and “2014 Dispositions” tables in this MD&A.
Page 30 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
Gain on Foreign Exchange
(in thousands of Canadian dollars)
Gain on foreign exchange
Three months ended December 31
Year ended December 31
2015
2014
Change
2015
2014
Change
$11,212
$9,011
$2,201
$49,375
$22,602
$26,773
The amounts in the table above were recorded by Finance Trust due to the translation of the U.S. Holdco Notes into Canadian dollars. The U.S.
Holdco Notes are eliminated in the Trusts’ Financial Statements however, the related foreign exchange difference is not eliminated on combination
as it flows through net income of Finance Trust and other comprehensive income of the REIT. This is because U.S. Holdco is a subsidiary of the
REIT and forms part of its net investment in the United States. U.S. Holdco is not a subsidiary of Finance Trust. The average exchange rate for
the three months ended December 31, 2015 was Canadian $1.34 for each U.S. $1.00 (Q4 2014 - $1.13). The average exchange rate for the year
ended December 31, 2015 was Canadian $1.28 for each U.S. $1.00 (December 31, 2014 - $1.10).
Income Tax Expense
(in thousands of Canadian dollars)
Current income taxes
Deferred income taxes
Total income taxes
Three months ended December 31
Year ended December 31
2015
$283
2014
$450
Change
2015
2014
Change
($167)
$2,455
$1,068
$1,387
3,146
11,494
(8,348)
32,617
43,704
(11,087)
$3,429
$11,944
($8,515)
$35,072
$44,772
($9,700)
Current income taxes expense of $2.5 million for the year ended December 31, 2015, includes a minimum income tax expense of $1.1 million
relating to the sale of U.S. properties sold during 2015.
The REIT is generally subject to tax in Canada under the Tax Act with respect to its taxable income each year, except to the extent such taxable
income is paid or made payable to unitholders and deducted by the REIT for tax purposes. The REIT’s current income tax expense is primarily
due to U.S. state taxes.
The REIT’s deferred income tax expense is recorded in respect of U.S. Holdco and arose due to taxable temporary differences between the tax
and accounting bases of assets and liabilities net of the benefit of unused tax credits, deferred interest deductions and losses that are available to
be carried forward to future tax years to the extent that it is probable that the unused tax credits, deferred interest deductions and losses can be
realized.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply when the assets are realized or the liabilities are settled,
based on the tax laws that have been enacted or substantively enacted at the statement of financial position date. Deferred income tax relating to
items recognized in equity will also be recognized in equity.
As at December 31, 2015, the REIT had net deferred tax liabilities of $189.7 million (December 31, 2014 - $129.9 million) primarily related to
taxable temporary differences between the tax and accounting bases of U.S. investment properties.
FUNDS FROM OPERATIONS
FFO is a recognized measure that is widely used by the real estate industry, particularly by those publicly traded entities that own and operate
investment properties. FFO is a financial measure which should not be considered as an alternative to net income, cash flow from operations, or
any other operating or liquidity measure prescribed under IFRS. The Trusts present FFO in accordance with the REALpac White Paper on Funds
From Operations. The use of FFO, combined with the required IFRS presentations, has been included for the purpose of improving the
understanding of the operating results of the Trusts. FFO provides an operating performance measure that when compared period over period
reflects the impact on operations of trends in occupancy levels, rental rates, property operating costs, acquisition activities and finance costs, that
is not immediately apparent from net income determined in accordance with IFRS.
In April 2014, REALpac revised their definition of FFO to add an adjustment for realty taxes accounted for under IFRIC 21 and an adjustment for
incremental leasing costs of full-time or salaried staff.
Page 31 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
Realty taxes accounted for under IFRIC 21:
As a result of the requirements of IFRIC 21 wherein the obligating event that gives rise to the property tax liability (where such property taxes meet
the definition of a levy in IFRIC 21) does not occur over a period of time, an adjustment is made to FFO to reflect a pro-rata expense over the
period of ownership.
Incremental leasing costs:
Leasing costs related to full-time or salaried staff, and related internal costs, that can be directly attributed to signed leases and that would otherwise
be capitalized if incurred from external sources are added back to profit or loss in determining FFO. The purpose of this adjustment is to achieve
consistency between entities that use internal leasing personnel and those that use external leasing personnel.
FUNDS FROM OPERATIONS
(in thousands of Canadian dollars except per unit amounts)
Property operating income
Finance income
Finance cost - operations (excluding exchangeable unit distributions)
Trust expenses (excluding the fair value adjustment to unit-based compensation)
Current income taxes expense
FFO from equity accounted investments (page 22)
Realty taxes accounted for under IFRIC 21
Incremental leasing costs
FFO
Weighted average number of Stapled Units (in thousands of Stapled Units
adjusted for conversion of exchangeable Stapled Units)(1)
Diluted weighted average number of Stapled Units (in thousands of Stapled Units)
for the calculation of FFO(1)(2)(3)(4)
FFO per Stapled Unit (basic – adjusted for conversion of exchangeable units)
FFO per Stapled Unit (diluted)
Distributions per Stapled Unit
Payout ratio per Stapled Unit as a % of FFO
Three months ended December 31
Year ended December 31
2015
$202,102
1,225
(68,578)
(3,568)
(429)
19,753
(9,134)
1,508
2014
$208,261
223
(73,622)
(3,114)
(436)
12,437
(6,948)
1,658
2015
$773,513
3,770
(272,514)
(13,333)
(2,341)
74,875
-
5,973
2014
$803,276
901
(300,793)
(11,519)
(920)
45,964
-
6,042
$142,879
$138,459
$569,943
$542,951
294,944
290,378
293,026
288,871
305,442
300,865
303,651
299,464
$0.48
$0.48
$0.34
70.8%
$0.48
$0.47
$0.34
70.8%
$1.95
$1.92
$1.35
69.2%
$1.88
$1.86
$1.35
71.8%
(1) For the three months and year ended December 31, 2015, included in the weighted average and diluted weighted average number of Stapled Units are exchangeable units of
16,230,642. For the three months and year ended December 31, 2014, included in the weighted average and diluted weighted average number of Stapled Units are exchangeable
units of 16,230,642 and 16,698,530, respectively.
(2) For the three months ended December 31, 2015 and 2014, 330,669 Stapled Units and 319,596 Stapled Units, respectively, are included in the determination of diluted FFO with
respect to the REIT’s Unit Option Plan and Incentive Unit Plan. For the years ended December 31, 2015 and 2014, 457,248 Stapled Units and 425,505 Stapled Units, respectively,
are included in the determination of diluted FFO with respect to the REIT’s Unit Option Plan and Incentive Unit Plan.
(3) The 2016, 2018 and 2020 convertible debentures are dilutive for the three months ended December 31, 2015 and December 31, 2014. Therefore, debenture interest of $3.3
million and $3.3 million, respectively, is added to FFO and 10,167,133 Stapled Units and 10,167,335 Stapled Units, respectively, are included in the diluted weighted average
number of Stapled Units outstanding for these periods.
(4) The 2016, 2018 and 2020 convertible debentures are dilutive for the years ended December 31, 2015 and December 31, 2014. Therefore, debenture interest of $13.3 million and
$13.3 million, respectively, is added to FFO and 10,167,230 Stapled Units and 10,167,523 Stapled Units, respectively, are included in the diluted weighted average number of
Stapled Units outstanding for these periods.
Page 32 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
Included in FFO are the following items which can be a source of significant variances between periods:
(in thousands of Canadian dollars)
Additional capital expenditure recoveries net of capital expenditures(1)
Adjustment to straight-lining of contractual rent
Sundry income(1)(2)
Current income taxes(3)
Three months ended December 31
Year ended December 31
2015
$6,998
(3,910)
2014
Change
2015
2014
Change
$2,772
$4,226
$17,832
$11,308
$6,524
-
(3,910)
(1,684)
-
(1,684)
391
(193)
584
8,383
2,096
6,287
-
-
-
(1,087)
-
(1,087)
$3,479
$2,579
$900
$23,444
$13,404
$10,040
Includes amounts relating to the Trusts’ interests of real estate assets included in equity accounted investments.
(1)
(2) Sundry income includes lease termination payments and other one-time items.
(3) Minimum income tax payable relating to the sale of U.S. properties.
Excluding the above items, FFO would have been $139.4 million for the three months ended December 31, 2015 (Q4 2014 - $135.9 million) and
$0.47 per basic Stapled Unit (Q4 2014 - $0.47 per basic Stapled Unit). For the year ended December 31, 2015, FFO would have been $546.5 million
(December 31, 2014 - $529.5 million) and $1.87 per basic Stapled Unit (December 31, 2014 - $1.83 per basic Stapled Unit).
Page 33 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
ADJUSTED FUNDS FROM OPERATIONS
In calculating AFFO, the Trusts adjust FFO for costs incurred relating to leasing and capital expenditures, straight-line rent in excess of contractual
rent paid by tenants and non-cash expenses such as amortization. Capital expenditures excluded and not deducted in the calculation of AFFO
relate to capital expenditures which generate a new investment stream, such as the construction of a new retail pad during property expansion or
intensification, development activities or acquisition activities. AFFO is a supplemental measure that is used in the real estate industry to assess
the sustainability of cash distributions.
AFFO is a financial measure not defined under IFRS. AFFO should not be considered as an alternative to net income, cash provided by operations
or any other IFRS measure. There is no common industry definition or methodology for the calculation of AFFO. Furthermore, some entities
present AFFO as a modified earnings measure and not as a cash measure as presented herein.
(in thousands of Canadian dollars except per unit amounts)
2015
2014
2015
2014
Three months ended December 31
Year ended December 31
FFO
Add (deduct):
Straight-lining of contractual rent
Rent amortization of tenant inducements
Effective interest rate accretion
Unit-based compensation
Capital expenditures
Tenant expenditures
Incremental leasing costs
AFFO adjustments from equity accounted investments (page 22)
$142,879
$138,459
$569,943
$542,951
(116)
511
(594)
856
(15,419)
(21,829)
(1,508)
(2,027)
(3,432)
(15,823)
(16,177)
434
(918)
629
(10,410)
(9,064)
(1,658)
(529)
2,100
(4,337)
3,309
(41,716)
(54,628)
(5,973)
(13,473)
1,725
(4,304)
4,277
(38,206)
(32,941)
(6,042)
(6,207)
AFFO
$102,753
$113,511
$439,402
$445,076
Weighted average number of Stapled Units (in thousands of Stapled Units
adjusted for conversion of exchangeable Stapled Units)(1)
Diluted weighted average number of Stapled Units (in thousands of Stapled
Units) for the calculation of AFFO(1)(2)(3)(4)(5)
AFFO per Stapled Unit (basic - adjusted for conversion of exchangeable units)
AFFO per Stapled Unit (diluted)
294,944
290,378
293,026
288,871
301,202
300,865
303,651
299,464
$0.35
$0.35
$0.39
$0.39
$1.50
$1.49
$1.54
$1.53
(1) For the three months and year ended December 31, 2015, included in the weighted average and diluted weighted average number of Stapled Units are exchangeable units of
16,230,642. For the three months and year ended December 31, 2015 and 2014, included in the weighted average and diluted weighted average number of Stapled Units are
exchangeable units of 16,230,642 and 16,698,530 respectively.
(2) For the three months ended December 31, 2015 and 2014, 330,669 Stapled Units and 319,596 Stapled Units, respectively, are included in the determination of diluted AFFO with
respect to the REIT’s Unit Option Plan and Incentive Unit Plan. For the years ended December 31, 2015 and 2014, 457,248 Stapled Units and 425,505 Stapled Units, respectively,
are included in the determination of diluted AFFO with respect to the REIT’s Unit Option Plan and Incentive Unit Plan.
(3) The 2016 and 2018 convertible debentures are dilutive for the three months ended December 31, 2015. Therefore, debenture interest of $1.9 million is added to AFFO and
5,926,537 Stapled Units are included in the diluted weighted average number of Stapled Units outstanding for this period.
(4) The 2016, 2018 and 2020 convertible debentures are dilutive for the three months ended December 31, 2014. Therefore, debenture interest of $3.3 million is added to AFFO and
10,167,335 Stapled Units are included in the dilutive weighted average number of Stapled Units outstanding for this period.
(5) The 2016, 2018 and 2020 convertible debentures are dilutive for the years ended December 31, 2015 and December 31, 2014. Therefore, debenture interest of $13.3 million and
$13.3 million, respectively, is added to AFFO and 10,167,230 Stapled Units and 10,167,523 Stapled Units, respectively, are included in the diluted weighted average number of
Stapled Units outstanding for these periods.
Page 34 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
Included in AFFO are the following items which can be a source of significant variances between periods:
(in thousands of Canadian dollars)
2015
2014
Change
2015
2014
Change
Additional capital expenditure recoveries net of capital expenditures(1)
$6,998
$2,772
$4,226
$17,832
$11,308
$6,524
Three months ended December 31
Year ended December 31
Sundry income(1)(2)
Current income taxes(3)
Capital expenditures(1)
Tenant expenditures(1)
391
(193)
584
8,383
2,096
6,287
-
-
-
(1,087)
-
(1,087)
(16,543)
(10,380)
(6,163)
(52,186)
(41,667)
(10,519)
(23,266)
(9,337)
(13,929)
(57,389)
(34,631)
(22,758)
($32,420)
($17,138)
($15,282)
($84,447)
($62,894)
($21,553)
(1)
(2)
(3)
Includes amounts relating to the Trusts’ interests of real estate assets included in equity accounted investments.
Sundry income includes lease termination payments and other one-time items.
Minimum income tax payable relating to the sale of U.S. properties.
Excluding the above items, AFFO would have been $135.2 million for the three months ended December 31, 2015 (Q4 2014 - $130.6 million) and
$0.46 per basic Stapled Unit (Q4 2014 - $0.45 per basic Stapled Unit). For the year ended December 31, 2015, AFFO would have been $523.8
million (December 31, 2014 - $508.0 million) and $1.79 per basic Stapled Unit (December 31, 2014 - $1.76 per basic Stapled Unit).
Capital expenditures were unusually high for the three months and year ended December 31, 2015 primarily due to renovation projects at the
REIT’s Front St. property in Toronto, ON, Scotia Plaza in Toronto, ON and 160 Elgin St., Ottawa, ON. Tenant expenditures were unusually high
for the three months and year ended December 31, 2015 primarily due to costs associated with lease renewals completed in 2014 and 2015 at the
REIT’s Front St. property in Toronto, ON and TransCanada Tower in Calgary, AB.
The following is a reconciliation of the Trusts’ AFFO to cash provided by operations.
(in thousands of Canadian dollars)
2015
2014
2015
2014
Three months ended December 31
Year ended December 31
AFFO
Straight-lining of contractual rent
Net (income) loss from equity accounted investments
Finance cost - operations
Effective interest rate accretion
Exchangeable unit distributions
Additions to capital expenditures and tenant expenditures
Adjustments for the Trusts’ interests in equity accounted investments (page 22)
Change in other non-cash operating items
$102,753
$113,511
$439,402
$445,076
116
39,017
74,202
594
(5,624)
37,248
(56,743)
42,615
3,432
(12,222)
79,247
918
(5,625)
19,474
314
(716)
15,823
(841)
295,010
4,337
16,177
(44,123)
323,955
4,304
(22,496)
(23,162)
96,344
(60,561)
71,147
4,366
4,524
(31,822)
Cash provided by operations
$234,178
$198,333
$771,542
$765,918
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H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
LIQUIDITY AND CAPITAL RESOURCES
Cash Distributions
In accordance with National Policy 41-201 - Income Trusts and Other Indirect Offerings, the Trusts are required to provide the following additional
disclosure relating to cash distributions.
Three months ended
Year ended
Year ended
Year ended
December 31,
December 31,
December 31,
December 31,
(in thousands of Canadian dollars)
2015
Adjusted cash provided by operations(1)
Net income (loss)
Total distributions(2)
$153,112
(39,454)
93,921
2015
$489,850
340,148
373,072
Excess (shortfall) of adjusted cash provided by
operations over total distributions
59,191
116,778
Excess (shortfall) of net income (loss) over total
distributions
(133,375)
(32,924)
2014
$461,509
424,655
366,802
94,707
57,853
2013
$322,503
323,635
331,040
(8,537)
(7,405)
(1)
(2)
Adjusted cash provided by operations is a non-GAAP measure which deducts interest paid from cash provided by operations.
Total Distributions include cash distributions to unitholders and unit distributions issued under the DRIP.
Total distributions include unit distributions issued under the DRIP of $26,102 and $105,422, respectively, for the three months and year ended
December 31, 2015 and $85,358 and $74,260 respectively, for the years ended December 31, 2014 and 2013 which are non-cash distributions.
Distributions exceeded adjusted cash provided by operations for the year ended December 31, 2013, which did not represent an economic return
of capital but rather was primarily due to unit distributions issued under the DRIP. Unit distributions issued under the DRIP result in an increase in
the number of Stapled Units outstanding which may result in increased cash distributions in the future assuming a stable cash component of
distributions per unit. Distributions exceeded net income (loss) for the three months and year ended December 31, 2015 and year ended December
31, 2013 which is primarily due to non-cash items. Non-cash items relating to the issuance of exchangeable units, fair value adjustments on real
estate assets, gain (loss) on change in fair value, amortization, unrealized gain (loss) on foreign exchange and deferred income tax recoveries are
deducted from or added to net income and have no impact on cash available to pay current distributions.
Capital Resources
Subject to market conditions, management expects to be able to meet all of the Trusts’ ongoing obligations and to finance short-term development
commitments through the general operating facilities discussed below and the Trusts’ cash flow from operations. As at December 31, 2015, the
Trusts are not in default or arrears on any of its obligations including interest or principal payments on debt and any debt covenant.
Excluding ECHO, the REIT has cash and cash equivalents on hand of $82.9 million and has the following bank facilities as at December 31, 2015:
Operating Facility
(in thousands of Canadian Dollars)
Total
Bank Indebtedness
Drawn
Facility
Outstanding
Letters of Credit
Available
Balance
H&R REIT unsecured operating facility
Primaris secured operating facility
H&R REIT and CrestPSP secured operating facility
Retail co-ownership secured operating facility
$500,000
300,000
15,000
3,514
$165,499
138,020
14,000
3,514
$62,341
$272,160
334
161,646
-
-
1,000
-
$818,514
$321,033
$62,675
$434,806
In December 2015, construction financing for the LIC Project for up to U.S. $640.0 million was secured through a syndicate of lenders co-led by
two U.S. banks. This construction facility can only be used for the LIC Project, and the REIT is committed to contribute an additional U.S. $64.4
million to the development prior to drawing on the facility. After these capital contributions have been made by the REIT and the funds have been
spent by the Project, the construction facility will be available to fund the remaining development costs.
As at December 31, 2015, excluding ECHO, the REIT had 85 unencumbered properties, with a fair value of approximately $2.1 billion. Also, due
to the REIT’s 19-year history and management’s conservative strategy of securing long-term financing on individual properties, the REIT had
Page 36 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
numerous other properties with very low loan to value ratios. As at December 31, 2015, excluding real estate assets reported in the Trusts’ equity
accounted investments, the REIT had 40 properties valued at approximately $1.4 billion which are encumbered with mortgages totaling $247.4
million. In this pool of assets, the average loan to value is 17.9% the minimum, loan to value is 5.2%, and the maximum loan to value is 29.7%.
The following is a summary of material contractual obligations of the REIT including payments due as at December 31, 2015 for the next five years
and thereafter:
Contractual Obligations(1)
(in thousands of Canadian dollars)
2016
2017-
2018
2019-
2020
2021 and
thereafter
Total
Payments Due by Period
Mortgages payable
Convertible Debentures
Senior Debentures
Bank indebtedness(2)
Loan Payable(3)
LIC Project(4)
Property acquisitions
Total contractual obligations
$494,491
75,000
180,000
-
83,876
88,837
7,750
$879,221
$1,076,852
$2,645,769
$5,096,333
74,394
747,500
321,033
-
-
-
99,654
375,000
-
-
-
-
-
-
-
-
-
249,048
1,302,500
321,033
83,876
88,837
7,750
$929,954
$2,022,148
$1,551,506
$2,645,769
$7,149,377
(1) The amounts in the above table are the principal amounts due under the contractual agreements.
(2) Excludes ECHO’s bank indebtedness of $90.1 million which is covered by ECHO’s revolving credit facility of U.S. $200.0 million which expires on August 8, 2017.
(3) The loan payable balance per the Trusts’ Financial Statements as at December 31, 2015 was $55.7 million which is payable to ECHO. 33.6% of the balance above has been
eliminated upon consolidation of the Trusts’ Financial Statements as the REIT has a 33.6% interest in ECHO, however there is a contractual obligation for the full amount.
(4) The total amount in the table above represents the REIT’s remaining capital contributions prior to construction financing commencing in 2016.
DBRS Limited (“DBRS”) provides credit ratings of debt securities for commercial entities. A credit rating generally provides an indication of the risk
that the borrower will not fulfill its obligations in a timely manner with respect to both interest and principal commitments. Rating categories range
from highest credit quality (generally AAA) to default payment (generally D). A credit rating is not a recommendation to buy, sell or hold securities.
DBRS has confirmed that the REIT has a credit rating of BBB (high) with a Stable trend as at December 31, 2015. This is the highest Canadian
real estate industry rating achieved by only three REITs and one real estate company to date. A credit rating of BBB (high) by DBRS is generally
an indication of adequate credit quality, where the capacity for payment of financial obligations is considered acceptable, however the entity may
be vulnerable to future events. A credit rating of BBB or higher is an investment grade rating. There can be no assurance that any rating will
remain in effect for any given period of time or that any rating will not be withdrawn or revised by DBRS at any time. The credit rating is reviewed
periodically by DBRS.
The REIT has no material capital or operating lease obligations.
Funding of Future Commitments
The REIT believes that as at December 31, 2015, through the combined amount available under its general operating facilities of $434.8 million
and its unencumbered property pool of approximately $2.1 billion, it has sufficient funds for future commitments.
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H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
The following summarizes the estimated loan to value ratios that will be outstanding on properties whose mortgages mature over the next five
years, including investments in the Trusts’ Interests of mortgages relating to equity accounted investments and mortgages classified as held for
sale:
Year
2016
2017
2018
2019
2020
Number of
Properties
on Maturity ($000’s)(1)
Mortgage Debt due
Weighted Average
Interest Rate on Maturity
44
21
35
29
18
147
$316,285
407,507
120,381
314,762
417,060
$1,575,995
5.4%
4.7%
5.4%
3.5%
4.5%
4.6%
Fair Value of Investment
Properties ($000’s)(1)
$636,079
902,625
504,682
847,043
1,093,656
$3,984,085
Loan to
Value
50%
45%
24%
37%
38%
40%
(1)
Converting U.S. dollars to Canadian dollars at an exchange rate of $1.38 as at December 31, 2015.
Based on the low percentage of the projected loan to values of the maturing mortgages, the REIT is confident it will be able to refinance these
mortgages upon maturity should it choose to do so.
OFF-BALANCE SHEET ITEMS
The REIT has co-owners and partners in various projects. As a rule the REIT does not provide guarantees or indemnities for these co-owners and
partners pursuant to property acquisitions because should such guarantees be provided, recourse would be available against the REIT in the event
of a default of the co-owners and partners. In such case, the REIT would have a claim against the underlying real estate investment. However, in
certain circumstances, subject to compliance with the REIT’s Declaration of Trust and the determination by management that the fair value of the
co-owners’ or partners’ investment is greater than the mortgages payable for which the REIT has provided guarantees, such guarantees will be
provided.
At December 31, 2015, such guarantees amounted to $269.9 million expiring in 2029 (December 31, 2014 - $229.0 million, expiring in 2022), and
no amount has been provided for in the Trusts’ Financial Statements for these items. These amounts arise where the REIT has guaranteed a co-
owner’s share of the mortgage liability. The REIT, however, customarily guarantees or indemnifies the obligations of its nominee companies which
hold separate title to each of its properties owned.
In addition, the REIT continued to guarantee certain debt assumed by purchasers in connection with past dispositions of properties, and will remain
liable thereunder until such debts are extinguished or the lenders agree to release the REIT’s guarantee. At December 31, 2015, the estimated
amount of debt subject to such guarantees, and therefore the maximum exposure to credit risk is approximately $146.5 million, expiring between
2016 and 2020 (December 31, 2014 - $152.2 million, expiring between 2016 and 2020). There have been no defaults by the primary obligor for
debts on which the REIT has provided its guarantees, and as a result, no contingent loss on these guarantees has been recognized in the Trusts’
Financial Statements.
In the normal course of operations, the REIT has issued letters of credit in connection with developments, financings, operations and acquisitions.
As at December 31, 2015, the REIT has outstanding letters of credit totalling $62.7 million (December 31, 2014 - $55.9 million), including $18.6
million (December 31, 2014 - $17.8 million) which has been pledged as security for certain mortgages payable. The letters of credit are secured in
the same manner as the bank indebtedness.
Under the construction facility agreement for the LIC Project, the REIT is committed to contribute an additional U.S. $64.4 million to the project
prior to drawing on the facility. These committed contributions will be included in the equity accounted investments in associates when incurred.
After these capital contributions have been made by the REIT, and the funds have been spent by the project, the construction facility will be
available to fund the remaining development costs.
Related Party Transactions
Effective July 1, 2013, the REIT entered into an agreement with the former property manager of the REIT for it to provide specified services to the
REIT including the cost sharing of premises, certain personnel, equipment and support systems, as well as additional services to be agreed upon
from time to time. The agreement will continue until terminated by either party in accordance with the terms of the agreement. During the three
months ended December 31, 2015, the REIT incurred costs of $0.4 million (December 31, 2014 - $0.4 million) under this agreement. During the
year ended December 31, 2015, the REIT incurred costs of $1.5 million (December 31, 2014 - $1.5 million) under this agreement.
Page 38 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
The REIT leases space to companies partially owned by family members of the CEO. The rental income earned for the three months ended
December 31, 2015 is $0.4 million (December 31, 2014 - $0.4 million) and for the year ended December 31, 2015 is $1.6 million (December 31,
2014 - $1.5 million).
These transactions are measured at the amount of consideration established and agreed to by the related parties.
FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS
Where appropriate, the REIT, including ECHO, uses forward contracts to lock-in lending rates on certain anticipated mortgages. This strategy
provides certainty to the rate of interest on borrowings when the REIT is involved in transactions that may close further into the future than usual
for typical transactions. At the end of each reporting period, an interest rate swap is marked-to-market, resulting in an unrealized gain or loss
recorded in net income.
Where appropriate, the REIT uses forward exchange contracts to lock-in foreign exchange rates. This strategy provides certainty in the foreign
exchange rates on transactions that will occur in the future.
SECTION IV
CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
Preparation of the Trusts’ Financial Statements requires management to make estimates and judgements that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and
expenses during the reporting period.
Management believes the policies which are subject to greater estimation and judgement are outlined below. For a detailed description of these
and other accounting policies refer to notes 1 and 2 of the Trusts’ Financial Statements.
Use of Estimates
Information about assumption and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial
year are:
• Fair value of real estate assets;
• Fair value of financial instruments;
• Fair value of cash-settled unit-based compensation;
• Fair value of convertible debentures; and
• Deferred tax asset (liability).
Use of Judgements
• Business combinations
Accounting for business combinations under IFRS 3, Business Combinations (“IFRS 3”) is only applicable if it is determined that a business
has been acquired. Under IFRS 3, a business is defined as an integrated set of activities and assets conducted and managed for the purpose
of providing a return to investors or lower costs or other economic benefits directly and proportionately to the REIT. A business generally
consists of inputs, processes applied to those inputs and resulting outputs that are, or will be, used to generate revenues. In the absence of
meeting such criteria, a group of assets is deemed to have been acquired. If goodwill is present in a transferred set of activities and assets,
the transferred set is presumed to be a business. Judgement is used by management in determining whether the acquisition of an individual
property, or a group of properties, qualifies as a business combination in accordance with IFRS 3 or as an asset acquisition.
• Valuations of real estate assets
Real estate assets, which consist of investment properties and properties under development, are carried on the combined statements of
financial position at fair value, as determined by either qualified external valuation professionals or by management. The valuations are based
Page 39 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
on a number of assumptions, such as appropriate discount rates and capitalization rates and estimates of future rental income, operating
expenses and capital expenditures. Valuation of real estate assets is one of the principal estimates and uncertainties of the REIT. Refer to
note 3 of the Trusts’ Financial Statements for further information on estimates and assumptions made in the determination of the fair value of
real estate assets. Judgement is applied in determining whether certain costs are additions to the carrying value of the real estate assets,
identifying the point at which practical completion of the property occurs and identifying the directly attributable borrowing costs to be included
in the carrying value of the development properties.
• Leases
The REIT’s policy for property rental revenue recognition is described in note 2(f) of the December 31, 2014 Trusts’ Financial Statements. The
REIT makes judgements in determining whether certain leases, in particular those tenant leases with long contractual terms and long-term
ground leases where the REIT is the lessor, are operating or finance leases. The REIT has determined that all of its leases are operating
leases.
•
Income taxes
The REIT currently qualifies as a real estate investment trust and a mutual fund trust for Canadian income tax purposes. A real estate
investment trust will not be subject to the tax levied on “specified investment flow-through” (“SIFT”) trusts provided it continues to meet
prescribed conditions under the Tax Act, including with respect to the nature of its assets and revenue, (the “REIT Conditions”) at all times
throughout a taxation year. Accordingly, no provision for current or deferred income taxes has been recorded by the REIT at December 31,
2015 in respect of its Canadian entities.
The REIT will not be subject to income tax in a year to the extent that it continues to qualify as a real estate investment trust and distributes all
of its taxable income to its unitholders. Income allocated to unitholders will be taxed at the unitholder level. The REIT currently distributes,
and is required to distribute, all of its income to its unitholders. Accordingly, for financial statement reporting purposes, the tax deductibility of
the REIT’s distributions is treated as an exemption from taxation.
•
Impairment of equity accounted investments
The REIT determines at each reporting date whether there is any objective evidence that the equity accounted investments are impaired. If so,
the REIT calculates the amount of impairment as the difference between the recoverable amount of the equity accounted investment and its
carrying value and recognizes the amount in net income.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Each of the Trust’s CEO and CFO has designed, or caused to be designed under their direct supervision, the applicable Trusts’ disclosure controls
and procedures (as defined in National Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings (“NI 52-109”), adopted
by the Canadian Securities Administrators to provide reasonable assurance that: (i) material information relating to the applicable Trust, including
its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which the annual filings are
being prepared; and (ii) material information required to be disclosed in the annual filings is recorded, processed, summarized and reported on a
timely basis. The Trusts’ CEO and CFO have each concluded that such disclosure controls and procedures were appropriately designed and were
operating effectively as at December 31, 2015. The Trusts’ Financial Statements and this MD&A were reviewed and approved by the REIT’s Audit
Committee and the Board of Trustees prior to this publication.
Management of each Trust has reviewed its internal control over financial reporting on an annual basis. The Trusts’ management, under the
supervision of the CFO, has evaluated the effectiveness of internal control over financial reporting using the framework and criteria established in
Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission in May 2013 (2013
COSO Framework). Based on this evaluation, management has concluded that internal control over financial reporting was effective and in
accordance with the criteria established in the 2013 COSO Framework as of December 31, 2015. No changes were made to the design of either
Trust’s internal control over financial reporting during the three month period ended December, 2015 that have materially affected, or are reasonably
likely to materially affect, the Trusts’ internal control over financial reporting.
Each Trust’s management, including the CEO and CFO, does not expect that the applicable Trusts’ controls and procedures will prevent or detect
all misstatements due to error or fraud. Due to the inherent limitations in all control systems, an evaluation of controls can provide only reasonable,
not absolute assurance, that all control issues and instances of fraud or error, if any, within the Trusts have been detected. The Trusts are
continually evolving and enhancing their systems of controls and procedures.
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H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
SECTION V
RISKS AND UNCERTAINTIES
All real estate assets are subject to a degree of risk and uncertainty. They are affected by various factors including general market conditions and
local market circumstances. An example of general market conditions would be the availability of long-term mortgage financing whereas local
conditions would relate to factors affecting specific properties such as an oversupply of space or a reduction in demand for real estate in a particular
area. Management attempts to manage these risks through geographic, type of asset and tenant diversification in the REIT’s portfolio. The major
risk factors including detailed descriptions are outlined below and in the REIT’s Annual Information Form.
Real Property Ownership
All real property investments are subject to a degree of risk and uncertainty. Such investments are affected by various factors including general
economic conditions, local real estate markets, demand for leased premises, competition from other available premises and various other factors.
The value of real property and any improvements thereto may also depend on the credit and financial stability of the tenants. Distributable cash
and the REIT’s income would be adversely affected if one or more major tenants or a significant number of tenants were to become unable to meet
their obligations under their leases or if a significant amount of available space in the properties in which the REIT has an interest is not able to be
leased on economically favourable lease terms. In the event of default by a tenant, delays or limitations in enforcing rights as lessor may be
experienced and substantial costs in protecting the REIT’s investment may be incurred. Furthermore, at any time, a tenant of any of the properties
in which the REIT has an interest may seek the protection of bankruptcy, insolvency or similar laws that could result in the rejection and termination
of such tenant’s lease and thereby cause a reduction in the cash flow available to the REIT.
Given the prominence of the oil and gas industry in the province of Alberta, the economy of this province can be significantly impacted by commodity
prices. As at December 31, 2015, approximately 28.3% of the REIT’s adjusted same-asset property operating income was generated from Alberta.
Accordingly, any continuing decline or prolonged weakness in commodity prices, could adversely affect those tenants of the REIT that are involved
in the oil and gas industry, thereby increasing the credit risk of such tenants to the REIT which in turn may adversely affect the REIT’s operating
results.
With respect to the Primaris portfolio, retail shopping centres have traditionally relied on there being a number of anchor tenants (department stores,
discount department stores and grocery stores) in the centre, and therefore they are subject to the risk of such anchor tenants either moving out
of the property or going out of business. Within the Primaris portfolio, certain of the major tenants are permitted to cease operating from their leased
premises at any time at their option, however, they remain liable to pay all remaining rent in accordance with their leases. Other major tenants are
permitted to cease operating from their leased premises or to terminate their leases if certain events occur. Some commercial retail unit tenants
have a right to cease operating from their premises if certain major tenants cease operating from their premises. The exercise of such rights by a
tenant may have a negative effect on a property. There can be no assurance that such rights will not be exercised in the future.
The ability to rent unleased space in the properties in which the REIT has an interest will be affected by many factors and costs may be incurred
in making improvements or repairs to property required by a new tenant. A prolonged deterioration in economic conditions could increase and
exacerbate the foregoing risks. The failure to rent unleased space on a timely basis or at all would likely have an adverse effect on the REIT’s
financial condition.
Certain significant expenditures, including property taxes, maintenance costs, mortgage payments, insurance costs and related charges must be
made throughout the period of ownership of real property regardless of whether the property is producing any income. If the REIT is unable to meet
mortgage payments on any property, losses could be sustained as a result of the mortgagee’s exercise of its rights of foreclosure or sale.
The REIT may, in the future, be exposed to a general decline of demand by tenants for space in properties. As well, certain of the leases of the
properties held by the REIT have early termination provisions which, if exercised, would reduce the average lease term. However, such termination
rights are generally exercisable at a cost to the tenant only and the amount of space in the REIT portfolio which could be affected is not significant.
A mortgage on any one property may, from time to time, exceed the estimated current market value of the related property. The cash flow from
such a property may not be sufficient to cover debt servicing for that property. The cash flow from the REIT portfolio is, however, expected by
management to be sufficient to cover any cash flow shortfalls on such a property.
Lease Rollover Risk
Lease rollover risk arises from the possibility that the REIT may experience difficulty renewing leases as they expire. Management attempts to
enter into long-term leases to mitigate this risk. Management attempts to mitigate the risk by having staggered lease maturities and entering into
longer term leases with built-in rental escalations. The leases for 34.2% of the REIT’s total commercial leasable area will expire in the next 5 years.
Page 41 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
Interest and Other Debt-Related Risk
The REIT has been able to leverage off the low interest rate environment that the Canadian and U.S. economy has experienced in recent years
which has enhanced its return to unitholders. A reversal of this trend, however, may lead to the Trusts’ debt being refinanced at higher rates,
thereby reducing net income and cash flows which could ultimately affect the level of distributions. In order to minimize this risk, the REIT negotiates
fixed rate term debt with staggered maturities on the portfolio and attempts to match average lease maturity to average debt maturity. Derivative
financial instruments may be utilized by the REIT in the management of its interest rate exposure. In addition, the REIT Declaration of Trust restricts
total indebtedness permitted on the portfolio.
Construction Risks
It is likely that, subject to compliance with the REIT Declaration of Trust, the REIT will be involved in various development projects. The REIT’s
obligations in respect of properties under construction, or which are to be constructed, are subject to risks which include (i) the potential insolvency
of a third party developer (where the REIT is not the developer); (ii) a third party developer’s failure to use advanced funds in payment of construction
costs; (iii) construction or other unforeseeable delays; (iv) cost overruns; (v) the failure of tenants to occupy and pay rent in accordance with existing
lease agreements, some of which are conditional; (vi) the incurring of construction costs before ensuring rental revenues will be earned from the
project; and (vii) increases in interest rates during the period of the development. Management strives to mitigate these risks where possible by
entering into fixed price construction contracts with general contractors (and to the extent possible, on a bonded basis) and by attempting to obtain
long-term financing as early as possible during construction.
Currency Risk
The Trusts are exposed to foreign exchange fluctuations as a result of ownership of assets in the United States and the rental income earned from
these properties. In order to mitigate the risk, the REIT’s debt on these properties is also held in U.S. dollars to act as a natural hedge.
The REIT is exposed to foreign exchange fluctuations as a result of the U.S. Holdco Notes being denominated in U.S. dollars.
Credit Risk and Tenant Concentration
The REIT is exposed to credit risk in the event that borrowers default on the repayment of the amounts owing to the REIT. Management mitigates
this risk by ensuring adequate security has been provided in support of mortgages receivable.
The REIT is exposed to credit risk as an owner of real estate in that tenants may become unable to pay the contracted rents. Management mitigates
this risk by carrying out appropriate credit checks and related due diligence on the significant tenants. Management has diversified the REIT’s
holdings so that it owns several categories of properties (office, retail, industrial and residential) and acquires properties throughout Canada and
the United States. In addition, management ensures that no tenant or related group of tenants, other than investment grade tenants, account for
a significant portion of the cash flow. The only tenants which individually account for more than 5% of the rentals from investment properties of the
REIT are Encana Corporation and Bell Canada. Both of these companies have a public debt rating that is rated with at least a BBB stable rating
by a recognized rating agency.
Environmental Risk
As an owner and manager of real estate assets in Canada and the United States, the REIT is subject to various laws relating to environmental
matters. These laws impose a liability for the cost of removal and remediation of certain hazardous materials released or deposited on properties
owned by the REIT on or adjacent properties.
In accordance with best management practices, Phase 1 environmental audits are reviewed on all properties prior to acquisition. Further
investigation is conducted if Phase 1 tests indicate a potential problem. The REIT has operating policies to monitor and manage risk. In addition,
the standard lease utilized requires tenants to comply with environmental laws and regulations, and restricts tenants from carrying on
environmentally hazardous activities or having environmentally hazardous substances on site.
Joint Arrangement Risks
The REIT has several investments in joint ventures and investments in associates. The REIT is subject to risks associated with the management
and performance of these joint arrangements. Such risks include any disagreements with its partners relating to the development or operations of
a property, as well as differences with respect to strategic decision making. Other risks include partners not meeting their financial or operational
obligations. The REIT attempts to mitigate these risks by maintaining good working relationships with its partners, and conducting due diligence on
their partners to ensure there is a similar alignment of strategy prior to creating a joint arrangement.
Page 42 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
Unit Prices
Publicly traded trust units will not necessarily trade at values determined solely by reference to the underlying value of trust assets. Accordingly,
the Stapled Units may trade at a premium or a discount to the underlying value of the assets of the REIT and Finance Trust. Investors in Stapled
Units will be subject to all of the risks of an investment in units of Finance Trust and of an investment in units of the REIT. See also “Forward-
Looking Disclaimer”.
One of the factors that may influence the quoted price of the Stapled Units is the annual yield on the Stapled Units. Accordingly, an increase in
market interest rates may lead investors in Stapled Units to demand a higher annual yield, which could adversely affect the quoted price of Stapled
Units. In addition, the quoted price for Stapled Units may be affected by changes in general market conditions, fluctuations in the markets for equity
securities and numerous other factors beyond the control of the REIT and/or Finance Trust.
Availability of Cash for Distributions
As the monthly cash distribution paid by Finance Trust fluctuates, the monthly cash distribution paid by the REIT will also fluctuate in order to result
in an aggregate monthly cash distribution as previously outlined. Although the REIT intends to make distributions of its available cash to unitholders
in accordance with its distribution policy, these cash distributions may be reduced or suspended. The actual amount distributed by the REIT will
depend on numerous factors including monthly cash distributions paid by Finance Trust, capital market conditions, the financial performance of the
properties, the REIT’s debt covenants and obligations, its working capital requirements, its future capital requirements, its development
commitments and fluctuations in interest rates. Cash available to the REIT for distributions may be reduced from time to time because of items
such as principal repayments on debt, tenant allowances, leasing commissions, capital expenditures or any other business needs that the trustees
deem reasonable. The REIT may be required to use part of its debt capacity in order to accommodate any or all of the above items. The market
value of Stapled Units may decline significantly if the REIT and/or Finance Trust suspends or reduces distributions. The REIT trustees retain the
right to re-evaluate the distribution policy from time to time as they consider appropriate.
Ability to Access Capital Markets
As the REIT distributes a substantial portion of its income to unitholders, the REIT may need to obtain additional capital through capital markets
and the REIT’s ability to access the capital markets through equity issues and forms of secured or unsecured debt financing may affect the
operations of the REIT as such financing may be available only on disadvantageous terms, if at all. If financing is not available on acceptable terms,
further acquisitions or ongoing development projects may be curtailed and cash available for distributions or to fund future commitments may be
adversely affected.
Dilution
The number of units each of the Trusts is authorized to issue is unlimited. The trustees have the discretion to issue additional Stapled Units in
certain circumstances, including under the REIT’s Unit Option Plan. Any issuance of Stapled Units may have a dilutive effect on the investors of
Stapled Units.
Unitholder Liability
The Declarations of Trust of each of the REIT and Finance Trust provide that unitholders will have no personal liability for actions of the Trusts and
no recourse will be available to the private property of any unitholder for satisfaction of any obligation or claims arising out of a contract or obligation
of a trust. Each Declaration of Trust of the REIT and Finance Trust further provides that this lack of unitholder liability, where possible, must be
provided for in certain written instruments signed by the applicable Trust. In addition, legislation has been enacted in the Provinces of Ontario and
certain other provinces that is intended to provide unitholders in those provinces with limited liability. However, there remains a risk, which the
Trusts consider to be remote in the circumstances, that a unitholder could be held personally liable for a Trust’s obligations to the extent that claims
are not satisfied out of the Trusts’ assets. It is intended that the Trusts’ affairs will be conducted to seek to minimize such risk wherever possible.
Redemption Right
Unitholders are entitled to have their units redeemed at any time on demand. It is anticipated that this redemption right will not be the primary
mechanism for unitholders to liquidate their investments. The aggregate redemption price payable by the Trusts is subject to limitations. In certain
circumstances, the REIT’s Declaration of Trust provides for the in specie distributions of notes of H&R Portfolio LP Trust in the event of redemption
of units of the REIT that are part of the Stapled Units. The notes which may be distributed in specie to unitholders in connection with a redemption
will not be listed on any stock exchange, no established market is expected to develop for such notes and they may be subject to resale restrictions
under applicable securities laws.
Page 43 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
Debentures
The likelihood that purchasers of the 2016, 2018 and 2020 convertible debentures and the Series B, C, D, E, F, G, I, J and K Senior Debentures
will receive payments owing to them under the terms of such debentures will depend on the financial health of the REIT and its creditworthiness.
In addition, such debentures are unsecured obligations of the REIT and are subordinate in right of payment to all the REIT’s existing and future
senior indebtedness as defined in each such respective trust indenture. Therefore, if the REIT becomes bankrupt, liquidates its assets, reorganizes
or enters into certain other transactions, the REIT’s assets will be available to pay its obligations with respect to such debentures only after it has
paid all of its senior indebtedness in full. There may be insufficient assets remaining following such payments to pay amounts due on any or all of
the debentures then outstanding.
The debentures are also effectively subordinate to claims of creditors (including trade creditors) of the REIT’s subsidiaries except to the extent the
REIT is a creditor of such subsidiaries ranking at least pari passu with such other creditors. Finance Trust is a creditor of U.S. Holdco, a subsidiary
of the REIT. A parent entity is entitled only to the residual equity of its subsidiaries after all debt obligations of its subsidiaries are discharged. In
the event of bankruptcy, liquidation or reorganization of the REIT, holders of indebtedness of the REIT (including holders of the convertible
debentures), may become subordinate to lenders to the subsidiaries of the REIT. The indentures governing such debentures do not prohibit or
limit the ability of the REIT or its subsidiaries to incur additional debt or liabilities (including senior indebtedness), to amend and modify the ranking
of any indebtedness or to make distributions, except, in respect of distributions where an event of default has occurred and such default has not
been cured or waived. The indentures do not contain any provision specifically intended to protect holders of debentures in the event of a future
leveraged transaction involving the REIT.
Tax Risk
The Tax Act includes rules (referred to herein as the ‘‘SIFT Rules’’) which effectively tax certain income of a publicly traded trust or partnership that
is distributed to its investors on the same basis as would have applied had the income been earned through a taxable corporation and distributed
by way of dividend to its shareholders. The SIFT Rules apply only to ‘‘SIFT trusts’’, ‘‘SIFT partnerships’’ (each as defined in the Tax Act, and
collectively, “SIFTs”) and their investors. A trust that qualifies as a “real estate investment trust” (as defined in the Tax Act) for a taxation year will
not be considered to be a SIFT trust in that year (the “REIT Exemption”).
Based on a review of the REIT’s assets and revenues, management believes that the REIT satisfied the tests to qualify for the REIT Exemption for
2015. Management of the REIT intends to conduct the affairs of the REIT so that it qualifies for the REIT Exemption at all times. However, as the
REIT Exemption includes complex revenue and asset tests, no assurances can be provided that the REIT will continue to qualify for any subsequent
year.
The Tax Act includes rules affecting certain publicly traded stapled securities of SIFTs, REITs and corporations which can result in the denial of a
deduction for certain payments made by another entity to a REIT, or to a subsidiary of a REIT (the “Stapled Security Rules”). Management of each
of the REIT and Finance Trust has reviewed the Stapled Security Rules and has concluded that the Stapled Security Rules should not materially
adversely affect the REIT, Finance Trust or holders of Stapled Units. However, no assurances can be given in this regard.
There can be no assurance that income tax laws and the treatment of mutual fund trusts will not be changed in a manner which adversely affects
holders of Stapled Units. If the REIT or Finance Trust ceases to qualify as a “mutual fund trust” under the Tax Act and the units thereof cease to
be listed on a designated stock exchange (which currently includes the TSX), the REIT Units or Finance Trust Units, as the case may be, will cease
to be qualified investments for registered retirement savings plans, deferred profit sharing plans, registered retirement income funds, registered
education savings plans, registered disability savings plans and tax-free savings accounts.
Pursuant to rules in the Tax Act, if the REIT or Finance Trust experiences a “loss restriction event” (i) it will be deemed to have a year-end for tax
purposes (which would result in an unscheduled distribution of undistributed net income and net realized capital gains, if any, at such time to
Unitholders to the extent necessary so that such trust is not liable for income tax on such amounts under Part I of the Tax Act), and (ii) it will become
subject to the loss restriction rules generally applicable to a corporation that experiences an acquisition of control, including a deemed realization
of any unrealized capital losses and restrictions on its ability to carry forward losses. Generally, the REIT or Finance Trust will be subject to a loss
restriction event if a person becomes a “majority-interest beneficiary”, or a group of persons becomes a “majority-interest group of beneficiaries”,
of such trust, each as defined in the affiliated persons rules contained in the Tax Act, with certain modifications. Generally, a majority-interest
beneficiary of a trust is a beneficiary of the trust whose beneficial interests in the income or capital of the trust, as the case may be, together with
the beneficial interests in the income or capital of the trust, as the case may be, of persons and partnerships with whom such beneficiary is affiliated
for the purposes of the Tax Act, represent greater than 50% of the fair market value of all the interests in the income or capital of the trust, as the
case may be.
The REIT operates in the United States through U.S. Holdco which is capitalized with debt and equity provided by the REIT and debt in the form
of U.S. Holdco Notes owed to Finance Trust and H&R Portfolio Limited Partnership. As at December 31, 2015, Finance Trust holds U.S. $220.4
million of U.S. Holdco Notes. U.S. Holdco treats the U.S. Holdco Notes as indebtedness for U.S. federal income tax purposes. If the IRS or a
Page 44 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
court were to determine that the U.S. Holdco Notes should be treated for U.S. federal income tax purposes as equity rather than debt, the interest
on the U.S. Holdco Notes could be treated as a dividend, and interest on the U.S. Holdco Notes would not be deductible for U.S. federal income
tax purposes. In addition, if the IRS were to determine that the interest rate on the U.S. Holdco Notes did not represent an arm’s length rate, any
excess amount over the arm’s length rate would not be deductible and could be re-characterized as a dividend payment instead of an interest
payment. This would significantly increase the U.S. federal income tax liability of U.S. Holdco, potentially including the tax liability for prior years
in which U.S. Holdco has claimed a deduction for interest paid on the U.S. Holdco Notes. In addition, U.S. Holdco could be subject to penalties.
Such an increase in tax liability could materially adversely affect U.S. Holdco’s ability to make interest payments on the U.S. Holdco Notes or the
REIT’s ability to make distributions on its units. Additionally, payments of interest on the U.S. Holdco Notes considered to be paid to non-U.S.
holders of Stapled Units as discussed below could be subject to withholding taxes.
To the extent that the REIT or a related party provided debt financing to U.S. Holdco (e.g., by acquiring U.S. Holdco Notes), in determining income
for U.S. tax purposes, U.S. Holdco is subject to possible limitations on the deductibility of interest, if any, paid to the REIT or such related party.
Section 163(j) of the Code applies to defer U.S. Holdco’s deduction of interest paid on debt to the REIT or such related party in years that (i) the
debt to equity ratio of U.S. Holdco exceeded 1.5:1, and (ii) the net interest expense exceeds an amount equal to 50% of its “adjusted taxable
income” (generally, earnings before interest, taxes, depreciation, and amortization). The REIT’s position is that, due to the treatment of Finance
Trust as a grantor trust that is disregarded for U.S. federal tax purposes, the interest paid to Finance Trust is treated as having been paid to the
holders of the Finance Trust Units and is therefore not subject to section 163(j). If section 163(j) applied to interest paid to Finance Trust, depending
on the facts and circumstances and the availability of net operating losses to U.S. Holdco (which are subject to normal assessment by the IRS),
the U.S. federal income tax liability of U.S. Holdco could increase. In such case, the amount of income available for distribution by the REIT to its
Unitholders could be reduced.
Additional Tax Risks Applicable to Unitholders
The REIT is classified as a foreign corporation for United States federal income tax purposes. A foreign corporation will be classified as a PFIC
for United States federal income tax purposes if either (i) 75% or more of its gross income is passive income or (ii) on average for the taxable year,
50% or more of its assets (by value) produce or are held for the production of passive income. The properties of the REIT are managed by
subsidiaries of the REIT rather than directly by its own employees. Although the REIT's officers and employees oversee the activities of the
managers, it is unclear whether the REIT will be characterized as a PFIC for U.S. federal income tax purposes. If the REIT were treated as a PFIC,
then in the absence of certain elections being made by a U.S. Unitholder with respect to such U.S. Unitholder’s REIT Units, any distributions in
respect of the REIT Units which are treated as “excess distribution” under the applicable rules and any gain on a sale or other disposition of the
REIT Units would be treated as ordinary income and would be subject to special tax rules, including an interest charge. In addition, if the REIT
were treated as a PFIC, then dividends paid on the REIT Units will not qualify for the reduced 20% US federal income tax rate applicable to certain
qualifying dividends received by noncorporate taxpayers.
The foregoing adverse consequences of PFIC characterization can be mitigated by making certain elections. U.S. Unitholders should consult with
their own tax advisors regarding the implications of these rules and the advisability of making one of the applicable PFIC elections, taking into
account their particular circumstances. If the REIT were a PFIC, U.S. Unitholders would be required to file an annual return on IRS Form 8621.
U.S. individuals are required to report an interest in any “specified foreign financial asset” if the aggregate value of such assets owned by the U.S.
individual exceeds $50,000 (or such higher threshold as may apply to a particular taxpayer pursuant to the instructions to IRS Form 8938). The
REIT Units are treated as a specified foreign financial asset for this purpose.
Finance Trust qualifies as an investment trust that is classified as a grantor trust for U.S. federal income tax purposes under Treasury Regulation
section 301.7701-4(c) (a ‘‘Fixed Investment Trust’’) and section 671 of the Code. In general, an investment trust will qualify as a Fixed Investment
Trust if: (i) the trust has a single class of ownership interests, representing undivided beneficial interests in the assets of the trust; and (ii) there is
no power under the trust agreement to vary the investment of the holders. If Finance Trust is a Fixed Investment Trust, then it will generally be
disregarded for U.S. federal income tax purposes, with the result that the holders of Finance Trust Units will be treated as owning directly their pro
rata shares of all of the Finance Trust assets (i.e. primarily the U.S. Holdco Notes). Moreover, all payments made on the U.S. Holdco Notes will be
treated as payments made directly to the holders of the Finance Trust units in proportion to their interest in Finance Trust.
Provided that Finance Trust qualifies as a Fixed Investment Trust and the U.S. Holdco Notes are respected as debt for U.S. federal income tax
purposes, payments of principal and interest on the U.S. Holdco Notes will be treated as payments directly to Unitholders. Interest on the U.S.
Holdco Notes will generally be taxable to U.S. holders as ordinary income at the time it is paid or accrued and will be subject to U.S. federal taxation
at a maximum marginal rate of 39.6%. Interest on the U.S. Holdco Notes to Canadian resident Unitholders may be eligible for an exemption from
U.S. withholding tax under the Canada-U.S. Tax Convention (the “U.S. Treaty”) if the applicable limitation on benefit provisions contained in the
U.S. Treaty are satisfied. If the U.S. Holdco Notes were treated as equity rather than debt for U.S. federal income tax purposes, then the stated
interest on the U.S. Holdco Notes would be treated as a distribution with respect to units.
Page 45 of 46
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2015
U.S. Unitholders are required to file an information return on IRS Form 3520 to report their interest in the Finance Trust and to include a copy of
their Form 3520-A Foreign Grantor Trust Owner Statement, which is being provided by Finance Trust to its registered U.S. Unitholders. If you have
not received a Foreign Grantor Trust Owner Statement, pro forma information to prepare a Form 3520-A Foreign Grantor Trust Owner Statement
will be available on our website. You should consult with your own tax advisor regarding the requirements of filing information returns.
A holder of Stapled Units that is a resident of the U.S. for purposes of the Tax Act will generally be subject to Canadian withholding tax under Part
XIII of the Tax Act at the rate of 25% on the portion of the income of the REIT and Finance Trust paid or credited (whether in cash or in specie) in
respect of such Stapled Units, subject to reduction under the U.S. Treaty if applicable. In the case of income paid or credited on REIT units, the
withholding rate applicable to a U.S. Unitholder entitled to the benefits of the U.S. Treaty in respect of such income would generally be reduced to
15%. In the case of income paid or credited to a U.S. resident holder of Finance Trust Units, there is uncertainty as to the appropriate rate of
withholding under the U.S. Treaty and in light of this uncertainty, management of Finance Trust currently applies the 25% withholding rate under
the Tax Act to income paid or credited to U.S. residents. U.S. Unitholders may be entitled to a refund of a portion of such withholding tax if the rate
applied by Finance Trust were determined to be excessive. You should consult with your own tax advisor regarding the advisability of applying for
such a refund.
OUTSTANDING UNIT DATA
The beneficial interests in each of the Trusts are represented by a single class of units of each Trust respectively, which are unlimited in number.
Each such unit carries a single vote at any meeting of unitholders of the respective Trust. As at February 11, 2016, there were 280,112,243 Stapled
Units issued and outstanding (each comprised of a REIT unit and a Finance Trust unit).
As at December 31, 2015, the maximum number of units authorized to be issued under the REIT’s Unit Option Plan was 28,000,000. Of this
amount, 14,056,429 options had been granted, 343,422 have expired and 14,286,993 remain to be granted. Of the amount originally granted,
7,481,423 had been exercised and expired and therefore, 6,575,006 options to purchase Stapled Units were outstanding. As at February 11, 2016,
there were 6,575,006 options to purchase Stapled Units outstanding of which 4,515,689 are fully vested.
As at December 31, 2015, the maximum number of units authorized to be granted under the REIT’s Incentive Unit Plan was 5,000,000. Of this
amount, 314,655 had been granted, of which 11,665 had been expired, 4,697,010 remain to be granted and 302,990 incentive units remain
outstanding as at December 31, 2015. As at February 11, 2016, there were 304,825 incentive units outstanding.
As at December 31, 2015 and February 11, 2016, there were 16,663,816 exchangeable units outstanding of which 9,500,000 exchangeable units
are accompanied by special voting units.
The following table lists the principal outstanding balance of the REIT’s convertible debentures as at February 11, 2016, and the number of Stapled
Units required to convert the convertible debentures to equity:
Convertible Debentures
2016 Convertible Debentures (HR.DB.E)
2018 Convertible Debentures (HR.DB.H)
2020 Convertible Debentures (HR.DB.D)
ADDITIONAL INFORMATION
February 11, 2016
$75.0 million
74.4 million
99.7 million
2,918,287
3,008,249
4,240,595
Principal outstanding as at
Maximum number of Stapled
Units issuable
Additional information relating to the REIT and Finance Trust, including the REIT’s Annual Information Form, is available on SEDAR at
www.sedar.com.
Page 46 of 46
Combined Financial Statements of
H&R REAL ESTATE INVESTMENT TRUST
and
H&R FINANCE TRUST
Years ended December 31, 2015 and 2014
KPMG LLP
Chartered Accountants
Bay Adelaide Centre
333 Bay Street Suite 4600
Toronto ON M5H 2S5
Canada
Telephone
Fax
Internet
(416) 777-8500
(416) 777-8818
www.kpmg.ca
INDEPENDENT AUDITORS' REPORT
To the Unitholders of H&R Real Estate Investment Trust
We have audited the accompanying combined financial statements of H&R Real Estate Investment
Trust and H&R Finance Trust (collectively, the "Trusts"), which comprise the combined statements of
financial position as at December 31, 2015 and 2014, the combined statements of comprehensive
income, changes in unitholders' equity and cash flows for the years then ended, and notes,
comprising a summary of significant accounting policies and other explanatory information.
Management's Responsibility for the Combined Financial Statements
Management is responsible for the preparation and fair presentation of these combined financial
statements in accordance with International Financial Reporting Standards, and for such internal
control as management determines is necessary to enable the preparation of combined financial
statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these combined financial statements based on our
audits. We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we comply with ethical requirements and plan and perform
the audit to obtain reasonable assurance about whether the combined financial statements are free
from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the combined financial statements. The procedures selected depend on our judgment, including
the assessment of the risks of material misstatement of the combined financial statements, whether
due to fraud or error. In making those risk assessments, we consider internal control relevant to the
Trusts' preparation and fair presentation of the combined financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Trusts' internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates made
by management, as well as evaluating the overall presentation of the combined financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to
provide a basis for our audit opinion.
Opinion
In our opinion, the combined financial statements present fairly, in all material respects, the combined
financial position of the Trusts as at December 31, 2015 and 2014, and their combined financial
performance and their combined cash flows for the years then ended in accordance with International
Financial Reporting Standards.
Chartered Professional Accountants, Licensed Public Accountants
February 17, 2016
Toronto, Canada
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG
network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity.
KPMG Canada provides services to KPMG LLP.
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Combined Statements of Financial Position
(In thousands of Canadian dollars)
Assets
Real estate assets:
Investment properties
Properties under development
Equity accounted investments
Mortgages receivable
Assets classified as held for sale
Other assets
Cash and cash equivalents
Liabilities and Unitholders' Equity
Liabilities:
Mortgages payable
Debentures payable
Exchangeable units
Deferred tax liability
Liabilities classified as held for sale
Loan payable
Bank indebtedness
Accounts payable and accrued liabilities
Unitholders' equity
Commitments and contingencies
Subsequent event
See accompanying notes to the combined financial statements.
Approved on behalf of the Board of Trustees:
“Robert Dickson”
“Thomas J. Hofstedter”
Trustee
Trustee
1
Note
3
3, 4
5
6
7
8
9
10
11
12
27
7
13
14
15
28
13
December 31
2015
December 31
2014
$
12,576,075
97,504
12,673,579
$
12,116,983
105,006
12,221,989
1,117,786
103,353
3,000
54,310
38,287
13,990,315
$
703,019
79,922
296,992
42,703
23,755
13,368,380
$
$
4,537,278
1,550,769
334,110
189,658
-
55,717
321,033
176,830
7,165,395
$
4,318,136
1,535,838
362,105
129,864
66,179
147,608
123,863
157,119
6,840,712
6,824,920
6,527,668
$
13,990,315
$
13,368,380
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Combined Statements of Comprehensive Income
(In thousands of Canadian dollars)
Years ended December 31, 2015 and 2014
Property operating income:
Rentals from investment properties
Property operating costs
Net income from equity accounted investments
Finance costs:
Finance income
Finance cost - operations
Gain (loss) on change in fair value
Trust expenses
Fair value adjustment on real estate assets
Loss on sale of real estate assets
Gain on foreign exchange
Net income before income taxes
Income tax expense
Net income
Other comprehensive income:
Unrealized gain on translation of U.S. denominated foreign operations
Transfer of realized loss on cash flow hedges to net income
Note
2015
2014
19
5
20
21
3
3
27
18
$
1,188,314
(414,801)
773,513
$
1,227,803
(424,527)
803,276
841
44,123
3,770
(295,010)
36,240
(255,000)
(9,327)
(178,868)
(5,428)
49,375
375,106
901
(323,955)
(8,029)
(331,083)
(11,091)
(42,523)
(16,025)
22,602
469,279
(34,958)
340,148
(44,624)
424,655
227,430
31
227,461
90,140
395
90,535
Total comprehensive income all attributable to unitholders
$
567,609
$
515,190
See accompanying notes to the combined financial statements.
2
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Combined Statements of Changes in Unitholders' Equity
(In thousands of Canadian dollars)
Years ended December 31, 2015 and 2014
UNITHOLDERS' EQUITY
Note
Value of
Units
Accumulated
net income
Accumulated
distributions
Accumulated
other
comprehensive
income
(note 18)
Unitholders' equity, January 1, 2014
Proceeds from issuance of units
Issue costs
Net income
Distributions to unitholders
Conversion of convertible debentures, net
Units repurchased and cancelled
Other comprehensive income
Unitholders' equity, December 31, 2014
Proceeds from issuance of units
Issue costs
Net income
Distributions to unitholders
Conversion of convertible debentures, net
Units repurchased and cancelled
Other comprehensive income
Unitholders' equity, December 31, 2015
17(b)
11(c)
17(e)
17(b)
11(c)
17(e)
See accompanying notes to the combined financial statements.
$
5,028,278
106,943
(28)
-
-
16
(1,452)
-
5,133,757
$
3,398,726
-
-
424,655
-
-
-
-
3,823,381
107,000
(353)
-
-
5
(3,937)
-
5,236,472
$
-
-
340,148
-
-
-
-
4,163,529
$
$
(2,181,794)
-
-
-
(366,802)
-
-
-
(2,548,596)
-
-
-
(373,072)
-
-
-
(2,921,668)
$
$
28,591
-
-
-
-
-
-
90,535
119,126
-
-
-
-
-
-
227,461
346,587
$
Total
$
6,273,801
106,943
(28)
424,655
(366,802)
16
(1,452)
90,535
6,527,668
107,000
(353)
340,148
(373,072)
5
(3,937)
227,461
6,824,920
$
3
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Combined Statements of Cash Flows
(In thousands of Canadian dollars)
Years ended December 31, 2015 and 2014
Cash provided by (used in):
Operations:
Net income
Items not affecting cash:
Net income from equity accounted investments
Finance cost - operations
Rent amortization of tenant inducements
Gain on foreign exchange
Fair value adjustment on real estate assets
Loss on sale of real estate assets
Finance cost - (gain) loss on change in fair value
Unit-based compensation
Deferred income taxes
Change in other non-cash operating items
Investing:
Properties under development
Investment properties:
Net proceeds on disposition of real estate assets
Acquisitions
Redevelopment
Capital expenditures
Leasing expenses and tenant inducements
Equity accounted investments, net
Mortgages receivable
Restricted cash
Financing:
Bank indebtedness
Interest paid
Mortgages payable:
New mortgages payable
Principal repayments
Repayment of loan payable
Proceeds from issuance of debentures payable
Repayment of debentures payable
Proceeds from issuance of units, net of issue costs
Units repurchased and cancelled
Finance cost - exchangeable unit distributions
Distributions to unitholders
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
See note on supplemental cash flow information (note 22).
See accompanying notes to the combined financial statements.
4
Note
2015
2014
$
340,148
$
424,655
5
20
19
3
3
21
17(a)(ii)
27
22
3, 22
3, 22
3, 22
3
3
8
11(c)
11(c)
17(e)
20
17(b)
9
9
(841)
295,010
2,100
(49,375)
178,868
5,428
(36,240)
(697)
32,617
4,524
771,542
(44,123)
323,955
1,725
(22,602)
42,523
16,025
8,029
3,849
43,704
(31,822)
765,918
(2,436)
(49,548)
355,714
(301,668)
(43,331)
(41,716)
(54,628)
(207,986)
13,016
(7,773)
(290,808)
197,170
(281,692)
535,123
(151,942)
(56,606)
(38,206)
(32,941)
(75,906)
(254)
1,939
131,659
7,101
(304,409)
418,732
(408,042)
(119,886)
370,752
(350,000)
847
(3,937)
(22,496)
(267,650)
(466,202)
14,532
23,755
38,287
$
141,580
(443,169)
-
-
-
3,249
(1,452)
(23,162)
(281,444)
(901,706)
(4,129)
27,884
23,755
$
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
These combined financial statements include the accounts of H&R Real Estate Investment Trust (the "REIT") and H&R Finance Trust ("Finance
Trust", together with the REIT, the “Trusts”). The REIT is an unincorporated open-ended trust and Finance Trust is an unincorporated investment
trust both domiciled in Canada. The REIT owns, operates and develops commercial and residential properties across Canada and in the United
States. The principal office and centre of administration of the Trusts is located at 3625 Dufferin Street, Suite 500, Toronto, Ontario M3K 1N4.
Unitholders of each Trust participate pro rata in distributions of income and, in the event of termination of a Trust, participate pro rata in the net
assets remaining after satisfaction of all liabilities of such Trust.
On October 1, 2008, the REIT completed an internal reorganization pursuant to a Plan of Arrangement (the "Plan of Arrangement") as described in
the REIT's information circular dated August 20, 2008, resulting in the stapling of the Trusts' units. The Plan of Arrangement further resulted in,
among other things, the creation of Finance Trust on October 1, 2008. Each unitholder received, for each REIT unit held, a unit of Finance Trust.
Each issued and outstanding Finance Trust unit is stapled to a unit of the REIT on a one-for-one basis so as to form stapled units ("Stapled Units"),
and such Stapled Units are listed and posted for trading on the Toronto Stock Exchange ("TSX") under the symbol HR.UN. The units of each of the
Trusts may only be transferred together as Stapled Units unless an event of "uncoupling" has occurred.
On October 24, 2013, the Ontario Securities Commission (on its behalf and on behalf of the other provincial securities regulators) issued a decision
which permits the REIT and Finance Trust to file one set of combined financial statements rather than separate financial statements. These combined
financial statements are being presented on a basis whereby the assets and liabilities of the REIT and Finance Trust have been combined in
accordance with the accounting principles applicable to both the REIT and Finance Trust in accordance with International Financial Reporting
Standards (“IFRS”) to reflect the financial position and results of the REIT and Finance Trust on a combined basis. The combined presentation is
useful to the unitholders of the Trusts, for the following reasons:
•
•
•
•
The units of the Trusts are stapled (as noted above), resulting in the Trusts being under common ownership;
A support agreement between the Trusts ensures that until such time as an event of “uncoupling” occurs, when units are issued by the REIT,
units must also be issued by Finance Trust simultaneously so as to maintain the stapled unit structure;
The sole activity of Finance Trust is to provide capital funding to H&R REIT (U.S.) Holdings Inc. ("U.S. Holdco"), a wholly owned U.S. subsidiary
of the REIT; and
The investment activities of Finance Trust are restricted in its Declaration of Trust to providing such funding to U.S. Holdco and to make
temporary investments of excess funds.
1.
Basis of preparation:
(a) Statement of compliance
These combined financial statements have been prepared in accordance with IFRS as published by the International Accounting
Standards Board (“IASB”) and using accounting policies described herein.
The combined financial statements were approved by the Board of Trustees of the REIT on February 17, 2016.
5
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
1.
Basis of preparation (continued):
(b) Basis of measurement
The combined financial statements have been prepared on the historical cost basis except for the following material items in the combined
statements of financial position which have been measured at fair value:
(i) Real estate assets;
(ii) Derivative financial instruments;
(iii) Liabilities for cash-settled unit-based compensation;
(iv) Convertible debentures; and
(v) Exchangeable units.
(c)
Functional currency and presentation
These combined financial statements are presented in Canadian dollars, except where otherwise stated, which is the Trusts’ functional
currency. All financial information has been rounded to the nearest thousand.
The Trusts present their combined statements of financial position based on the liquidity method, where all assets and liabilities are
presented in ascending order of liquidity.
(d) Use of estimates and judgements
The preparation of these combined financial statements requires management to make judgements, estimates and assumptions that
affect the application of accounting policies, the reported amounts of assets, liabilities, income and expenses and disclosure of
contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates.
(i) Use of estimates
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in
the period in which the estimates are revised and in any future periods affected. Information about assumptions and estimation
uncertainties that have a significant risk of resulting in a material adjustment within the next financial year are included in the
following notes:
• Fair value of real estate assets (note 3);
• Fair value of financial instruments;
• Fair value of cash-settled unit-based compensation (note 17(a));
• Fair value of convertible debentures; and
• Deferred tax asset (liability) (note 27).
6
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
1.
Basis of preparation (continued):
(ii) Use of judgements
The critical judgements made in applying accounting policies that have the most significant effect on the amounts recognized in
these combined financial statements are as follows:
• Business combinations
Accounting for business combinations under IFRS 3, Business Combinations (“IFRS 3”) is only applicable if it is determined
that a business has been acquired. Under IFRS 3, a business is defined as an integrated set of activities and assets conducted
and managed for the purpose of providing a return to investors or lower costs or other economic benefits directly and
proportionately to the REIT. A business generally consists of inputs, processes applied to those inputs, and resulting outputs
that are, or will be, used to generate revenues. In the absence of such criteria, a group of assets is deemed to have been
acquired. If goodwill is present in a transferred set of activities and assets, the transferred set is presumed to be a business.
Judgement is used by management in determining whether the acquisition of an individual property, or group of properties,
qualifies as a business combination in accordance with IFRS 3 or as an asset acquisition.
• Valuations of real estate assets
Real estate assets, which consist of investment properties and properties under development, are carried on the combined
statements of financial position at fair value, as determined by either qualified external valuation professionals or by
management. The valuations are based on a number of assumptions, such as appropriate discount rates and capitalization
rates and estimates of future rental income, operating expenses and capital expenditures. Valuation of real estate assets is
one of the principal estimates and uncertainties of these combined financial statements. Refer to note 3 for further information
on estimates and assumptions made in the determination of the fair value of real estate assets. Judgement is applied in
determining whether certain costs are additions to the carrying value of the real estate assets, identifying the point at which
practical completion of the property occurs and identifying the directly attributable borrowing costs to be included in the carrying
value of the development properties.
• Leases
The REIT makes judgements in determining whether certain leases, in particular those tenant leases with long contractual
terms and long-term ground leases where the REIT is the lessor, are operating or finance leases. The REIT has determined
that all of its leases are operating leases.
•
Income taxes
The REIT is a mutual fund trust and a real estate investment trust pursuant to the Income Tax Act (Canada) (“Tax Act”). Under
current tax legislation, the REIT is not liable to pay Canadian income tax provided that its taxable income is fully distributed to
unitholders each year. The REIT is a real estate investment trust if it meets prescribed conditions under the Tax Act relating to
the nature of its assets and revenue (the "REIT Conditions"). The REIT has reviewed the REIT Conditions and has assessed
its interpretation and application to the REIT's assets and revenue, and it has determined that it qualifies as a real estate
investment trust pursuant to the Tax Act. The REIT expects to continue to qualify as a real estate investment trust; however,
should it no longer qualify, the REIT would be subject to tax on its taxable income distributed to unitholders.
7
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
1.
Basis of preparation (continued):
•
Impairment of equity accounted investments
The REIT determines at each reporting date whether there is any objective evidence that the equity accounted investments are
impaired. If so, the REIT calculates the amount of impairment as the difference between the recoverable amount of the equity
accounted investment and its carrying value and recognizes the amount in net income.
2. Significant accounting policies:
The accounting policies set out below have been applied consistently for all periods presented in these combined financial statements.
(a) Basis of combination:
The principles used to prepare these combined financial statements are similar to those used to prepare consolidated financial
statements. The combined financial statements include the assets, liabilities, unitholders' equity, comprehensive income (loss) and
operating results of the Trusts, after elimination of the following:
(i)
the REIT's notes payable to Finance Trust; and
(ii)
the REIT's interest expense and Finance Trust's interest income from the notes payable to Finance Trust.
The foreign exchange gain (loss) recorded in net income as a result of exchanging Finance Trust's U.S. dollar note receivable from U.S.
Holdco is not eliminated on combination as it flows through net income on Finance Trust’s books and other comprehensive income on
the REIT’s books. This is because U.S. Holdco is a subsidiary of the REIT and forms part of its net investment in the United States, but
is not a subsidiary of Finance Trust.
The combination of the Trusts does not result in the elimination of the equity of Finance Trust as neither of the Trusts hold any interest in
the other. The equity of the Trusts is presented by way of combining the two together.
(b) Basis of consolidation:
These combined financial statements include the accounts of all entities in which the REIT holds a controlling interest. The REIT carries
out a portion of its activities through joint operations and records its proportionate share of assets, liabilities, revenues, expenses and
cash flows of all joint operations in which it participates. All material intercompany transactions and balances have been eliminated upon
consolidation.
(c)
Investment properties:
Investment properties are held to earn rental income or for capital appreciation, or both, but not for sale in the ordinary course of business.
All of the REIT’s commercial properties are investment properties which are measured at fair value.
The REIT performs an assessment of each investment property acquired to determine whether the acquisition is to be accounted for as
an asset acquisition or a business combination. A transaction is considered to be a business combination if the acquired property meets
the definition of a business under IFRS 3, as set out in note 1(d)(ii). The REIT expenses transaction costs on business combinations and
capitalizes transaction costs on asset acquisitions.
8
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
2.
Significant accounting policies (continued):
Upon acquisition, investment properties are initially recorded at cost. Subsequent to initial recognition, the REIT uses the fair value model
to account for investment properties. Under the fair value model, investment properties are recorded at fair value, determined based on
available market evidence at each reporting date. The related gain or loss in fair value is recognized in net income in the year in which
it arises.
Subsequent capital expenditures are capitalized to investment properties only when it is probable that future economic benefits of the
expenditure will flow to the REIT and the cost can be measured reliably. All other repairs and maintenance costs are expensed when
incurred. Leasing costs, such as commissions incurred in negotiating tenant leases, are capitalized to investment properties.
Gains or losses from the disposal of investment properties are determined as the difference between the net disposal proceeds and the
carrying amount of the investment property and are recognized in net income in the year of disposal.
(d) Properties under development:
Properties under development for future use as investment property are accounted for as investment property under IAS 40, Investment
Property. Costs eligible for capitalization to properties under development are initially recorded at cost, and subsequent to initial
recognition are accounted for using the fair value method. At each reporting date, the properties under development are recorded at fair
value based on available market evidence. The related gain or loss in fair value is recognized in net income in the year in which it arises.
The cost of properties under development includes direct development costs, realty taxes and borrowing costs that are directly attributable
to the development. Borrowing costs associated with direct expenditures on properties under development are capitalized. Borrowing
costs relating to the purchase of a site or property acquired for redevelopment are also capitalized. The amount of borrowing costs
capitalized is determined first by reference to borrowing specific to the project, where relevant, and otherwise by applying a weighted
average cost of borrowings to eligible expenditures after adjusting for borrowings associated with other specific developments. Borrowing
costs are capitalized from the commencement of the development until the date of practical completion. The capitalization of borrowing
costs is suspended if there are prolonged periods when development activity is interrupted.
Upon practical completion of a development, the development property is transferred to investment properties at the fair value on the
date of practical completion. The REIT considers practical completion to have occurred when the property is capable of operating in the
manner intended by management. Generally this occurs upon completion of construction and receipt of all necessary occupancy and
other material permits. Where the REIT has pre-leased space as of or prior to the start of the development and the lease requires the
REIT to construct tenant improvements which enhance the value of the property, practical completion is considered to occur on completion
of such improvements.
(e) Assets and liabilities held for sale:
Non-current assets that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for
sale. For this purpose, a sale is highly probable if management is committed to a plan to achieve the sale; there is an active program to
find a buyer; the non-current asset is being actively marketed at a reasonable price; the sale is anticipated to be completed within one
year from the date of classification; and it is unlikely there will be changes to the plan.
Non-current liabilities that are to be assumed by the buyer on disposition of the non-current asset, are also classified as held for sale.
Non-current assets and non-current liabilities held for sale must be classified separately from other assets and other liabilities in the
statement of financial position. These amounts cannot be offset or presented as a single amount.
9
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
2.
Significant accounting policies (continued):
(f) Revenue recognition:
The REIT retains substantially all of the benefits and risks of ownership of its investment properties and therefore, accounts for its leases
with tenants as operating leases. Rentals from investment properties include all amounts earned from tenants, including recovery of
operating costs.
Rental revenue from investment property is recognized in net income on a straight-line basis over the term of the related lease. The
difference between the rental revenue recognized and the amounts contractually due under the lease agreements is recorded in accrued
rent receivable. Lease incentives granted are recognized as an integral part of total rental income over the term of the lease.
(g)
Income taxes:
Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in net income except to the extent
that it relates to a business combination, or items recognized directly in equity or in other comprehensive income.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively
enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
The REIT is a mutual fund trust and a real estate investment trust pursuant to the Tax Act. Under current tax legislation, a real estate
investment trust is entitled to deduct distributions of taxable income such that it is not liable to pay income tax provided that its taxable
income is fully distributed to unitholders. The REIT intends to continue to qualify as a real estate investment trust and to make distributions
not less than the amount necessary to ensure that the REIT will not be liable to pay income taxes.
The REIT qualified as a real estate investment trust throughout 2015 and the 2014 comparative year. Deferred tax is not recognized for
the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and
that affects neither accounting nor taxable net income, and differences relating to investments in subsidiaries and jointly controlled entities
to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognized for taxable
temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be
applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting
date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they
relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, if such entities intend to
settle current tax liabilities and assets on a net basis or the entities tax assets and liabilities will be realized simultaneously.
A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable
that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date
and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
Finance Trust qualifies as a mutual fund trust that is not a specified investment flow-through trust under the Tax Act. In accordance with
the terms of Finance Trust’s Declaration of Trust, all of the net income for tax purposes will be paid or be payable to unitholders in the
taxation year so that no income tax is payable by Finance Trust. For financial statement reporting purposes, the tax deductibility of
Finance Trust's distributions is treated as an exemption from taxation as Finance Trust has distributed and is committed to continue
distributing all of its taxable income to its unitholders.
10
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
2.
Significant accounting policies (continued):
(h) Unit-based compensation:
The REIT has a unit option plan and incentive unit plan available for REIT trustees, officers, employees and consultants as disclosed in
note 17(a). These plans are considered to be a cash-settled liability under IFRS 2, Share-based Payment and as a result is measured
at each reporting period and at settlement date at its fair value as defined by IFRS. The fair value of the amount payable to participants
in respect of the unit option plan and incentive unit plan is recognized as an expense with a corresponding increase or decrease in
liabilities, over the period that the employees unconditionally become entitled to payment. Any change in the fair value of the liability is
recognized as a component of trust expenses.
(i) Cash and cash equivalents:
Cash and cash equivalents include deposits in banks, certificates of deposit and short-term investments with original maturities of less
than 90 days.
(j) Restricted cash:
Restricted cash includes amounts held in reserve by lenders to fund mortgage payments, repairs and capital expenditures or property
tax payments.
(k) Foreign currency translation:
The REIT accounts for its investments in U.S. Holdco, a wholly owned subsidiary of the REIT, in the United States (“foreign operations”)
as a U.S. denominated foreign operation. Assets and liabilities of foreign operations are translated into Canadian dollars at the exchange
rates in effect at the combined statements of financial position dates and revenue and expenses are translated at the average exchange
rates for the reporting periods.
The foreign currency translation adjustment is recorded as a separate component of accumulated other comprehensive income (loss)
until there is a reduction in the REIT’s net investment in the foreign operations. The U.S. dollar denominated bank indebtedness is
designated as a hedge of the REIT’s investment in self-sustaining operations. Accordingly, the accumulated unrealized gains or losses
arising from the translation of this obligation are recorded as a foreign currency translation adjustment in accumulated other
comprehensive income (loss).
Finance Trust’s U.S. dollar denominated assets and liabilities are translated into Canadian dollars at the exchange rates in effect at the
combined statements of financial position dates and revenue and expenses are translated at the actual exchange rate on the date
incurred, resulting in any gain (loss) recorded in comprehensive income.
(l) Financial instruments:
(i) Non-derivative financial assets
Cash and cash equivalents, restricted cash, accounts receivable and mortgages receivable, with fixed or determinable payments
that are not quoted in an active market, are non-derivative financial assets classified as loans and receivables. Such assets are
recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, loans and
receivables are measured at amortized cost using the effective interest method, less any impairment losses.
11
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
2.
Significant accounting policies (continued):
The Trusts derecognize a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights
to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of
ownership of the financial asset are transferred. Financial assets and liabilities are offset and the net amount presented in the combined
statements of financial position when, and only when, the Trusts have a current legal right to offset the amounts and intends either to settle
on a net basis or to realize the asset and settle the liability simultaneously.
(ii) Non-derivative financial liabilities
Non-derivative financial liabilities consist of mortgages payable, loan payable, senior debentures, bank indebtedness and accounts
payable and accrued liabilities. Such financial liabilities are recognized initially at fair value plus any directly attributable transaction
costs. Subsequent to initial recognition these financial liabilities are measured at amortized cost using the effective interest method.
The Trusts derecognize a financial liability when its contractual obligations are discharged or cancelled or expire.
(iii) Derivative financial instruments
The REIT holds derivative financial instruments to hedge its foreign currency and interest rate risk exposures. Derivatives are
recognized initially at fair value; attributable transaction costs are recognized in net income as incurred. Subsequent to initial
recognition, derivatives are measured at fair value at the end of each reporting period. Any resulting gain or loss is recognized in
net income immediately unless the derivative is designated and effective as a hedging instrument. None of the REIT’s derivative
instruments are accounted for as hedges.
(iv) Financial liabilities measured at fair value through net income
A financial liability is classified at fair value through net income if it is classified as held for trading or is designated as such upon
initial recognition.
The convertible debentures and exchangeable units were designated at fair value through net income upon initial recognition. Any
gains or losses arising on remeasurement are recognized in net income.
(m) Stapled Units:
Under IAS 32, Financial Instruments: Presentation (“IAS 32”), puttable instruments, such as the Stapled Units are generally classified as
financial liabilities unless the exemption criteria are met for equity classification. As a result of the REIT receiving consent of its unitholders
to modify the REIT’s Declaration of Trust to eliminate the mandatory distribution and leave distributions to the discretion of the trustees
and the ability of the trustees to fund distributions by way of issuing additional units prior to the amendment, the REIT met the exemption
criteria under IAS 32 for equity classification. Finance Trust also met the exemption criteria under IAS 32 for equity classification.
Nevertheless, the Stapled Units are not considered ordinary units under IAS 33, Earnings Per Share, and therefore an income per unit
calculation is not presented.
12
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
2.
Significant accounting policies (continued):
(n) Finance costs:
Finance costs are comprised of interest expense on borrowings, distributions on exchangeable units classified as liabilities, gain (loss)
on change in fair value of convertible debentures, gain (loss) on change in fair value of exchangeable units and net gain (loss) on
derivative instruments.
Finance costs associated with financial liabilities presented at amortized cost are recognized in net income using the effective interest
method.
(o)
Investment in associates and joint ventures:
An associate is an entity over which the Trust has significant influence. Significant influence is the power to participate in an entity’s
financial and operating policy decisions, which is presumed to exist when an investor holds 20 percent or more of the voting power of
another entity. An investment is considered an associate when significant influence exists but there is no joint control over the investment.
The Trusts account for investments in associates using the equity method.
The Trusts consider investments in joint arrangements to be joint ventures when they jointly control one or more investment properties
with another party and have rights to the net assets of the arrangements. This occurs when the joint arrangement is structured through
a separate vehicle, such as a partnership, with separation maintained.
The Trusts’ interest in its associates and joint ventures are accounted for using the equity method and are carried on the combined
statements of financial position at cost, adjusted for the Trusts’ proportionate share of post-acquisition changes in the net assets, less
any identified impairment loss. The Trusts’ share of profits and losses is recognized in the share of net income from the associate or
joint venture investments in the combined statements of comprehensive income and the Trusts’ other comprehensive income includes
their share of the associate or joint ventures’ other comprehensive income.
An associate or a joint venture is considered to be impaired if there is objective evidence of impairment as a result of one or more
events that occurred after the initial recognition of the joint venture and that event has a negative impact on the future cash flows of the
joint venture that can be reliably estimated.
(p) Joint Operations:
The Trusts consider investments in joint arrangements to be joint operations when they make operating, financial and strategic decisions
over one or more investment properties jointly with another party and have direct rights to the assets and obligations for the liabilities
relating to the arrangement. When the arrangement is considered to be a joint operation, the Trusts will include their share of the
underlying assets, liabilities, revenue and expenses in their financial results.
(q) Business Combinations:
The purchase method of accounting is used for acquisitions meeting the definition of a business. The consideration transferred in a
business combination is measured at fair value, which is calculated as the sum of the acquisition date fair values of the assets transferred
by the REIT, the liabilities incurred by the REIT to former owners of the acquiree, and the equity interests issued by the REIT.
Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their
acquisition date fair values. The excess of the cost of acquisition over the fair value of the REIT’s share of the identifiable net assets
acquired, if any, is recorded as goodwill. If the cost of acquisition is less than the fair value of the REIT’s share of the net assets acquired,
the difference is recognized directly in the combined statements of comprehensive income for the year as an acquisition gain. Any
transaction costs incurred with respect to the business combination are expensed in the period incurred.
13
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
2.
Significant accounting policies (continued):
(r) Segmented Reporting:
A reportable operating segment is a distinguishable component of the Trusts that is engaged either in providing related products or
services (business segment) or in providing products or services within a particular economic environment (geographical segment), which
is subject to risks and rewards that are different from those of other reportable segments. The Trusts have both operating segments and
geographic segments.
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker,
determined to be the Chief Executive Officer (“CEO”). The Trusts have six operating segments: office, retail, industrial, residential,
Primaris and ECHO. The office segment includes the Trusts’ head office and Finance Trust. The operating segments derive their revenue
primarily from rental income from lessees. All of the Trusts’ operating activities are reported within these six operating segments.
Geographic segments are separated into Canadian and U.S. properties. All of the Trusts’ operating activities are reported within the
Canadian and U.S. property geographic segments.
(s) Levies:
Effective January 1, 2014, the REIT has adopted IFRS Interpretations Committee, 21, Levies (“IFRIC 21”). IFRIC 21 provides guidance
on accounting for levies in accordance with the requirements of IAS 37, Provisions, Contingent Liabilities and Contingent Assets. For
the purposes of IFRIC 21, realty taxes payable by the REIT are considered levies. Based on the guidance of IFRIC 21, the REIT
recognizes the full amount of annual U.S. realty tax liabilities at the point in time when the realty tax obligation is imposed.
(t) New standards and interpretations not yet adopted:
Standards issued but not yet effective up to the date of issuance of these combined financial statements are described below. The Trusts
intend to adopt these standards when they become effective.
(i) Financial Instruments: Classification and Measurement (“IFRS 9”)
In July 2014, the IASB issued IFRS 9 Financial Instruments: Classification and Measurement replacing IAS 39, Financial Instruments:
Recognition and Measurement. The project had three main phases: classification and measurement, impairment, and general
hedging. The standard becomes effective for annual periods beginning on or after January 1, 2018 and is to be applied retrospectively.
Early adoption is permitted. The Trusts are currently assessing the impact of the new standard on the combined financial statements.
(ii) Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11)
On May 6, 2014, the IASB issued Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11). The
amendments apply prospectively for annual periods beginning on or after January 1, 2016. The Trusts intend to adopt the
amendments to IFRS 11 in the combined financial statements for the annual period beginning on January 1, 2016.
(iii) Revenue from Contracts with Customers (“IFRS 15”)
On May 28, 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers. The new standard is effective for annual
periods beginning on or after January 1, 2018. IFRS 15 will replace IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13
Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfer of Assets from
Customers, and SIC 31 Revenue - Barter Transactions Involving Advertising Services. The Trusts intend to adopt IFRS 15 in the
combined financial statements for the annual period beginning on January 1, 2018. The extent of the impact of adoption of the
standard has not yet been determined.
14
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
2.
Significant accounting policies (continued):
(iv) Leases (“IFRS 16”)
On January 13, 2016, the IASB issued IFRS 16, Leases. The new standard will replace existing lease guidance in IFRS and related
interpretations, and requires companies to bring most leases on-balance sheet. The new standard is effective for years beginning on
or after January 1, 2019. The extent of the impact of adoption of the standard has not yet been determined.
3.
Real estate assets:
Investment
Properties Under
Investment
Properties Under
Properties
December 31
Development
Properties
Development
December 31
2015
2015
2014
2014
Opening balance, beginning of year
$
12,116,983
$
105,006
$
12,786,205
$
146,478
Acquisitions of investment properties, including transaction costs
Additions to existing investment properties:
Capital expenditures
Leasing expenses and tenant inducements
Redevelopment
Additions to properties under development (including
capitalized interest)
Dispositions
Transfer of investment properties to equity accounted investments (note 5)
Transfer of investment properties to assets classified as
held for sale (note 7)
Amortization of tenant inducements, straight-line rents and blend and
extend rents included in revenue
Transfer of property under development that has reached
practical completion to investment properties
Change in foreign exchange
Fair value adjustment on real estate assets
Closing balance, end of year
346,914
41,716
54,628
45,845
-
(148,680)
(194,970)
(3,000)
16,861
-
478,646
(178,868)
-
-
-
-
2,436
(9,938)
-
-
-
-
-
-
151,942
38,206
32,941
52,684
-
-
-
-
-
50,880
(947,162)
-
(296,992)
21,331
92,352
227,999
(42,523)
-
-
-
-
(92,352)
-
-
$
12,576,075
$
97,504
$
12,116,983
$
105,006
Legal title to each of the properties in the United States is held by a separate legal entity which is 100% owned, directly or indirectly, by U.S.
Holdco, a wholly owned subsidiary of the REIT. In certain cases, the assets of each such separate legal entity are not available to satisfy
the debts or obligations of any other person or entity. Each such separate legal entity maintains separate books and records. The identity
of the owner of a particular United States property is available from U.S. Holdco. This structure does not prevent distributions to the entity
owners provided there are no conditions of default.
15
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
3.
Real estate assets (continued):
Asset acquisitions:
During the year ended December 31, 2015, the REIT acquired six investment properties (year ended December 31, 2014 - three investment
properties, a 50% ownership interest in one investment property, one equity accounted investment and one parcel of land adjacent to an
existing investment property). The results of operations for these acquisitions are included in these combined financial statements from the
date of acquisition.
The following table summarizes the cost plus transaction costs incurred of the assets and liabilities as at the respective dates of acquisition:
Assets
Investment properties
Equity accounted investments:
Investment in associate
Liabilities
Mortgage payable
Total identifiable net assets settled by cash
December 31
December 31
2015
2014
$
346,822
$
151,890
-
71,065
(45,247)
301,575
$
-
222,955
$
During the year ended December 31, 2015, the REIT incurred additional costs of $92 (December 31, 2014 - $52) in respect to prior year
acquisitions which are not included in the above table.
Asset dispositions:
During the year ended December 31, 2015, the REIT sold a 49.5% ownership interest in 16 industrial properties, a 75% ownership interest in
one industrial property and a 50% ownership interest in three industrial properties. In addition, the REIT sold two industrial properties, three
retail properties, one office property, a parcel of land and a portion of an office property (sold as separate condominium units) and recognized
a loss on sale of real estate assets of $5,428. The loss on sale of real estate assets is primarily due to mark-to-market adjustments on the
purchasers’ assumption of mortgages on 11 properties of $4,525 and one-time prepayment penalties of $1,999 to discharge two mortgages.
Excluding these costs, the properties sold during the year ended December 31, 2015 generated a gain of sale of $1,096.
During the year ended December 31, 2014, the REIT sold a 50% ownership interest in 84 industrial properties, a 50% ownership interest in
three retail properties and a 50% ownership interest in one office property. In addition, the REIT sold five industrial properties, five retail
properties, one office property, a parcel of land and a portion of an office property (sold as separate condominium units) and recognized a loss
on sale of real estate assets of $16,025. The loss on sale of real estate assets is primarily due to mark-to-market adjustments on the purchasers’
assumption of mortgages on 23 properties of $16,560 and one-time prepayment penalties of $3,112 to discharge five mortgages. Excluding
these costs, the properties sold during the year ended December 31, 2014 generated a gain of sale of $3,647.
16
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
3.
Real estate assets (continued):
Fair value disclosure:
The estimated fair values of the REIT’s real estate assets are based on the following methods and key assumptions:
(i) Consideration of recent sales of similar properties within similar market areas;
(ii) The discounted cash flow analysis which is based upon, among other things, rental income from current leases and assumptions about
rental income from future leases reflecting market conditions at each reporting period, less future cash outflows in respect of such leases
discounted generally over a term of ten years;
(iii) The direct capitalization method which is based on the conversion of normalized earnings directly into an expression of fair value. The
normalized net income for the year is divided by an overall capitalization rate; and
(iv) The use of external independent appraisers. During the year ended December 31, 2015, certain properties were valued by professional
external independent appraisers. These properties make up 21.3% of the investment properties balance as at December 31, 2015 (year
ended December 31, 2014 - 24.8%). The remainder of the portfolio is valued by the REIT’s internal valuation team. The properties that
are externally appraised are judgmentally selected by management to form a representative cross section of the REIT’s portfolio based
on size, geography and the availability of market data. In addition, an external independent appraisal is often obtained for properties
acquired or properties where the associated mortgage is being refinanced.
The REIT utilizes external industry sources to determine a range of capitalization and discount rates. To the extent that the externally provided
capitalization and discount rates ranges change from one reporting period to the next, the fair value of the investment properties would increase
or decrease accordingly.
The REIT has utilized the following weighted average discount rates and terminal capitalization rates in estimating the fair value of the
investment properties:
December 31, 2015
December 31, 2014
Discount Rates
Terminal Capitalization Rates
Canada
6.49%
6.49%
United
States
7.25%
7.42%
Total
Canada
6.68%
6.68%
5.96%
5.91%
United
States
6.84%
7.04%
Total
6.18%
6.14%
17
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
3.
Real estate assets (continued):
Weighted Average Overall Capitalization Rates
Canada
United States
Total
S o t s e ded
Office
6.12%
6.34%
Primaris
5.56%
N/A
December 31, 2015
H&R
Retail
6.76%
7.36%
Industrial
Residential
6.79%
N/A *
N/A
5.82%
* As at December 31, 2015, U.S. industrial real estate assets are accounted for as equity accounted investments (note 5).
Weighted Average Overall Capitalization Rates
Canada
United States
Total
Six months ended
Office
6.00%
6.14%
Primaris
5.60%
N/A
December 31, 2014
H&R
Retail
6.57%
7.29%
Industrial
6.96%
7.05%
Residential
N/A
5.90%
Total
6.02%
6.66%
6.18%
Total
5.99%
6.69%
6.11%
The weighted average overall capitalization rates as at December 31, 2015 are calculated based on stabilized net operating income for the
three months ended December 31, 2015 (December 31, 2014 - based on the three months ended December 31, 2014).
Fair value sensitivity:
The REIT’s investment properties are classified as fair value level 3 assets under the fair value hierarchy, as the inputs in the valuations of
these investment properties are not based on observable market data. The following table provides a sensitivity analysis for the weighted
average capitalization rate applied as at December 31, 2015:
Capitalization Rate
Weighted
Sensitivity
Average Overall
Fair Value of
Fair Value
Increase (Decrease)
(0.75)%
(0.50)%
(0.25)%
December 31, 2015
0.25%
0.50%
0.75%
Capitalization Rate
5.43%
Investment Properties
Variance
$
14,313,102
$
1,737,027
5.68%
5.93%
6.18%
6.43%
6.68%
6.93%
$
$
$
$
$
$
13,683,124
13,106,264
12,576,075
12,087,114
11,634,752
11,215,028
$
$
$
$
$
$
1,107,049
530,189
-
(488,961)
(941,323)
(1,361,047)
% Change
13.81%
8.80%
4.22%
0.00%
(3.89% )
(7.49% )
(10.82% )
Ratio of Debt(1)
to Total Assets
41.1%
42.8%
44.5%
46.2%
47.9%
49.6%
51.2%
(1) For the above calculation, debt includes mortgages payable, the face value of debentures payable, loan payable and bank indebtedness.
4.
Properties under development:
Six months ended
Project
Address
Heart Lake
Mayfield West Business Park, Caledon, ON
Airport Road
7900 Airport Road, Brampton, ON
December 31 December 31
2014
2015
$
82,097
15,407
97,504
$
18
$
80,612
24,394
105,006
$
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
5. Equity accounted investments:
The REIT has entered into a number of arrangements with other parties for the purpose of jointly owning and operating investment properties.
In order to determine how these arrangements should be accounted for, the REIT has assessed the structure of the arrangement, and whether
the REIT has control over the operations of such properties. The REIT has found that its arrangements fall into two categories: a) joint ventures,
where the REIT has joint control over the operations, each investment is structured as a separate vehicle and the REIT has rights to the net
assets of the entities; and b) investments in associates, where the REIT has significant influence over the investment but does not have joint
control over the operations. Both of these types of arrangements are accounted for using the equity method. During the year ended December
31, 2015, the REIT disposed of a 49.5% ownership interest in 16 industrial properties in the U.S. and the remaining 50.5% interest is now
accounted for as a joint venture. The amount transferred into equity accounted investments relating to these properties was $194,970 (note
3). During the year ended December 31, 2014, the REIT acquired a net interest in one associate for $71,065 (note 3). The REIT’s interests in
equity accounted investments are outlined as follows:
Investments in joint ventures:
100 Yonge
Scotia Plaza
Telus Tower
Location
Principal activity
Toronto, Ontario
Toronto, Ontario
Own and operate investment property
Own and operate investment property
Calgary, Alberta
Own and operate investment property
16 industrial properties
United States
Own and operate investment property
Investments in associates:
ECHO Realty LP ("ECHO")
LIC Operator Co., L.P. ("LIC")
United States
United States
Own and operate investment properties
Develop, own and operate investment property
Ownership interest (% )
December 31 December 31
2014
2015
33.3
33.3
50.0
50.5
33.6
50.0
33.3
33.3
50.0
-
33.6
50.0
The following tables summarize the total amounts of the financial information of ECHO, LIC, 100 Yonge, Scotia Plaza, Telus Tower and the 16
industrial properties in the U.S. and reconciles the summarized financial information to the carrying amount of the REIT’s interest in these
arrangements. The REIT has determined that it is appropriate to aggregate each of the investments in joint ventures and investments in
associates as the individual investments are not individually material:
December 31, 2015
Equity accounted investments:
Investment properties
Properties under development
Loan receivable
Other assets
Cash and cash equivalents
Mortgages payable
Bank indebtedness
Accounts payable and accrued liabilities
Non-controlling interest
Net assets
REIT's share of net assets
Elimination of intercompany loans
Investments in
Investments in
joint ventures
associates
Total
$
2,001,977
$
2,162,079
$
4,164,056
-
70,100
14,681
18,888
(906,289)
-
(26,262)
-
1,173,095
466,522
(34,083)
471,024
83,877
108,580
89,509
(667,601)
(268,248)
(82,563)
(61,388)
1,835,269
713,506
(28,159)
471,024
153,977
123,261
108,397
(1,573,890)
(268,248)
(108,825)
(61,388)
3,008,364
1,180,028
(62,242)
Amount in the combined statements of financial position
$
432,439
$
685,347
$
1,117,786
ECHO reports its financial position to the REIT one month in arrears due to time constraints on its reporting. Therefore, the above amounts
include ECHO’s financial information as at November 30, 2015. In December 2015, ECHO secured new mortgages on two properties for
approximately $3,900 (REIT’s share). The REIT is not aware of any other significant transactions that ECHO was a party to in December 2015.
19
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
5.
Equity accounted investments (continued):
December 31, 2014
Equity accounted investments:
Investment properties
Properties under development
Loan receivable
Other assets
Cash and cash equivalents
Mortgages payable
Bank indebtedness
Accounts payable and accrued liabilities
Non-controlling interest
Net assets
REIT's share of net assets
Elimination of intercompany loans
Amount in the combined statements of financial position
Investments in
joint ventures
Investments in
associates
Total
$
1,691,400
-
64,300
11,421
16,450
$
1,552,742
225,005
222,210
30,987
23,013
$
3,244,142
225,005
286,510
42,408
39,463
(778,451)
-
(52,717)
-
(569,111)
(163,017)
(51,390)
(27,075)
(1,347,562)
(163,017)
(104,107)
(27,075)
952,403
1,243,364
2,195,767
355,216
(32,150)
454,554
(74,601)
809,770
(106,751)
$
323,066
$
379,953
$
703,019
ECHO reports its financial position to the REIT one month in arrears due to time constraints on its reporting. Therefore, the above amounts
include ECHO’s financial information as at November 30, 2014. The REIT is not aware of ECHO being a party to any significant transactions
that occurred during December 2014.
20
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
5.
Equity accounted investments (continued):
Year ended December 31, 2015
Year ended December 31, 2014
Investments in
Investments in
Investments in
Investment in
joint ventures
associates
Total
joint ventures
associates
Total
Net income (loss) from equity accounted
investments:
Rentals from investment properties
$
201,129
$
163,146
$
364,275
$
174,335
$
122,064
$
296,399
Property operating costs
Net income from equity accounted investments
Finance income
Finance cost - operations
Loss on change in fair value
Trust expenses
Fair value adjustment on real estate assets
Gain (loss) on sale of real estate assets
Income taxes
Net income (loss)
Net income attributable to
non-controlling interest
Net income (loss) attributable to shareholders
REIT's share of net income (loss) attributable
to shareholders
Elimination of intercompany loan interest
Amount in the combined statements
(79,462)
-
2,784
(33,437)
-
(262)
(142,181)
-
(160)
(51,589)
-
(51,589)
(31,770)
1,646
4,570
(34,755)
(3,341)
(2,949)
(12,407)
(8,435)
(98)
75,607
(823)
74,784
(111,232)
1,646
7,354
(68,192)
(3,341)
(3,211)
(154,588)
(8,435)
(258)
24,018
(823)
23,195
(82,688)
-
2,798
(27,890)
-
-
(7,732)
-
-
(24,929)
1,339
6,767
(28,835)
-
(502)
2,632
1,736
(440)
(107,617)
1,339
9,565
(56,725)
-
(502)
(5,100)
1,736
(440)
58,823
79,832
138,655
-
58,823
(2,510)
77,322
(2,510)
136,145
(21,826)
(1,354)
25,140
(1,119)
3,314
(2,473)
21,586
(1,354)
26,015
(2,124)
47,601
(3,478)
of comprehensive income (loss)
$
(23,180)
$
24,021
$
841
$
20,232
$
23,891
$
44,123
ECHO reports its financial results to the REIT one month in arrears due to time constraints on its reporting. Therefore, the above amounts
include ECHO’s financial information for December 1, 2014 to November 30, 2015 and December 1, 2013 to November 30, 2014. In December
2015, ECHO secured new mortgages on two properties for approximately $3,900 (REIT’s share). The REIT is not aware of any other significant
transactions that ECHO was a party to in December 2015.
21
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
6. Mortgages receivable:
Mortgages receivable represent vendor take-back financing and other arrangements. As at December 31, 2015, mortgages receivable bear
interest at effective rates between 3.13% and 9.00% per annum (December 31, 2014 - between 3.13% and 4.40% per annum) with a
weighted average effective rate of 4.74% per annum (December 31, 2014 - 3.36%), and mature between 2016 and 2026 (December 31,
2014 - mature between 2015 and 2026).
Future repayments are as follows:
Years ending December 31:
2016
2017
2018
2019
2020
Thereafter
December 31
2015
$
67,957
-
-
-
26,497
8,899
$
103,353
7. Assets and liabilities classified as held for sale:
As at December 31, 2015, the REIT holds a 50% ownership interest in one industrial property (December 31, 2014 - 49.5% ownership interest
in 16 industrial properties, a 50% ownership interest in one industrial property and a 100% ownership interest in one industrial property) as
held for sale.
The following table sets forth the combined statement of financial position items associated with investment properties classified as held for
sale:
Assets
Investment properties
Liabilities
Mortgages payable
Accounts payable and accrued liabilities
December 31
December 31
2015
2014
$
3,000
$
296,992
$
-
$
65,958
-
-
$
221
66,179
$
22
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
8.
Other assets:
Restricted cash*
Accounts receivable
Prepaid expenses and sundry assets
December 31
December 31
2015
2014
$
16,457
$
8,684
14,686
12,263
23,167
54,310
$
21,756
42,703
$
*
Included in restricted cash are bank term deposits of $4,151 (December 31, 2014 - $nil) at a rate of interest of 0.75% (December 31, 2014 - nil).
9. Cash and cash equivalents:
Cash and cash equivalents at December 31, 2015 includes cash on hand of $38,021 (December 31, 2014 - $23,496) and bank term deposits
of $266 (December 31, 2014 - $259) at a rate of interest of 0.44% (December 31, 2014 - 0.88%).
10. Mortgages payable:
The mortgages payable are secured by real estate assets and letters of credit in certain cases, bearing fixed interest with a contractual
weighted average rate of 4.60% (December 31, 2014 - 4.85%) per annum and maturing between 2016 and 2033 (December 31, 2014 -
maturing between 2015 and 2035). Included in mortgages payable at December 31, 2015 are U.S. dollar denominated mortgages of U.S.
$1,165,504 (December 31, 2014 - U.S. $1,122,169). The Canadian equivalents of these amounts are $1,608,396 (December 31, 2014 -
$1,301,716).
Debt related to certain Canadian properties is held by separate legal entities, where the rent received from each property is first used to satisfy
the related debt obligations with any balance then available to satisfy the cash flow requirements of the REIT.
Future principal mortgage payments are as follows:
December 31
2015
Years ending December 31:
2016
2017
2018
2019
2020
Thereafter
Financing costs and mark-to-market adjustment arising on acquisitions
23
$
381,144
551,024
243,631
279,166
559,476
2,513,551
4,527,992
9,286
4,537,278
$
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
11. Debentures payable:
The full terms of the debentures are contained in the public offering documents; the following table summarizes the key terms:
Contractual
interest
rate
Effective
interest
rate
Maturity
Conversion
price
Face
value
Carrying
value
Carrying
value
December 31 December 31
2014
2015
Convertible Debentures (a)
2016 Convertible Debentures (HR.DB.E)
2018 Convertible Debentures (HR.DB.H)
2020 Convertible Debentures (HR.DB.D)
December 31, 2016
November 30, 2018
June 30, 2020
4.50%
5.40%
5.90%
4.50% $ 25.70
24.73
5.40%
23.50
5.90%
$ 75,000
74,394
99,654
$ 75,188
76,016
102,145
$ 76,208
79,607
105,623
Senior Debentures (b)
Series A Senior Debentures
Series H Senior Debentures
Series D Senior Debentures
Series I Senior Debentures
Series B Senior Debentures
Series E Senior Debentures
Series J Senior Debentures
Series G Senior Debentures
Series C Senior Debentures
Series K Senior Debentures
Series F Senior Debentures
*
**
July 27, 2016
January 23, 2017
February 3, 2017
February 2, 2018
February 9, 2018
June 20, 2018
December 1, 2018
March 1, 2019
5.20%
(1)
5.40%
(1)
4.78%
(2)
4.96%
(2)
5.90%
4.90%
(3)
3.34%
5.00%
(4)
6.06%
5.22%
(3)
3.54%
5.30%
(4)
March 2, 2020
4.45%
4.63%
249,048
253,349
261,438
-
-
-
-
-
-
-
-
-
-
-
-
-
180,000
60,000
115,000
100,000
172,500
175,000
125,000
200,000
175,000
-
-
179,862
59,891
114,815
99,449
172,050
174,186
124,009
199,036
174,122
114,986
234,700
179,555
59,792
114,648
99,207
-
173,873
123,703
-
173,936
1,302,500
1,297,420
1,274,400
$1,551,548
$1,550,769
$1,535,838
The carrying values of the Convertible Debentures (as defined below) are determined using the quoted price on the TSX on December 31,
2015 and December 31, 2014.
* Matured and repaid on February 3, 2015.
** Matured and repaid on October 9, 2015.
(2) Bore interest at a rate equal to 3-month Canadian Dealer Offered Rate plus 150 basis points. The REIT entered into an interest rate swap on the Series H Senior
Debentures to fix the interest rate at 2.94%.
(3) Bears interest at a rate equal to 3-month Canadian Dealer Offered Rate plus 165 basis points. The weighted average interest rate for year ended December 31,
2015 was 2.57%.
(4) Denominated in U.S. dollars and bears interest at a rate equal to 3-month London Interbank Offered Rate plus 108 basis points. The weighted average interest
rate for the period ended December 31, 2015 was 1.37%.
(5) Bears interest at a rate equal to 3-month Canadian Dealer Offered Rate plus 143 basis points. The weighted average interest rate for the period ended December
31, 2015 was 2.19%.
24
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
11. Debentures payable (continued):
(a)
2016 Convertible Debentures, 2018 Convertible Debentures and 2020 Convertible Debentures (collectively, the “Convertible
Debentures”):
In July 2010, the REIT completed a public offering of $100,000 Series D convertible unsecured subordinated debentures (the “2020
Convertible Debentures”). The 2020 Convertible Debentures could not be redeemed by the REIT on or before June 30, 2014.
Thereafter, but prior to June 30, 2016, the 2020 Convertible Debentures may be redeemed, in whole or in part, only if the current market
price of a Stapled Unit is at least 125% of the conversion price. On or after June 30, 2016 and prior to the maturity date, the 2020
Convertible Debentures may be redeemed by the REIT, in whole or in part, at a price equal to the principal amount plus accrued interest.
Interest on the 2020 Convertible Debentures is payable semi-annually on June 30 and December 31.
In November 2011, the REIT completed a public offering of $75,000 Series E convertible unsecured subordinated debentures (the “2016
Convertible Debentures”). The 2016 Convertible Debentures could not be redeemed by the REIT on or before November 30, 2014.
Thereafter, but prior to November 30, 2015, the 2016 Convertible Debentures could have been redeemed, in whole or in part, only if the
current market price of a Stapled Unit is at least 125% of the conversion price. On or after November 30, 2015 and prior to the maturity
date, the 2016 Convertible Debentures may be redeemed by the REIT, in whole or in part, at a price equal to the principal amount plus
accrued interest. Interest on the 2016 Convertible Debentures is payable semi-annually on June 30 and December 31.
On April 4, 2013, the REIT assumed all of Primaris’s outstanding convertible debentures. The 2014b and 2015 Convertible Debentures
were fully redeemed in 2013. The remaining balance of the Series H convertible unsecured subordinated debentures (the “2018
Convertible Debentures”) could not be redeemed by the REIT on or before November 30, 2014. Thereafter, but up to November 30,
2016, the 2018 Convertible Debentures may be redeemed, in whole or in part, only if the current market price of a Stapled Unit is at
least 125% of the conversion price. On or after December 1, 2016 and prior to the maturity date, the 2018 Convertible Debentures may
be redeemed by the REIT, in whole or in part, at a price equal to the principal amount plus accrued interest. Interest on the 2018
Convertible Debentures is payable semi-annually on May 31 and November 30.
Each Convertible Debenture is convertible into freely tradeable Stapled Units at the holder’s option at (i) any time prior to the maturity
date and (ii) the business day immediately preceding the date specified by the REIT for redemption of the Convertible Debentures, at a
specified conversion price, subject to adjustment upon the occurrence of certain events in accordance with the indenture governing the
Convertible Debentures.
On redemption or maturity of the Convertible Debentures, the REIT may, at its option and subject to certain conditions, elect to satisfy
its obligation to repay all or any portion of the principal amount of the Convertible Debentures that are to be redeemed or that are to
mature through the issuance of Stapled Units by way of issuing (or causing it to be issued) a variable number of Stapled Units equal to
the principal amount of the Convertible Debentures that are to be redeemed or that are to mature divided by 95% of the then fair market
value of the Stapled Units.
(b) Series B Senior Debentures, Series C Senior Debentures, Series D Senior Debentures, Series E Senior Debentures, Series F Senior
Debentures, Series G Senior Debentures, Series I Senior Debentures, Series J Senior Debentures and Series K Senior Debentures
(collectively, the “Senior Debentures”):
In February 2015, the REIT issued U.S. $125,000 Series J floating rate unsecured senior debentures (the “Series J Senior Debentures”).
The interest on the Series J Senior Debentures is payable quarterly on February 9, May 9, August 9 and November 9. On issuance,
the REIT recorded a liability of U.S. $124,525, net of issue costs of U.S. $475.
In July 2015, the REIT issued $200,000 Series K floating rate unsecured senior debentures (the “Series K Senior Debentures”). The
interest on the Series K Senior Debentures is payable quarterly on March 1, June 1, September 1 and December 1. On issuance, the
REIT recorded a liability of $198,897, net of issue costs of $1,103.
25
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
11. Debentures payable (continued):
Interest expense is recorded as a charge to net income and is calculated at an effective interest rate with the difference between the coupon
rate and the effective rate being credited to the carrying value such that, at maturity, the carrying value is equal to the face value of the then
outstanding Senior Debentures.
At its option, the REIT may redeem any of the Senior Debentures, in whole at any time, or in part from time to time, prior to maturity on payment
of a redemption price equal to the greater of (i) the Canada Yield Price as defined in the relevant supplemental trust indenture and (ii) par,
together in each case with accrued and unpaid interest to the date fixed for redemption. The REIT will give notice of any redemption at least
30 days but not more than 60 days before the date fixed for redemption. Where less than all of any Senior Debentures are to be redeemed
pursuant to their terms, the Senior Debentures to be so redeemed will be redeemed on a pro rata basis according to the principal amount of
Senior Debentures registered in the respective name of each holder of Senior Debentures or in such other manner as the indenture trustee
may consider equitable.
The Senior Debentures are rated BBB (high) with a Stable trend by DBRS Limited.
(c) A summary of the carrying value of debentures payable is as follows:
Convertible Debentures
Carrying value, beginning of year
Conversion - 2018 Convertible Debentures
(Gain) loss on change in fair value
Carrying value, end of year
Senior Debentures
Carrying value, beginning of year
Repaid - Series A Senior Debentures
Repaid - Series H Senior Debentures
Issued - Series J Senior Debentures
Issued - Series K Senior Debentures
Accretion adjustment
Carrying value, end of year
December 31
December 31
Note
2015
2014
$
261,438
$
259,895
21
(5)
(8,084)
253,349
1,274,400
(115,000)
(235,000)
171,855
198,897
2,268
1,297,420
(16)
1,559
261,438
1,272,235
-
-
-
-
2,165
1,274,400
$
1,550,769
$
1,535,838
12. Exchangeable units:
Certain of the REIT’s subsidiaries have issued exchangeable units which are puttable instruments where the REIT has a contractual obligation
to issue Stapled Units to participating vendors upon redemption. These puttable instruments are classified as a liability under IFRS and are
measured at fair value through net income (note 21). Fair value is determined by using the quoted prices for the Stapled Units as the
exchangeable units are exchangeable into 16,663,816 (December 31, 2014 - 16,663,816) Stapled Units at the option of the holder. The quoted
price as at December 31, 2015 was $20.05 (December 31, 2014 - $21.73).
Holders of the exchangeable units are entitled to receive distributions on a per unit amount equal to a per Stapled Unit amount provided to
holders of Stapled Units.
26
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
12. Exchangeable units (continued):
The REIT and Finance Trust have entered into various exchange and support agreements that provide, among other things, the mechanics
whereby exchangeable units may be exchanged for Stapled Units.
The following number of exchangeable units are issued and outstanding:
As at January 1, 2014:
Class B LP units of H&R Portfolio Limited Partnership, a subsidiary partnership of the REIT,
exchanged for Stapled Units
As at December 31, 2014 and December 31, 2015
17,403,119
(739,303)
16,663,816
A subsidiary of the REIT holds 433,174 Stapled Units to mirror these exchangeable units. Therefore, when these Class B LP units are
exchanged for Stapled Units, the number of outstanding Stapled Units will not increase.
13. Loan payable:
In February 2016, the REIT repaid the remainder of the loan payable to ECHO for a total cash payment of U.S. $60,780. The amount presented
on the statements of financial position as at December 31, 2015 represents the loan payable amount net of the REIT’s interest in the equity
accounted investment in ECHO.
14. Bank indebtedness:
The REIT has the following facilities:
(a)
(b)
(c)
(d)
A general unsecured operating facility due on December 18, 2018. The total facility as at December 31, 2015 is $500,000 (December
31, 2014 - $300,000) and can be drawn in either Canadian or U.S. dollars. The amount available at December 31, 2015, after taking
into account the bank indebtedness drawn of $165,499 (December 31, 2014 - $71,360), outstanding letters of credit and other items,
is $272,160 (December 31, 2014 - $173,313). The Canadian dollar bank indebtedness bears interest at rates approximating the prime
rate of a Canadian chartered bank. At December 31, 2015, the Canadian prime interest rate was 2.70% (December 31, 2014 - 3.00%)
per annum.
A general operating facility which is secured by fixed charges over certain investment properties due on December 18, 2017. The total
facility as at December 31, 2015 is $300,000 (December 31, 2014 - $200,000). The amount available at December 31, 2015, after
taking into account the bank indebtedness drawn of $138,020 (December 31, 2014 - $37,653) and the outstanding letters of credit is
$161,646 (December 31, 2014 - $161,792). The bank indebtedness bears interest at a rate approximating the prime rate of a Canadian
chartered bank.
A general operating facility which is secured by fixed charges over certain investment properties due on September 30, 2017. The
total facility as at December 31, 2015 is $3,514 (December 31, 2014 - $14,850). The amount available at December 31, 2015, after
taking into account the bank indebtedness drawn of $3,514 (December 31, 2014 - $14,850), is nil (December 31, 2014 - nil).
A general operating facility which is secured by fixed charges over certain investment properties due on February 19, 2017. The total
facility as at December 31, 2015 is $15,000 (December 31, 2014 - not applicable) and can be drawn in either Canadian or U.S. dollars.
The amount available at December 31, 2015, after taking into account the bank indebtedness drawn of $14,000 (December 31, 2014
- not applicable), is $1,000 (December 31, 2014 - not applicable).
Included in bank indebtedness at December 31, 2015 are U.S. dollar denominated amounts of $115,500 (December 31, 2014 - U.S. $51,269).
The Canadian equivalents of these amounts are $159,390 (December 31, 2014 - $59,472).
27
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
15. Accounts payable and accrued liabilities:
Current:
Other accounts payable and accrued liabilities
Mortgage interest payable
Prepaid rent
Unit-based compensation payable
Debenture interest payable
Derivative instruments
Non-current:
Security deposits
16. Derivative instruments:
Foreign exchange forward contracts
Mortgage interest rate swap
(a)
(b)
December 31
December 31
Note
2015
2014
17(a)(ii)
16
$
117,181
$
98,671
11,561
22,883
7,960
13,207
-
11,298
17,667
9,035
16,563
146
4,038
176,830
$
3,739
157,119
$
Fair value (liability) asset *
Net gain on derivative contracts**
December 31
December 31
December 31
December 31
2015
2014
2015
2014
$
-
$
-
$
-
$
126
-
(146)
161
263
$
-
$
(146)
$
161
$
389
(a) The REIT entered into foreign exchange forward contracts and swaps with Canadian chartered banks effectively locking the REIT’s rate to exchange U.S. dollars
into Canadian dollars. These arrangements were settled in 2014.
(b) The REIT entered into an interest rate swap on one U.S. mortgage. This swap was settled in 2015.
*
Derivative instruments in asset and liability positions are not presented on a net basis. Derivative instruments in an asset position are recorded in other assets
and derivative instruments in a liability position are recorded in accounts payable and accrued liabilities.
**
Excludes amounts relating to foreign exchange which have been recorded in accumulated other comprehensive income (note 18).
28
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
17. Unitholders’ equity:
The REIT is an unincorporated open-ended trust. The beneficial interests in the REIT are divided into two classes of trust units: units of the
REIT and special voting units. Each unit of the REIT and special voting unit carries a single vote at any meeting of unitholders. Holders of
special voting units do not have any additional rights than those of holders of units of the REIT. The aggregate number of units of the REIT
which the REIT may issue is unlimited and the aggregate number of special voting units which the REIT may issue is 9,500,000. The units of
the REIT carry the right to participate pro rata in any distributions. As at December 31, 2015 9,500,000 special voting units are issued and
outstanding (December 31, 2014 - 9,500,000 special voting units).
Finance Trust is an unincorporated investment trust. The beneficial interests in Finance Trust are represented by a single class of units which
are unlimited in number. Each unit carries a single vote at any meeting of unitholders and carries the right to participate pro rata in any
distributions.
The units of the REIT are stapled with the units of Finance Trust effective October 1, 2008. These Stapled Units are listed and posted for
trading on the TSX. The REIT has entered into a support agreement (“Support Agreement”) with Finance Trust to coordinate the issuance of
Stapled Units under various arrangements (note 17(c)).
The units of the Trusts are freely transferable and, other than as disclosed herein, the trustees shall not impose any restriction on the transfer
of units. Provided that an event of uncoupling (“Event of Uncoupling”) has not occurred: (a) each unit of the REIT may only be transferred
together with a unit of Finance Trust; (b) no unit may be issued by the REIT to any person unless: (i) a unit of Finance Trust is simultaneously
issued to such person, or (ii) the REIT has arranged that units will be consolidated (subject to any applicable regulatory approval) immediately
after such issuance, such that each holder of a REIT unit will hold an equal number of Finance Trust units and units of the REIT immediately
following such consolidation; and (c) a unitholder may require the REIT to redeem any particular number of units only if it also requires, at the
same time, and in accordance with the provisions of the Finance Trust Declaration of Trust, Finance Trust to redeem that same number of
units of Finance Trust.
An Event of Uncoupling shall occur only: (a) in the event that unitholders of the REIT vote in favour of the uncoupling of units of Finance Trust
and units of the REIT such that the two securities will trade separately; or (b) at the sole discretion of the trustees of Finance Trust, but only
in the event of the bankruptcy, insolvency, winding-up or reorganization (under an applicable law relating to insolvency) of the REIT or U.S.
Holdco or the taking of corporate action by the REIT or U.S. Holdco in furtherance of any such action or the admitting in writing by the REIT
or U.S. Holdco of its inability to pay its debts generally as they become due. The trustees of the Trusts shall use all reasonable efforts to
obtain and maintain a listing for the units of the REIT and, unless an Event of Uncoupling has occurred, the Stapled Units, on one or more
stock exchanges in Canada.
The unitholders have the right to require the Trusts to redeem their units on demand. Provided that no Event of Uncoupling has occurred,
unitholders who tender their units of one of the Trusts for redemption will also be required to tender for redemption corresponding units of the
other Trust in accordance with the provisions of the respective Declarations of Trust. Upon the tender of their units for redemption, all of the
unitholder’s rights to and under such units are surrendered and the unitholder is entitled to receive a price per unit as determined by the
applicable Declaration of Trust.
Upon valid tender for redemption of each unit of the REIT, the unitholder is entitled to receive a price per unit of the REIT as determined by a
formula based on the market price of Stapled Units less an amount based on the principal amount of U.S. Holdco Notes owing per outstanding
unit of Finance Trust. The redemption price payable by the REIT will be satisfied by way of a cash payment to the unitholder or, in certain
circumstances, including where such payment would cause the REIT’s monthly cash redemption obligations to exceed $50 (subject to
adjustment in certain circumstances or waiver by the trustees) an in specie distribution of notes of H&R Portfolio LP Trust (a subsidiary of the
REIT).
29
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
17. Unitholders’ equity (continued):
Upon valid tender for redemption of each unit of Finance Trust, the unitholder is entitled to receive, except as provided below, a price per unit
payable in cash equal to the Canadian dollar equivalent of the outstanding principal amount of the U.S. Holdco Notes as of the redemption
date, divided by the total number of Finance Trust units issued and outstanding immediately prior to the redemption date. In certain
circumstances, including where such payment would cause Finance Trust's monthly cash redemption obligations to exceed $50 (subject to
adjustment in certain circumstances or waiver by the trustees) the redemption price per Finance Trust unit being redeemed, to which a
redeeming unitholder is entitled shall be the fair market value of the Finance Trust units being redeemed, as determined by the trustees, which
shall be payable by way of delivery of U.S. Holdco Notes.
The following number of Stapled Units are issued and outstanding:
As at January 1, 2014
Issued under the Distribution Reinvestment Plan and Unit Purchase Plan (the "DRIP")
Options exercised
2018 Convertible Debentures converted into Stapled Units
Exchangeable units exchanged into Stapled Units
Repurchased through normal course issuer bid
As at December 31, 2014
Issued under the DRIP
Options exercised
2018 Convertible Debentures converted into Stapled Units
Repurchased through normal course issuer bid
As at December 31, 2015
269,974,773
3,932,252
193,700
606
739,303
(67,300)
274,773,334
4,943,820
72,167
202
(179,400)
279,610,123
The weighted average number of basic Stapled Units for the year ended December 31, 2015 is 276,795,506 (December 31, 2014 -
272,172,222).
(a) Unit-based compensation:
In order to provide long-term compensation to the REIT’s trustees, officers, employees and consultants, there may be grants of options
and incentive units, which are each subject to certain restrictions.
(i) Unit option plan:
As at December 31, 2015, a maximum of 28,000,000 (December 31, 2014 - 28,000,000) options to purchase Stapled Units were
authorized to be issued, of which 14,056,429 options (December 31, 2014 - 12,428,066 options) have been granted, 343,422
options (December 31, 2014 - 66,665 options) have expired and 14,286,993 options (December 31, 2014 - 15,638,599 options)
remain to be granted. The exercise price of each option approximated the quoted price of the Stapled Units on the date of grant
and shall be increased by the amount, if any, by which the fair quoted value of one Finance Trust unit at the time of exercise of
such option exceeds the fair quoted value of one Finance Trust unit at the time of grant of such option. The options vest at 33.3%
per year from the grant date, will be fully vested after three years, and expire ten years after the date of the grant. During the year
ended December 31, 2015, 1,628,363 options were granted (year ended December 31, 2014 – 935,946 options).
As described in note 2(h), the REIT’s unit option plan is considered a cash-settled plan with the fair value of the Stapled Units
underlying option grants recorded as a liability on the combined statements of financial position. The liability is released to equity
when the options are converted to Stapled Units. The fair value of the options is remeasured at each reporting period using the
Black-Scholes model. Measurement inputs include Stapled Unit price on measurement date, exercise price of the instrument,
expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available
information), weighted average expected life of the instruments (based on historical experience and general option holder
behaviour), expected distributions, and the risk-free interest rate (based on government bonds). Service and non-market
performance conditions attached to the transactions are not taken into account in measuring fair value.
30
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
17. Unitholders’ equity (continued):
A summary of the status of the unit option plan and the changes during the respective periods are as follows:
Outstanding, beginning of year
Granted
Exercised
Expired
Outstanding, end of year
December 31, 2015
Weighted
average
December 31, 2014
Weighted
average
Units
exercise price
Units
exercise price
5,295,567
$
21.41
4,553,321
$
21.04
1,628,363
(72,167)
(276,757)
6,575,006
21.94
15.74
22.02
21.57
$
935,946
(193,700)
-
5,295,567
22.17
16.42
-
21.41
$
Options exercisable, end of year
4,001,868
$
21.18
2,906,308
$
20.37
The options outstanding at December 31, 2015 are exercisable at varying prices ranging from $9.30 to $23.18 (December 31, 2014 - $9.30
to $23.18) with a weighted average remaining life of 7.0 years (December 31, 2014 - 7.4 years). The vested options are exercisable at varying
prices ranging from $9.30 to $23.18 (December 31, 2014 - $9.30 to $23.18) with a weighted average remaining life of 6.0 years (December
31, 2014 - 6.5 years).
(ii)
Incentive unit plan:
As at December 31, 2015, a maximum of 5,000,000 (December 31, 2014 - 5,000,000) incentive units exchangeable into Stapled Units
were authorized to be issued under the incentive unit plan, of which 314,655 incentive units (December 31, 2014 – 162,332 incentive
units) have been granted, 11,665 incentive units (December 31, 2014 - nil incentive units) have expired and 4,697,010 incentive units
(December 31, 2014 - 4,837,668 incentive units) remain to be granted.
Incentive units are recognized based on the grant date fair value. The awards will be satisfied either in Stapled Units issued from treasury
or cash, as determined by the REIT’s trustees, with the result that the awards are classified as cash-settled unit-based payments and
presented as liabilities. 100% of the incentive units vest on the third anniversary of the grant date and are subject to forfeiture until the
recipients of the awards have held office with or provided services to the REIT for a specified period of time. The incentive units may, if
specified at the time of grant, accrue cash distributions during the vesting period and accrued distributions will be paid when the incentive
units vest. These incentive units are recognized as liabilities, which are indexed to changes in fair value of the Stapled Units. During the
year ended December 31, 2015, 152,323 incentive units were granted (year ended December 31, 2014 – 162,332 incentive units).
A summary of the status of the incentive unit plan and the changes during the respective periods are as follows:
December 31
December 31
2015
Units
162,332
152,323
(11,665)
302,990
2014
Units
-
162,332
-
162,332
Outstanding, beginning of year
Granted
Expired
Outstanding, end of year
31
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
17. Unitholders’ equity (continued):
The fair value of the vested unit options and incentive units payable are as follows:
December 31
December 31
Options
Incentive units
Unit-based compensation expense (benefit) included in trust expenses is as follows:
Options
Incentive units
(b) Distributions:
2015
4,594
3,366
7,960
$
$
$
$
2014
7,746
1,289
9,035
2015
2014
$
(2,774)
$
2,560
2,077
1,289
$
(697)
$
3,849
Under the REIT’s Declaration of Trust, the total amount of income of the REIT to be distributed to unitholders for each calendar month
shall be subject to the discretion of the trustees, however, the total income distributed shall not be less than the amount necessary to
ensure that the REIT will not be liable to pay income tax under Part I of the Tax Act for any year. The trustees have the discretion to
pay the distributions in cash or Stapled Units. For the year ended December 31, 2015, the REIT declared per unit distributions of $1.23
(December 31, 2014 - $1.24).
Pursuant to Finance Trust’s Declaration of Trust, unitholders of Finance Trust are entitled to receive all of the Distributable Cash of
Finance Trust, as defined in the Declaration of Trust. Distributable Cash means, subject to certain exceptions, all amounts received by
Finance Trust less certain costs, expenses or other amounts payable by Finance Trust, and less any amounts which, in the opinion of
the trustees, may reasonably be considered to be necessary to provide for the payment of any costs or expenditures that have been or
will be incurred in the activities and operations of Finance Trust and to provide for payment of any tax liability of Finance Trust. Finance
Trust paid per unit distributions of $0.12 for the year ended December 31, 2015 (December 31, 2014 - $0.11).
The details of the distributions are as follows:
S o t s e ded
2014
281,444
85,358
366,802
$
$
Cash distributions to unitholders
Unit distributions (issued under the DRIP)
2015
267,650
$
105,422
373,072
$
32
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
17. Unitholders’ equity (continued):
(c) Support agreement:
Pursuant to provisions of the Declarations of Trust for Finance Trust and the REIT, at all times, each REIT unit must be stapled to a
Finance Trust unit (and each Finance Trust unit must be stapled to a REIT unit) unless there is an Event of Uncoupling. As part of the
Plan of Arrangement, the REIT and Finance Trust entered into the Support Agreement which provided, among other things, for the co-
ordination of the declaration and payment of all distributions so as to provide for simultaneous record dates and payment dates; for co-
ordination so as to permit the REIT to perform its obligations pursuant to the REIT’s Declaration of Trust, Unit Option Plan, DRIP and
Unitholder Rights Plan; for Finance Trust to take all such actions and do all such things as are necessary or desirable to enable and
permit the REIT to perform its obligations arising under any security issued by the REIT (including securities convertible, exercisable or
exchangeable into Stapled Units); for Finance Trust to take all such actions and do all such things as are necessary or desirable to
enable the REIT to perform its obligations or exercise its rights under its convertible debentures; and for Finance Trust to take all such
actions and do all such things as are necessary or desirable to issue Finance Trust units simultaneously (or as close to simultaneously
as possible) with the issue of REIT units and to otherwise ensure at all times that each holder of a particular number of REIT units holds
an equal number of Finance Trust units, including participating in and cooperating with any public or private distribution of Stapled Units
by, among other things, signing prospectuses or other offering documents.
In the event that the REIT issues additional REIT units, pursuant to the Support Agreement, the REIT and Finance Trust will co-ordinate
so as to ensure that each subscriber receives both REIT units and Finance Trust units, which shall trade together as Stapled Units. Prior
to such event, the REIT shall provide notice to Finance Trust to cause Finance Trust to issue and deliver the requisite number of Finance
Trust units to be received by and issued to, or to the order of, each subscriber as the REIT directs. In consideration of the issuance and
delivery of each such Finance Trust unit, the REIT (on behalf of the purchaser) or the purchaser, as the case may be, shall pay (or
arrange for the payment of) a purchase price equal to the fair market value (as determined by Finance Trust in consultation with the
REIT) of each such Finance Trust unit at the time of such issuance. The remainder of the subscription price for Stapled Units shall be
allocated to the issuance of REIT units by the REIT.
(d) Short form base shelf prospectus:
On April 30, 2015, the Trusts filed a short form base shelf prospectus, qualifying the Trusts to offer and issue Stapled Units and the REIT
to offer and issue the following securities: (i) preferred units; (ii) unsecured debt securities; (iii) subscription receipts exchangeable for
Stapled Units and/or other securities of the REIT; (iv) warrants exercisable to acquire Stapled Units and/or other securities of the REIT;
and (v) securities comprised of more than one of Stapled Units, preferred units, debt securities, subscription receipts and/or warrants
offered together as a unit, or any combination thereof having an offer price of up to $2,000,000 in aggregate (or the equivalent thereof,
at the date of issue, in any other currency or currencies, as the case may be) at any time during the 25-month period that the short form
base shelf prospectus (including any amendments) remains valid. As at December 31, 2015, $200,000 of Senior Debentures have been
issued under the short form base shelf prospectus.
(e) Normal course issuer bid:
On June 4, 2015, the Trusts received approval from the TSX for the renewal of its normal course issuer bid (“NCIB”), allowing the Trusts
to purchase for cancellation up to a maximum of 5,000,000 Stapled Units on the open market until the earlier of June 8, 2016 or the date
on which the Trusts have purchased the maximum number of Stapled Units permitted under the NCIB. During the year ended December
31, 2015, the Trusts purchased and cancelled 179,400 Stapled Units at a weighted average price of $21.94 per unit, for a total cost of
$3,937. During the year ended December 31, 2014, under a previous NCIB, the Trusts purchased and cancelled 67,300 Stapled Units
at a weighted average price of $21.58 per unit, for a total cost of $1,452.
33
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
18. Accumulated other comprehensive income:
Balance as at January 1, 2014
Transfer of realized loss on cash flow hedges to net income
Unrealized gain on translation of U.S. denominated foreign operation
Balance as at December 31, 2014
Transfer of realized loss on cash flow hedges to net income
Unrealized gain on translation of U.S. denominated foreign operation
Balance as at December 31, 2015
19. Rentals from investment properties:
Rental income
Straight-lining of contractual rent
Rent amortization of tenant inducements
Operating Leases:
Cash flow
Foreign
hedges
operations
Total
$
(768)
$
29,359
$
28,591
395
-
(373)
31
-
90,140
119,499
395
90,140
119,126
-
31
-
(342)
$
227,430
346,929
$
227,430
346,587
$
2015
2014
$
$
1,174,591
15,823
(2,100)
1,188,314
$
1,213,351
16,177
(1,725)
1,227,803
$
The REIT leases its investment properties under operating leases (note 2(f)). The future minimum lease payments under non-cancellable
leases are as follows:
December 31
2015
December 31
2014
$
$
689,438
2,439,767
4,265,096
7,394,301
677,137
2,389,763
4,294,296
7,361,196
$
$
Less than 1 year
Between 1 and 5 years
More than 5 years
34
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
20. Finance cost - operations:
Contractual interest on mortgages payable
Contractual interest on debentures payable
Effective interest rate accretion
Bank interest and charges
Exchangeable unit distributions
Capitalized interest*
2015
2014
$
$
204,568
64,715
(4,337)
7,568
22,496
295,010
-
295,010
228,807
68,077
(4,304)
9,545
23,162
325,287
(1,332)
323,955
$
$
*
Capitalized interest is determined using the REIT’s weighted average rate of borrowings, excluding any borrowings specifically for properties under development (December
31, 2014 – 4.79%). No capitalized interest was recorded for the year ended December 31, 2015.
21. Gain (loss) on change in fair value:
Gain (loss) on fair value of convertible debentures
Gain (loss) on fair value of exchangeable units
Gain on derivative instruments
Note
11(c)
16
22. Supplemental cash flow information:
The change in other non-cash operating items are as follows:
Straight-lining of contractual rent
Prepaid expenses and sundry assets
Accounts receivable
Accounts payable and accrued liabilities
2015
2014
$
8,084
$
(1,559)
27,995
(6,859)
161
36,240
$
389
(8,029)
$
2015
2014
$
(19,047)
$
(24,304)
(1,411)
(2,423)
27,405
6,526
3,134
(17,178)
$
4,524
$
(31,822)
35
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
22. Supplemental cash flow information (continued):
The following non-cash amounts have been excluded from operating, investing and financing activities in the combined statements of cash
flows:
Non-cash distributions to unitholders in the form of DRIP units
Non-cash conversion of convertible debentures
(Increase) decrease in accounts payable on redevelopment
Capitalized interest
Non-cash adjustment to proceeds on options exercised
Non-cash release of mortgage payable on disposition of investment properties
Increase in accounts payable included in finance cost - operations
Mortgages receivable from the sale of investment properties
Exchangeable units exchanged for Stapled Units
Acquisition of investment property through assumption of mortgage payable, net of
mark-to-market adjustment
23. Capital risk management:
The REIT’s primary objectives when managing capital are:
Note
17(b)
11(c)
20
2015
2014
$
105,422
5
(2,514)
-
378
(77,295)
(4,841)
37,135
-
$
85,358
16
3,922
1,332
1,127
(325,975)
(2,020)
69,981
17,181
45,246
-
(a)
to provide unitholders with stable and growing distributions generated by revenue it derives from investments in real estate assets; and
(b)
to maximize unit value through the ongoing active management of the REIT’s assets, the acquisition of additional properties and the
development and construction of projects which are pre-leased to creditworthy tenants.
The REIT considers its capital to be its unitholders’ equity, exchangeable units, mortgages payable, debentures payable, loan payable and
bank indebtedness. As long as the REIT complies with its investment and debt restrictions set out in its Declaration of Trust, it is free to
determine the appropriate level of capital in context with its cash flow requirements, overall business risks and potential business opportunities.
As a result of this, the REIT will make adjustments to its capital based on its investment strategies and changes in economic conditions.
The REIT’s level of indebtedness is subject to the limitations set out in its Declaration of Trust. The REIT is limited to a total indebtedness to
total assets ratio of 65% (for this purpose “indebtedness” excludes, among other things, Convertible Debentures, and U.S. Holdco notes
payable to Finance Trust). As at December 31, 2015, this ratio was 44.4% (December 31, 2014 - 44.4%). Management uses this ratio as a
key indicator in managing the REIT’s capital.
In addition to the above key ratio, the REIT’s general operating facilities (note 14) and debentures payable (note 11) collectively have the
following covenants calculated as defined within these agreements:
(a) Maximum indebtedness to gross book value
(b) Minimum interest coverage ratio
(c) Minimum unitholders' equity
(d) Maximum secured indebtedness to gross book value
(e) Minimum fixed charge coverage ratio
(f) Minimum adjusted unencumbered investment properties ratio
Covenant
2015
2014
65%
1.65 : 1
$3,000,000
40%
1.50 : 1
1.40 : 1
48.4%
2.84 : 1
44.4%
2.65 : 1
$6,824,920
36.4%
$6,527,668
N/A
1.78 : 1
1.77 : 1
N/A
N/A
Certain of the REIT’s mortgage providers also have minimum limits on debt-to-service coverage ratios ranging from 1.10 to 1.50 as at
December 31, 2015 and December 31, 2014. The REIT monitors these ratios and is in compliance with such external requirements.
36
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
24. Risk management:
(a) Credit risk:
The REIT is exposed to credit risk in the event that borrowers default on the repayment of the amounts owing to the REIT. Management
mitigates this risk by ensuring adequate security has been provided in support of mortgages receivable.
The REIT is exposed to credit risk as an owner of investment properties in that tenants may become unable to pay the contracted rent.
Management mitigates this risk by carrying out appropriate credit checks and related due diligence on significant tenants. Management
has diversified the REIT’s holdings so that it owns several categories of properties and acquires investment properties throughout
Canada and the United States.
In addition, management ensures that no tenant or related group of tenants, other than investment grade tenants, account for a
significant portion of the REIT’s cash flow. The only tenants which individually account for more than 5% of the rentals from investment
properties of the REIT are Encana Corporation and Bell Canada. Both of these companies have a public debt rating that is rated with
at least a BBB Stable rating by a recognized rating agency.
The REIT’s exposure to credit risk is as follows:
Mortgages receivable
Accounts receivable
(b)
Liquidity risk:
Note
6
8
December 31
2015
December 31
2014
$
$
103,353
14,686
118,039
79,922
12,263
92,185
$
$
The Trusts are subject to liquidity risk whereby it may not be able to refinance or pay its debt obligations when they become due.
The Trusts manage liquidity risk by:
• Assuring appropriate lines of credit available are available. As at December 31, 2015 the combined amounts available under its
general operating facilities is $434,806 (note 14);
• Maintaining a large unencumbered asset pool. As at December 31, 2015, there are 85 unencumbered properties with a fair value
of approximately $2,064,000;
• Entering into long-term mortgages on most of the REIT’s properties, whereby a significant amount of principal has been repaid at
the time of maturity which enables the REIT to refinance the debt; and
•
Structuring its financing so as to stagger the maturities of its debt, thereby minimizing exposure to liquidity risk in any one year
(notes 10, 11 and 14).
37
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
24. Risk management (continued):
Management monitors its liquidity risk through review of financial covenants contained in general operating facilities, debt agreements
and in accordance with the REIT’s Declaration of Trust.
The Trusts’ liquidity risk is as follows:
Mortgages payable*
Debentures payable*
Loan payable*
Bank indebtedness*
Accounts payable and accrued liabilities
Note
2016
Thereafter
Total
10
11
13
14
15, 17(a)(ii)
$
$
$
381,144
255,000
55,717
-
164,832
856,693
4,146,848
1,296,548
-
321,033
7,404
5,771,833
4,527,992
1,551,548
55,717
321,033
172,236
6,628,526
$
$
$
* Amounts in the above table only include the principal amount for each debt obligation.
(c) Market risk:
The Trusts are subject to currency risk and interest rate risk. The Trusts’ objective is to manage and control market risk exposure
within acceptable parameters, while optimizing the return on risk.
(i) Currency risk:
A portion of the REIT’s properties are located in the United States, resulting in the REIT being subject to foreign currency fluctuations
which may impact its financial position and results. In order to mitigate the risk, the REIT’s debt on these properties is also held in
U.S. dollars to act as a natural hedge.
A $0.10 weakening of the U.S. dollar against the average Canadian dollar exchange rate of $1.28 for the year ended December 31,
2015 (December 31, 2014 - $1.10) as well as the Canadian dollar exchange rate as at December 31, 2015 of $1.38 (December 31,
2014 - $1.16) would have decreased other comprehensive income (loss) by approximately $101,900 (December 31, 2014 - $86,600)
and decreased net income by approximately $7,100 (December 31, 2014 - $9,300). This analysis assumes that all other variables,
in particular interest rates, remain constant (a $0.10 weakening of the Canadian dollar against the U.S. dollar at December 31, 2014
would have had the equal but opposite effect).
(ii)
Interest rate risk:
The Trusts are exposed to interest rate risk on its borrowings. It minimizes this risk by obtaining long-term fixed interest rate debt. At
December 31, 2015, the percentage of fixed rate debt to total debt was 86.8% (December 31, 2014 - 96.4%). Therefore, a change in
interest rates at the reporting date would not have a material impact on net income as the majority of the Trust’s borrowings are
through fixed rate instruments.
The bank indebtedness is subject to variable interest rates. An increase in interest rates of 100 basis points for the year ended
December 31, 2015 would have decreased net income by approximately $1,800 (December 31, 2014 - $1,300). This analysis
assumes that all other variables, in particular foreign exchange rates, remain constant.
38
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
24. Risk management (continued):
The floating rate senior debentures are subject to variable interest rates. An increase in interest rates of 100 basis points for the year
ended December 31, 2015 would have decreased net income by approximately $2,900 (December 31, 2014 - $600). This analysis
assumes that all other variables, in particular foreign exchange rates, remain constant.
The floating rate mortgages payable are subject to variable interest rates. An increase in interest rates of 100 basis points for the
year ended December 31, 2015 would have decreased net income by approximately $500 (December 31, 2014 - nil). This analysis
assumes that all other variables, in particular foreign exchange rates, remain constant.
(d) Fair values:
(i)
Financial assets and liabilities carried at amortized cost:
The fair values of the Trusts’ accounts receivable, cash and cash equivalents, bank indebtedness and accounts payable and
accrued liabilities approximate their carrying amounts due to the relatively short periods to maturity of these financial instruments.
The fair value of the mortgages receivable has been determined by discounting the cash flows of these financial obligations using
year-end market rates for debt of similar terms and credit risks. Based on these assumptions, the fair value of mortgages receivable
at December 31, 2015 has been estimated at $105,183 (December 31, 2014 - $82,065) compared with the carrying value of
$103,353 (December 31, 2014 - $79,922).
The fair value of the mortgages payable has been determined by discounting the cash flows of these financial obligations using
year-end market rates for debt of similar terms and credit risks. Based on these assumptions, the fair value of mortgages payable
at December 31, 2015 has been estimated at $4,726,118 (December 31, 2014 - $4,566,432) compared with the carrying value of
$4,537,278 (December 31, 2014 - $4,318,136).
The fair value of the Senior Debentures payable has been measured based on the ask price of each series of Senior Debenture
similar terms and credit risks. Based on these assumptions, the fair value of the Senior Debentures payable at December 31,
2015 has been estimated at $1,351,590 (December 31, 2014 - $1,349,227) compared with the carrying value of $1,297,420
(December 31, 2014 - $1,274,400).
The fair value of the loan payable to ECHO approximates the carrying value as the loan payable was repaid in February 2016.
(ii) Assets and Liabilities carried at fair value:
Assets and liabilities measured at fair value in the combined statements of financial position, or disclosed in the notes to the
financial statements, are categorized using a fair value hierarchy that reflects the significance of the inputs used in determining
the fair values:
39
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
24. Risk management (continued):
•
•
•
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2: inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as
prices) or indirectly (i.e. derived from prices); and
Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
December 31, 2015
Note
Level 1
Level 2
Level 3
Total
Assets measured at fair value
Investment properties
Properties under development
Assets for which fair values are disclosed
Mortgages receivable
Liabilities measured at fair value
Convertible debentures
Exchangeable units
Liabilities for which fair values are disclosed
Mortgages payable
Senior debentures
3
4
$
-
-
$
-
-
$
12,576,075
97,504
$
12,576,075
97,504
24(d)(i)
11
24(d)(i)
24(d)(i)
-
-
(253,349)
(334,110)
-
-
(587,459)
-
-
-
-
-
-
-
105,183
105,183
12,778,762
12,778,762
-
-
(253,349)
(334,110)
(4,726,118)
(1,351,590)
(6,077,708)
(4,726,118)
(1,351,590)
(6,665,167)
$
(587,459)
$
-
$
6,701,054
$
6,113,595
December 31, 2014
Note
Level 1
Level 2
Level 3
Total
Assets measured at fair value
Investment properties
Properties under development
Assets for which fair values are disclosed
Mortgages receivable
Liabilities measured at fair value
Convertible debentures
Exchangeable units
Derivative instruments
Liabilities for which fair values are disclosed
Mortgages payable
Senior debentures
3
4
$
-
-
$
-
-
$
12,116,983
105,006
$
12,116,983
105,006
-
-
(261,438)
(362,105)
-
-
-
(623,543)
-
-
-
-
(146)
-
-
(146)
82,065
12,304,054
82,065
12,304,054
-
-
-
(261,438)
(362,105)
(146)
(4,566,432)
(1,349,227)
(5,915,659)
(4,566,432)
(1,349,227)
(6,539,348)
$
(623,543)
$
(146)
$
6,388,395
$
5,764,706
24(d)(i)
11
16
24(d)(i)
24(d)(i)
40
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
25. Related party transactions:
Effective July 1, 2013, the REIT entered into an agreement with the former property manager of the REIT for it to provide specified services
to the REIT including the cost sharing of premises, certain personnel, equipment and support systems, as well as additional services to be
agreed upon from time to time. The agreement will continue until terminated by either party in accordance with the terms of the agreement.
During the year ended December 31, 2015, the REIT incurred costs of $1,515 (December 31, 2014 - $1,497) under this agreement.
The REIT leases space to companies partially owned by family members of the CEO. The rental income earned for the year ended December
31, 2015 is $1,609 (December 31, 2014 - $1,488).
These transactions are measured at the amount of consideration established and agreed to by the related parties.
The REIT has interests in various investment properties through joint arrangements and investments in associates. Generally, the REIT
provides asset and property management services to co-owners, partners and third parties for which it earns market-based fees. Transactions
subsequent to the formation of a co-ownership that are not contemplated by the co-ownership agreements are considered to be related party
transactions for financial statement purposes.
Key management personnel compensation:
Short-term employee salaries and benefits
Employee unit-based compensation
2015
2014
$
4,913
$
5,024
(1,038)
3,875
$
2,695
7,719
$
41
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
26. Segmented disclosures:
(i) Operating segments:
The Trusts have six operating segments as follows:
December 31, 2015
Office
Primaris
H&R
Retail
ECHO
Industrial Residential
Total
Number of investment properties
39
31
131
205
103
8
517
Real estate assets:
Investment properties
Properties under development
$
7,043,480
$
3,205,150
-
7,043,480
-
3,205,150
$
1,621,292
-
1,621,292
$
734,188
$
1,064,535
$
422,791
$
14,091,436
18,940
753,128
97,504
1,162,039
207,554
630,345
323,998
14,415,434
Less: assets classified as held for sale
Less: Trusts' proportionate share of real estate
assets relating to equity accounted investments
-
-
-
-
(3,000)
-
(3,000)
(557,500)
6,485,980
$
-
3,205,150
$
-
1,621,292
$
(753,128)
-
$
(220,673)
938,366
$
(207,554)
$
422,791
(1,738,855)
12,673,579
$
December 31, 2014
Office
Primaris
H&R
Retail
ECHO
Industrial
Residential
Number of investment properties
40
31
134
186
108
2
Total
501
Real estate assets:
Investment properties
Properties under development
Less: assets classified as held for sale
Less: Trusts' proportionate share of real estate
assets relating to equity accounted investments
$
6,884,729
$
3,227,350
$
1,546,968
$
528,291
$
1,315,600
$
51,794
$
13,554,732
-
-
6,884,729
3,227,350
-
1,546,968
12,952
541,243
105,006
1,420,606
93,395
145,189
211,353
13,766,085
-
-
-
-
(296,992)
-
(296,992)
(612,466)
6,272,263
$
-
3,227,350
$
-
1,546,968
$
(541,243)
-
$
-
1,123,614
$
(93,395)
51,794
$
(1,247,104)
$
12,221,989
42
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
26. Segmented disclosure (continued):
Property operating income by reportable segment for the year ended December 31, 2015 and December 31, 2014 is as follows:
Office*
Primaris
H&R
Retail
ECHO
Industrial
Residential
2015
December 31
Property operating income:
Rentals from investment properties
$
679,174
$
309,968
$
146,172
$
54,772
$
103,822
$
26,379
$
1,320,287
Property operating costs
(242,901)
436,273
(130,351)
179,617
(32,967)
113,205
(10,667)
44,105
(25,663)
78,159
(12,291)
14,088
(454,840)
865,447
Less: Trusts' proportionate share of property operating
income relating to equity accounted investments
(36,389)
-
-
(44,105)
(11,440)
-
(91,934)
$
399,884
$
179,617
$
113,205
$
-
$
66,719
$
14,088
$
773,513
Office*
Primaris
H&R
Retail
ECHO
Industrial
Residential
2014
December 31
Property operating income:
Rentals from investment properties
Property operating costs
$
668,300
$
314,485
$
136,765
$
41,000
$
171,100
$
703
$
1,332,353
(247,633)
420,667
(130,656)
183,829
(30,125)
106,640
(8,377)
32,623
(45,435)
125,665
(405)
298
(462,631)
869,722
Less: Trusts' proportionate share of property operating
income relating to equity accounted investments
(33,823)
-
-
(32,623)
-
-
(66,446)
$
386,844
$
183,829
$
106,640
$
-
$
125,665
$
298
$
803,276
*
Includes the Trusts’ head office and Finance Trust.
43
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
26. Segmented disclosure (continued):
(ii) Geographic segments:
The Trusts operate in Canada and the United States.
Investment properties and properties under development are attributed to countries based on the location of the properties.
Real estate assets:
Canada
United States
Less: assets classified as held for sale
Less: Trusts' proportionate share of investment properties and properties under development
relating to equity accounted investments
Rentals from investment properties:
Canada
United States
Less: Trusts' proportionate share of rentals relating to equity
accounted investments
December 31
December 31
2015
2014
$
10,098,153
4,317,281
14,415,434
(3,000)
$
10,611,527
3,154,558
13,766,085
(296,992)
(1,738,855)
12,673,579
$
(1,247,104)
12,221,989
$
2015
2014
$
989,525
$
1,062,386
330,762
1,320,287
269,967
1,332,353
(131,973)
(104,550)
$
1,188,314
$
1,227,803
44
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
27.
Income tax expense:
Income tax computed at the Canadian statutory rate of nil applicable to
the REIT for 2015 and 2014
Current U.S. income taxes
Deferred income taxes applicable to U.S. Holdco
Income tax expense in the determination of net income
2015
2014
$
-
$
-
2,341
920
32,617
34,958
$
43,704
44,624
$
The Tax Act contains legislation (the “SIFT Rules”) affecting the tax treatment of “specified investment flow-through” (“SIFT”) trusts. A SIFT
includes a publicly-traded trust. Under the SIFT Rules, distributions of certain income by a SIFT are not deductible in computing the SIFT’s
taxable income, and a SIFT is subject to tax on such income at a rate that is substantially equivalent to the general tax rate applicable to a
Canadian corporation. The SIFT Rules do not apply to a publicly-traded trust that qualifies as a real estate investment trust under the Tax
Act. The REIT completed the necessary tax restructuring to qualify as a real estate investment trust effective June 30, 2010.
The REIT has certain subsidiaries in the United States that are subject to tax on their taxable income at a rate of approximately 38%. The tax
effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
Deferred tax assets:
Net operating losses and deferred interest deductions
Accounts payable and accrued liabilities
Derivative instruments
Other assets
Deferred tax liabilities:
Investment properties
Equity accounted investments
December 31
December 31
2015
2014
$
84,889
2,146
$
95,483
2,101
-
938
87,973
254,178
23,453
277,631
56
218
97,858
218,397
9,325
227,722
Deferred tax liability
$
(189,658)
$
(129,864)
As at December 31, 2015, U.S. Holdco had accumulated net operating losses and deferred interest deductions available for carryforward for
U.S. income tax purposes of $228,687 (December 31, 2014 - $248,979). The net operating losses will expire between 2030 and 2032. The
deferred interest deductions and the deductible temporary differences do not generally expire under current tax legislation.
45
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Notes to Combined Financial Statements
(In thousands of Canadian dollars, except unit and per unit amounts)
Years ended December 31, 2015 and 2014
28. Commitments and contingencies:
(a)
In the normal course of operations, the REIT has issued letters of credit in connection with developments, financings, operations and
acquisitions. As at December 31, 2015, the REIT has outstanding letters of credit totalling $62,675 (December 31, 2014 - $55,857), including
$18,577 (December 31, 2014 - $17,781) which has been pledged as security for certain mortgages payable. The letters of credit are secured
in the same manner as the bank indebtedness (notes 14(a) and 14(b)).
(b) The REIT provides guarantees on behalf of third parties, including co-owners. As at December 31, 2015, the REIT issued guarantees
amounting to $269,899 (December 31, 2014 - $229,048), which expire in 2029 (December 31, 2014 - expire in 2022), relating to the co-
owner’s share of mortgage liability. In addition, the REIT continues to guarantee certain debt assumed by purchasers in connection with past
dispositions of properties, and will remain liable until such debts are extinguished or the lenders agree to release the REIT’s covenants. At
December 31, 2015, the estimated amount of debt subject to such guarantees, and therefore the maximum exposure to credit risk, is $146,541
(December 31, 2014 - $152,185) which expires between 2016 and 2020 (December 31, 2014 - expires between 2016 and 2020). There have
been no defaults by the primary obligor for debts on which the REIT has provided its guarantees, and as a result, no contingent loss on these
guarantees has been recognized in these combined financial statements.
Credit risks arise in the event that these parties default on repayment of their debt since they are guaranteed by the REIT. These credit risks
are mitigated as the REIT has recourse under these guarantees in the event of a default by the borrowers, in which case the REIT’s claim
would be against the underlying real estate investments.
(c) Under the construction facility agreement for the Long Island City, NY project, the REIT is committed to contribute an additional $64,374 U.S.
to the project prior to drawing on the facility. This committed contribution will be included in the equity accounted investments in associates
(note 5) when incurred. After these capital contributions have been made by the REIT, and the funds have been spent by the project, the
construction facility will be available to fund the remaining development costs.
(d) The REIT is involved in litigation and claims in relation to the investment properties that arise from time to time in the normal course of business.
In the opinion of management, any liability that may arise from such contingencies would not have a significant adverse effect on the combined
financial statements.
46
Corporate Information
H&R REIT Board of Trustees
Thomas J. Hofstedter (1), President and Chief Executive Officer, H&R Real Estate Investment Trust
Robert Dickson (1,2,3,4), Strategic financial consultant, marketing communications industry
Edward Gilbert (1,2,3,4), Chief Operating Officer, Firm Capital Mortgage Investment Trust
Laurence A. Lebovic (1,2, 3,4), Chief Executive Officer, Runnymede Development Corporation Ltd.
Ronald C. Rutman (1,2,3,4), Partner, Zeifman & Company, Chartered Accountants
H&R Finance Trust Board of Trustees
Thomas J. Hofstedter, President and Chief Executive Officer, H&R Real Estate Investment Trust
Shimshon (Stephen) Gross (2), President, LRG Holdings Inc.
Marvin Rubner (2), Manager and Founder, YAD Investments Limited.
Neil Sigler (2), Vice President, Gold Seal Management Inc.
(1) Investment Committee
(2) Audit Committee
(3) Compensation and Governance Committee
(4) Nominating Committee
Officers
Thomas J. Hofstedter, President and Chief Executive Officer
Larry Froom, Chief Financial Officer
Nathan Uhr, Chief Operating Officer (H&R REIT)
Pat Sullivan, Chief Operating Officer (Primaris)
Cheryl Fried, Executive Vice-President, Finance (H&R REIT)
Blair Kundell, Vice-President, Operations (H&R REIT)
Jason Birken, Vice-President, Finance (H&R REIT)
Auditors: KPMG LLP
Legal Counsel: Blake, Cassels & Graydon LLP
Taxability of Distributions: The 2015 distributions by H&R REIT were comprised of capital gains (14.0%), other
taxable income (38.1%), foreign non-business income (7.3%) and tax deferred return of capital (40.6%). The 2015
distributions by H&R Finance Trust were comprised of foreign non-business income (84.9%) and tax deferred return
of capital (15.1%). For a Canadian resident unitholder, only 55.3% of the 2015 distributions on a Stapled Unit are
subject to tax when considering these allocations and the non-taxable portion of the capital gains.
Plan Eligibility: RRSP, RRIF, DPSP, RESP, RDSP, TFSA
Stock Exchange Listing: Stapled Units and debentures of H&R are listed on the Toronto Stock Exchange under
the trading symbols HR.UN; HR.DB.D, HR.DB.E and HR.DB.H.
Unitholder Distribution Reinvestment Plan and Direct Unit Purchase Plan: Since January 2000, H&R
REIT has offered registered holders of its units resident in Canada the opportunity to participate in its Unitholder
Distribution Reinvestment Plan (the “DRIP”) and Direct Unit Purchase Plan. The DRIP allows participants to have
their monthly cash distributions of H&R REIT reinvested in additional Stapled Units of H&R at a 3% discount to the
weighted average price of the Stapled Units on the TSX for the five trading days (the “Average Market Price”)
immediately preceding the cash distribution date. The Direct Unit Purchase Plan allows participants to purchase
additional Stapled Units on a monthly basis at the Average Market Price subject to a minimum purchase of $250 per
month (up to a maximum of $13,500 per year) for each participant. For more information on the DRIP and/or the
Direct Unit Purchase Plan, please contact us by email through the “Contact Us” webpage of our website, or contact
our Registrar and Transfer Agent.
Registrar and Transfer Agent: CST Trust Company, P.O. Box 7010, Adelaide Street Postal Station, Toronto,
Ontario, Canada M5C 2W9 Telephone: 416-643-5500 within the Toronto area or 1-800-387-0825, Fax: 416-643-
5501, E-mail: inquiries@canstockta.com, Website: www.canstockta.com.
Contact Information: Investors, investment analysts and others seeking financial information should go to our
website at www.hr-reit.com, or e-mail info@hr-reit.com, or call 416-635-7520 and ask for Larry Froom, Chief Financial
Officer, or fax 416-398-0040, or write to H&R Real Estate Investment Trust, 3625 Dufferin Street, Suite 500, Toronto,
Ontario, Canada, M3K 1N4
H&R Real Estate Investment Trust and H&R Finance Trust
Tortuga Bay, Orlando Publix, Florida
Gotham Center, New York
www.HR-REIT.com