H&R Real Estate Investment Trust and H&R Finance Trust
2017 Annual Report
Including Combined MD&A and Financial Statements
The Bow, Calgary
Orchard Park, Kelowna
Airport Road, Brampton – Sleep Country
H&R Profile
H&R REIT is Canada’s largest diversified real estate investment trust with total assets of approximately
$14.6 billion at December 31, 2017. 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 45 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. $223.9
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
Alberta
25%
Other
Canadian
Provinces 10%
United
States
34%
Ontario
31%
Fair Value
by Type of Asset
Industrial,
7%
Office 47%
Retail 37%
Multi-family
9%
Primary Objectives
H&R strives to achieve two primary objectives: to maximize the value of units through active
management of H&R’s assets and to provide unitholders with stable and growing cash distributions
generated by revenues derived from a diversified portfolio of investment properties. 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 from a high quality portfolio. We achieve our primary objectives and mitigate risks through
long-term property leasing and financing, combined with conservative management of assets and
liabilities.
February 14, 2018
Fellow Unitholders,
As we report on our 2017 performance and look forward to 2018, we are pleased to provide an update on the
strides we have recently made to enhance the business of H&R REIT. We view these improvements in three
categories: 1) Governance; 2) Assets; and 3) Investment Profile.
Governance
The improvements we have made to our governance over the past five years are significant, and include adopting a
fully internalized management structure; adopting new board management policies including term limits; adding
three new trustees to our board; and undertaking a comprehensive review and reform of our executive
compensation program, with Willis Towers Watson providing independent advice on the design and governance of
the new program which came into effect in 2017. Following these improvements, we believe that we have adopted
best governance practices for H&R REIT. With management, trustees and their families owning more than $400
million of H&R units we have excellent alignment with investors.
Assets
We have continued to enhance the quality of the REIT’s assets, through acquisitions, developments and
dispositions. Notable acquisitions in recent years have included a series of large trophy office property
acquisitions, beginning in late 2011, including Hess Tower in Houston, Two Gotham in New York and Corus Quay
and The Atrium in Toronto. In 2013, we acquired Primaris REIT, one of the very few fully integrated enclosed
shopping centre platforms in Canada. Since late 2014, we have also created a residential apartment platform
acquiring more than 5,600 suites, primarily in Texas and Florida, operating under the Lantower Residential banner.
Our efforts to improve our asset base have not been limited to acquisitions. We have also undertaken value-
creating developments, including a number of U.S. gateway city multi-residential developments, as well as Toronto
industrial developments. The largest and most notable is our 50% interest in Jackson Park, a multi-residential
development in Long Island City, New York. This 1,871-suite development is nearing completion, with phased
occupancy commencing in the first quarter of 2018. We conservatively expect this project alone will have added
more than $1.00 to our net asset value per unit upon stabilization. We are confident that our other multi-residential
developments, while individually smaller in scale, spanning markets such as Miami, Seattle, Long Beach and San
Francisco Bay among others, will also result in positive contributions to our net asset value.
And lastly, as we have acquired and developed high-quality properties, we have also completed significant asset
sales, recycling more of our capital into our larger and core properties. We have sold more than $2.6 billion of
property over the past four years, including partial interests in our smaller and older Canadian industrial properties;
most of our U.S. industrial property portfolio; partial interests in several Primaris properties; and we are currently
negotiating to sell our U.S. $750 million U.S. retail portfolio.
We have executed these asset sales for a number of reasons. In some cases, we have pursued partial
dispositions, leveraging our management expertise to enhance returns through property management fees from our
joint venture partners, while also conservatively managing our risk exposures. In other cases, we have taken
advantage of strong property markets to sell some of the smaller and older properties that had been eclipsed in
quality and scale by subsequent acquisitions and developments. Some asset sales have reflected our desire to
streamline our portfolio to fewer, but larger focus areas, such as our decision to sell all of our U.S. industrial
properties and U.S. retail properties. Perhaps most importantly, as we have enhanced the quality of our portfolio
through capital recycling, we have done so in a gradual, conservative and measured manner, safeguarding the
stability of our capital structure and financial performance.
Investment Profile
This brings us to the third area of improvement: the profile of H&R REIT as an investment. While we operate the
business with a long-term perspective and will not allow short-term thinking to drive our decision making, there are
several areas where we are spending more time and effort to improve our profile with our unitholders. Some of
these initiatives coincide with our strategy, such as reducing leverage significantly over the past five years
consistent with investor preference, but also supportive of our strategy of increased investment in developments, as
well as cushioning against the potential for interest rates to be a headwind in the future.
As we look to improve our investment profile we continue to listen to our investors, as demonstrated by our “Say on
Pay” resolution, which 96% of unitholders supported at our last annual meeting. We have significantly improved our
disclosure and communications with unitholders, in an effort to help investors better understand and appreciate our
business, our strategy and the opportunity in our units. This quarter marks the seventh consecutive quarter where
we have held a conference call, we hosted our first two investor and analyst tours in Toronto and New York in the
fall, and we have enhanced the transparency of our financial reporting. We plan to continue to spend time working
with our investors to improve communication and disclosure.
Looking ahead, we see a number of positive factors that will contribute to our financial performance, including
development completions, rising rents and steady to rising occupancy. We are also pleased with our conservative
balance sheet, after a period of de-leveraging that muted FFO growth, and we plan to target maintaining leverage
in the 43% - 47% range. In the near term, we expect leverage to remain close to the bottom end of that range, with
the dispositions of our remaining U.S. industrial and U.S. retail properties, anticipated in the near future, expected
to generate roughly US$800 million of gross proceeds. We are actively pursuing reinvestment opportunities,
particularly in our Lantower Residential U.S. apartment platform. We are also buying back units regularly under our
normal course issuer bid, at significant discounts to our IFRS fair value, in efforts to minimize the impact of capital
recycling on FFO in the near term, and also to take advantage of the discount at which our units trade. However,
we expect the process of recycling this capital will have a modest negative impact on FFO growth in 2018, until sale
proceeds are reinvested.
After two years of relatively flat performance from our Primaris platform, reflecting the departure of Target, we
expect modest positive growth in FFO contribution for the full year 2018 as replacement tenants take occupancy,
despite the impact of Sears’ closures. The balance between Target replacement tenants and the impact of Sears
closures is tilted in our favour by the significantly higher rents generated by replacement tenants, as well as the
exceptionally low rents Sears paid (Target’s former rents were 50% higher). As we address the re-leasing of Sears
vacancies, we are encouraged by the stronger than expected tenant demand experienced, with 400,000 sq.ft. of
the 675,000 sq.ft. of total Sears vacancy under advanced leasing discussions. We expect Sears replacement
tenants to begin rent payments in 2019, supporting FFO growth, with an even greater positive impact in 2020.
We spent a considerable amount of time in 2017 reflecting on our business. Among the more notable conclusions
we reached was that we would focus on streamlining our property portfolio by narrowing our focus to fewer property
types, which led to our decisions to sell our U.S. industrial and U.S. retail property portfolios. We expect to
continue to evaluate all aspects of our business on an on-going basis, looking for ways we can 1) create value for
unitholders; 2) best position H&R REIT for long term success; and 3) enhance the profile of the REIT among
investors and analysts and bridging the gap between our trading price and our net asset value.
In our pursuit of continually improving H&R REIT, we remain focused on achieving the main goal we have pursued
throughout our history: To build a high quality portfolio of real estate, in order to deliver strong per unit performance
over the long term.
Our mandate for 2018 is clear: Continue to improve the quality and profile of our business, and invest time and
energy into improving our communication, disclosure and investor relations so that investors can better see the
opportunity we see in H&R REIT units.
Respectfully,
____________________________
Ronald C Rutman
Chairman
____________________________
Thomas J Hofstedter
President & Chief Executive Officer
COMBINED MANAGEMENT’S DISCUSSION
AND ANALYSIS OF H&R REAL ESTATE INVESTMENT
TRUST AND H&R FINANCE TRUST
For the Year ended December 31, 2017
Dated: February 14, 2018
TABLE OF CONTENTS
SECTION I ...................................................................................................................................................................................................................................................... 1
Basis Of Presentation .................................................................................................................................................................................................................................... 1
Forward-Looking Disclaimer .......................................................................................................................................................................................................................... 1
Non-Gaap Financial Measures ...................................................................................................................................................................................................................... 2
Overview ........................................................................................................................................................................................................................................................ 3
SECTION II ..................................................................................................................................................................................................................................................... 5
Selected Financial Information ....................................................................................................................................................................................................................... 5
Key Performance Drivers ................................................................................................................................................................................................................................ 7
Portfolio Overview ........................................................................................................................................................................................................................................... 7
Strategy Update ............................................................................................................................................................................................................................................ 10
Financial And Operating Highlights 2017 ..................................................................................................................................................................................................... 11
Summary Of Significant 2017 Activity .......................................................................................................................................................................................................... 11
SECTION III .................................................................................................................................................................................................................................................. 14
Assets ........................................................................................................................................................................................................................................................... 15
Liabilities And Unitholders’ Equity................................................................................................................................................................................................................ 21
Net Income, FFO And AFFO From Equity Accounted Investments ............................................................................................................................................................ 29
Other Income And Expense Items ............................................................................................................................................................................................................... 30
Funds From Operations And Adjusted Funds From Operations ................................................................................................................................................................. 33
Liquidity And Capital Resources .................................................................................................................................................................................................................. 36
Off-Balance Sheet Items .............................................................................................................................................................................................................................. 38
SECTION IV ................................................................................................................................................................................................................................................. 39
Critical Accounting Estimates And Judgments ............................................................................................................................................................................................ 39
New Standards And Interpretations Not Yet Adopted ................................................................................................................................................................................. 40
Disclosure Controls And Procedures And Internal Control Over Financial Reporting................................................................................................................................. 41
SECTION V .................................................................................................................................................................................................................................................. 42
Risks And Uncertainties ............................................................................................................................................................................................................................... 42
Outstanding Unit Data ................................................................................................................................................................................................................................. 49
Additional Information .................................................................................................................................................................................................................................. 49
Subsequent Events ...................................................................................................................................................................................................................................... 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
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 (“H&R”) and H&R Finance Trust (“Finance Trust” and together with H&R, the “Trusts”) for the year ended
December 31, 2017 includes material information up to February 14, 2018. Financial data for the years ended December 31, 2017 and 2016 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, 2017. The “Trusts’ Financial Statements” are defined to refer to the financial statements for the applicable period. 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.
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 H&R 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 H&R and Finance Trust have been combined in accordance with the accounting
principles applicable to both H&R and Finance Trust in accordance with IFRS, to reflect the financial position and results of H&R and Finance Trust on a
combined basis. This same decision permits H&R and Finance Trust to file one combined MD&A which has been done for the year ended December 31,
2017.
FORWARD-LOOKING DISCLAIMER
Certain information in this MD&A and accompanying letter to unitholders contain 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”, “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 including, the amount of distributions to unitholders, H&R’s intentions and
expectations regarding, and timing of, future U.S. industrial and U.S. retail dispositions, H&R’s targeted overall leverage, the contribution to FFO (as defined
below) of H&R’s capital recycling initiatives, H&R’s expectation with respect to the activities of H&R’s development properties, including redevelopment of
existing properties and building of new properties, the expected total cost and lease-up of Jackson Park, the contribution to net asset value from Jackson
Park, the first year’s property operating income from Jackson Park, the total cost, timing and expected financing of the Hercules Project, the expected
development of 2217 Bryan St. and the Koenig Project, the expected capital and tenant expenditures, including 160 Elgin St., Ottawa, ON, management’s
expectation relating to the opportunity to increase property operating income as a result of Sears’ departure and the growth in FFO from replacement
tenants in Sears vacancies, the timing of completion and occupancy of any leases relating to premises vacated by Target, contributions to FFO by new
tenants in former Target locations, that all necessary conditions will be met for the completion of the Reorganization, management’s belief that H&R has
sufficient funds for future commitments and management’s expectation to be able to meet all of the Trusts’ ongoing obligations and to finance short-term
development commitments through the Trusts’ general operating facilities and the adoption of new accounting policies. 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, uncertainties and other factors 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, performance or achievements of the Trusts to differ materially from the forward-looking statements contained
in this MD&A. Factors that could cause actual results, performance or achievements to differ materially from those expressed or implied by forward-looking
statements include, but not are limited to, 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. Additional risks and uncertainties include, among other things, risks related to: real property
ownership, credit risk and tenant concentration; lease rollover risk, interest and other debt-related risk; construction risks; currency risk; liquidity risk,
financing credit risk, cyber security risk, environmental risk; co-ownership interest in properties, joint arrangement risks; unit price risk; availability of cash
for distributions; ability to access capital markets; dilution; unitholder liability; redemption right risk; risks relating to debentures, tax risk and tax
consequences to U.S. holders. The Trusts caution that these lists of factors, risks and uncertainties are 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 H&R 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 H&R 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, assumes any responsibility for the
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H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
completeness of the information contained in H&R’s materials filed with the Canadian securities regulatory authorities or for any failure of H&R 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
H&R 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 14,
2018 and the Trusts, except as required by applicable Canadian 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 and the accompanying letter to unitholders, a number of
measures are presented that are not measures under generally accepted accounting principles (“GAAP”) in accordance with IFRS. 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.
Furthermore, 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.
(a) The Trusts’ proportionate share
The Trusts account for investments in joint ventures and associates as equity accounted investments in accordance with IFRS. The Trusts’
proportionate share is a non-GAAP measure that adjusts the Trusts’ Financial Statements to reflect H&R’s equity accounted investments and its
share of net income (loss) from equity accounted investments on a proportionately consolidated basis at H&R’s ownership percentage of the applicable
investment. Management believes this measure is important for investors as it is consistent with how the Trusts’ review and assess operating
performance of their entire portfolio. Throughout this MD&A, the balances at the Trusts’ proportionate share have been reconciled back to relevant
GAAP measures.
(b) Property operating income (cash basis)
Property operating income is the rental revenue generated from H&R’s investment properties, net of the property operating expenses incurred.
Property operating income (cash basis) is a non-GAAP measure which adjusts property operating income to exclude two non-cash items; straight-
lining of contractual rent and realty taxes accounted for under IFRS Interpretations Committee Interpretation 21, Levies (“IFRIC 21”), which relates to
the timing of the liability recognition for U.S. realty taxes. By excluding the impact of IFRIC 21, U.S. realty tax expenses are evenly matched with
realty tax recoveries received from tenants throughout the period. Management believes this non-GAAP measure is important for investors as it
adjusts property operating income for non-cash items which allows investors to better understand H&R’s operating performance and it is also used
as a key input in determining the value of investment properties. Refer to the “Property Operating Income” section in this MD&A for a reconciliation of
Property operating income to Property operating income (cash basis).
(c) Same-Asset property operating income and Same-Asset property operating income (cash basis)
Same-Asset property operating income and Same-Asset property operating income (cash basis) are non-GAAP financial measures used by H&R to
assess period-over-period performance for properties owned and operated since January 1, 2016. This typically excludes acquisitions, business
combinations, dispositions and transfers of properties under development to investment properties during the last two years (collectively,
“Transactions”). Management believes that these two measures are useful for investors in understanding period-over-period changes due to
occupancy, rental rates, realty taxes and operating costs, before evaluating the changes attributable to Transactions. Refer to the “Property Operating
Income” section in this MD&A for a reconciliation of Property operating income to Same-Asset property operating income and Same-Asset property
operating income (cash basis).
(d) Funds from operations (“FFO”) and Adjusted Funds from Operations (“AFFO”)
FFO and AFFO are non-GAAP financial measures widely used in the real estate industry as a measure of operating performance particularly by those
publicly traded entities that own and operate investment properties. The Trusts present their combined FFO and AFFO calculations in accordance
with the Real Property Association of Canada (REALpac) February 2017 White Paper on Funds From Operations and Adjusted Funds From
Operations for IFRS. 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. Management believes FFO to be a useful earnings measure for investors as it adjusts net income for
items 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
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H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
investment properties. AFFO is calculated by adjusting FFO for the following items: straight-lining of contractual rent, capital expenditures, tenant
expenditures and leasing costs. Although capital and tenant expenditures can vary from quarter to quarter due to tenant turnovers, vacancies and
the age of a property, the Trusts have elected to deduct actual capital and tenant expenditures in the period. This may differ from others in the
industry that deduct a normalized amount of capital and tenant expenditures, based on historical activity, in their AFFO calculation. 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. The Trusts’ method
of calculating FFO and AFFO may differ from other issuers’ calculations. FFO and AFFO should not be construed as an alternative to net income or
any other operating or liquidity measure prescribed under IFRS. Management uses FFO and AFFO to better understand and assess operating
performance since net income includes several non-cash items which management believes are not fully indicative of the Trusts’ performance. Refer
to the “Funds From Operations and Adjusted Funds From Operations” section of this MD&A for a reconciliation of Net income to FFO and AFFO.
(e)
Interest coverage ratio
The interest coverage ratio is a non-GAAP measure that is calculated by dividing the sum of: (i) property operating income (cash basis), (ii) finance
income and (iii) trust expenses (excluding unit-based compensation) by finance costs from operations (excluding effective interest rate accretion and
exchangeable unit distributions). This excludes other income, transaction costs, gain (loss) on sale of investments and unrealized gains (losses) that
may occur under IFRS. Management uses this ratio and believes it is useful for investors as it is an operational measure used to evaluate the Trusts’
ability to service the interest requirements of their outstanding debt. Interest coverage ratio is presented in the “Financial Highlights” and “Liabilities
and Unitholders’ Equity” sections of this MD&A.
(f) Debt to total assets at the Trusts’ proportionate share
H&R’s Declaration of Trust limits the indebtedness of H&R (subject to certain exceptions) to a maximum of 65% of the total assets of H&R, based on
the Trusts’ Financial Statements. The Trusts also present this ratio at the Trusts’ proportionate share which is a non-GAAP measure. Debt includes
mortgages payable, debentures payable and bank indebtedness. Management uses this ratio to determine the Trusts’ flexibility to incur additional
debt. Management believes this is useful for investors in order to assess the Trusts’ leverage and debt obligations. Refer to the “Financial Highlights”
and “Liabilities and Unitholders’ Equity” sections of this MD&A for debt to total assets per the Trusts’ Financial Statements and at the Trusts’
proportionate share.
(g) Payout ratio per Stapled Unit as a % of FFO
Payout Ratio per Stapled Unit as a % of FFO is a non-GAAP measure which assesses the Trusts’ ability to pay distributions and is calculated by
dividing distributions per Stapled Unit by FFO per Stapled Unit for the respective period. The Trusts use this ratio amongst other criteria to evaluate
the Trusts’ ability to maintain current distribution levels or increase future distributions as well as assess whether sufficient cash is being held back
for operational and capital expenditures. Refer to the “Financial Highlights” and “Funds From Operations and Adjusted Funds From Operations”
sections of this MD&A for the Trusts’ payout ratio per Stapled Unit as a % of FFO.
OVERVIEW
H&R is an unincorporated open-ended trust created by a declaration of trust (“H&R’s Declaration of Trust”) and governed by the laws of the Province of
Ontario. Unitholders are entitled to have their H&R 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 H&R’s information circular dated August 20, 2008, as an open-ended limited purpose unit trust pursuant to its declaration
of Trust (“Finance Trust’s Declaration of Trust”). Each issued and outstanding Finance Trust unit is “stapled” to a unit of H&R on a one-for-one basis such
that Finance Trust units and H&R 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 H&R 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” (as described below), in which case
Finance Trust units will cease to be listed on the TSX).
H&R has two primary objectives:
to maximize unit value through ongoing active management of H&R’s assets, acquisition of additional properties and the development and
construction of projects which are pre-leased to creditworthy tenants; and
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.
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H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
H&R’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.
H&R’s strategy to mitigate risk includes diversification both by asset class and geographic location. H&R invests in four real estate asset classes which
management views as comprising six separate operating segments. H&R invests in office, retail, industrial and residential properties and acquires
properties both in Canada and the United States. H&R’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 and Lantower Management Services LP,
both subsidiaries of H&R, (“H&R Retail”), and (iii) H&R’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. H&R’s residential segment operates
as Lantower Residential, a wholly-owned subsidiary of H&R, and focuses on acquiring and developing multi-family properties in the United States. H&R
therefore has six operating segments and management assesses the results of these operations separately.
The primary purpose of Finance Trust is to be a flow-through vehicle to allow H&R to indirectly access capital in a tax-efficient manner. 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 H&R. As at December 31,
2017, Finance Trust holds U.S. $223.9 million of aggregate principal amount of notes payable by U.S. Holdco (“U.S. Holdco Notes”) (December 31, 2016
– U.S. $220.5 million). Subject to cash flow requirements, Finance Trust intends to distribute to its unitholders, who are also unitholders of H&R, 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 net income (loss) on the H&R Financial Statements.
Mechanics of “Stapling” the Units of Finance Trust and H&R
Pursuant to the provisions of the Declarations of Trust for Finance Trust and H&R at all times each H&R unit must be ‘‘stapled’’ to a Finance Trust unit
(and each Finance Trust unit must be ‘‘stapled’’ to a H&R unit) unless there is an event of uncoupling. Any references in this MD&A to units should be
considered references to Stapled Units. As part of the Plan of Arrangement, H&R 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 H&R to perform its obligations pursuant to H&R’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 H&R to perform its obligations arising under any security issued by H&R
(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 H&R 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 H&R units and to otherwise ensure at all times that each holder of a particular number of H&R 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 H&R issues additional H&R units, pursuant to the Support Agreement, H&R and Finance Trust will coordinate so as to ensure that each
subscriber receives both H&R units and Finance Trust units, which shall trade together as Stapled Units. Prior to such event, H&R 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 H&R directs. In consideration of the issuance and delivery of each such Finance Trust unit, H&R (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 H&R) 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 H&R units by H&R. 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 H&R vote in favour of the uncoupling of units of Finance
Trust and units of H&R 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 H&R or U.S. Holdco or the taking of corporate
action by H&R or U.S. Holdco in furtherance of any such action or the admitting in writing by H&R 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 H&R and, unless an Event
of Uncoupling has occurred, the Stapled Units, on one or more stock exchanges in Canada.
Page 4 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
Investment Restrictions
Under Finance Trust’s 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.
Finance Trust’s 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
SELECTED FINANCIAL INFORMATION
Summary of Quarterly Results
The following tables summarize certain financial information of the Trusts per the Trusts’ Financial Statements for the quarters indicated below:
(in thousands of Canadian dollars)
Rentals from investment properties
Net income from equity accounted investments
Net income
Total comprehensive income (loss)
Rentals from investment properties
Net income (loss) from equity accounted investments
Net income
Total comprehensive income (loss)
Q4
2017
$298,042
118,337
325,213
335,466
Q4
2016
$305,500
82,176
140,616
180,987
Q3
2017
$289,568
3,072
78,784
(1,511)
Q3
2016
$297,258
4,758
113,865
139,798
Q2
2017
$286,987
26,280
153,070
104,181
Q2
2016
$289,835
(19,722)
104,079
88,387
Q1
2017
$293,857
19,718
110,803
98,462
Q1
2016
$303,418
(18,871)
30,185
(58,794)
Fluctuations between quarterly results are generally due to property acquisitions, dispositions, changes in foreign exchange rates and changes in the fair
value of real estate assets and financial instruments. From January 1, 2016 to December 31, 2017, H&R continued its strategy of redeploying capital by
selling certain investment properties and equity accounted investments for total proceeds of $1.2 billion and acquiring $915.1 million in new properties and
properties held for development. These acquisitions were primarily in the multi-family segment in the U.S. The proceeds from these net dispositions have
been used to reduce debt leading to a stronger balance sheet and accordingly, rentals from investment properties declined. Revenues may also have
significant fluctuations due to recoveries from tenants for changes to property operating costs depending on the timing of major maintenance project costs.
Net income from equity accounted investments increased by $115.3 million in Q4 2017 compared to Q3 2017 primarily due to the fair value adjustment on
real estate assets increasing by $117.6 million mainly due to the value of Jackson Park increasing by U.S. $98.7 million at H&R’s ownership interest. An
independent third party appraisal was obtained for this property in Q4 2017.
Net income increased by $246.4 million in Q4 2017 compared to Q3 2017 primarily as a result of an increase in net income from equity accounted
investments further explained above, a decrease in deferred income taxes and an increase in fair value adjustments on real estate assets.
Total comprehensive income (loss) increased by $337.0 million in Q4 2017 compared to Q3 2017 primarily due to the increase in net income previously
explained and a greater unrealized gain on translation of U.S. denominated foreign operations.
Page 5 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
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
Net income from equity accounted investments
Finance income
Net income
Total comprehensive income
Total assets
Total liabilities
Cash distributions per unit
FINANCIAL HIGHLIGHTS
(in thousands of Canadian dollars except per unit amounts)
Total assets
Debt to total assets per the Trusts’ Financial Statements(1)
Debt to total assets at the Trusts’ proportionate share(1)(3)
Unencumbered asset to unsecured debt coverage ratio(4)
Stapled Units outstanding
Exchangeable units outstanding
Year Ended
December 31,
2017
$1,168,454
167,407
4,999
667,870
536,598
14,558,863
7,379,100
$1.38
Year Ended
December 31,
2016
$1,196,011
48,341
4,715
388,745
350,378
14,155,012
7,242,362
$1.35
Year Ended
December 31,
2015
$1,188,314
841
3,770
340,148
567,609
13,990,315
7,165,395
$1.35
December 31,
2017
$14,558,863
44.6%(2)
46.6%(2)
1.69
291,320
15,979
December 31,
2016
$14,155,012
44.3%
46.0%
1.76
285,280
16,564
Year ended
December 31,
2017
$1,168,454
741,441
720,572
167,407
667,870
560,090
304,462
1.84
1.38
75.0%
3.00
December 31,
2015
$13,990,315
46.2%
48.4%
1.38
279,610
16,664
Year ended
December 31,
2016
$1,196,011
764,740
716,879
48,341
388,745
584,301
298,404
1.96
1.35
68.9%
2.81
Rentals from investment properties
Property operating income
Same-Asset property operating income (cash basis)(3)
Net income from equity accounted investments
Net income
FFO(3)
Weighted average number of basic Stapled Units for FFO(3)
FFO per basic Stapled Unit(3)
Distributions paid per Stapled Unit
Payout ratio per Stapled Unit as a % of FFO(3)
Interest coverage ratio(3)
Net income is reconciled to FFO which is reconciled to AFFO. See page 34.
Three months ended
December 31,
2017
Three months ended
December 31,
2016
$298,042
199,414
180,650
118,337
325,213
137,447
306,629
0.45
0.35
77.8%
2.99
$305,500
202,366
182,291
82,176
140,616
142,899
300,482
0.48
0.34
70.8%
2.90
(1)
(2)
(3)
(4)
Debt includes mortgages payable, debentures payable and bank indebtedness.
H&R had $115.1 million in restricted cash relating to Internal Revenue Code Section 1031 (“Section 1031”) U.S. property exchanges, at the Trusts’ proportionate share. These funds were
released in January 2018 and were used to repay bank indebtedness. Debt to total assets per the Trusts’ Financial Statements and at the Trusts’ proportionate share would have been
44.2% and 46.2%, respectively, as at December 31, 2017 if these funds were available in 2017.
These are non-GAAP measures. See the “Non-GAAP Financial Measures” section of this MD&A.
Unencumbered assets are investment properties and properties under development without encumbrances for mortgages or bank indebtedness. Unsecured debt includes senior
debentures and H&R’s unsecured bank facilities.
Page 6 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
KEY PERFORMANCE DRIVERS
The following table is presented at the Trusts’ proportionate share and includes investment properties classified as assets held for sale:
OPERATIONS(1)
Occupancy as at December 31
Occupancy – Same-Asset as at December 31(1)
Average contractual rent per sq.ft. for the year
ended December 31-Canadian properties(2)
Average contractual rent per sq.ft. for the year
ended December 31-U.S. properties (USD)(2)
Average remaining term to maturity of leases
as at December 31 (in years)
Average remaining term to maturity of mortgages
payable as at December 31 (in years)
Office
Primaris
97.0%
96.9%
98.3%
98.3%
$25.92
$26.12
$35.75
$35.07
11.8
12.6
5.0
5.2
92.6%(3)
87.4%
92.6%(3)
87.4%
$23.36
$23.83
N/A
N/A
4.9
4.6
4.2
4.3
H&R
Retail
97.4%
98.6%
97.4%
98.6%
$11.75
$11.70
$13.11
$13.25
6.1
7.1
5.0
5.8
ECHO
Industrial
Lantower
Residential
94.1%
94.3%
93.8%
94.2%
N/A
N/A
$15.17
$15.01
10.6
11.3
11.0
11.1
98.4%
99.8%
98.3%
99.7%
$6.65
$6.52
$3.54
$3.64
7.2
7.5
6.0
6.4
90.0%
93.1%
93.9%
94.5%
N/A
N/A
$15.99
$14.99
N/A
N/A
8.4
8.3
Total
95.6%
95.7%
96.5%
96.1%
$18.10
$18.32
$16.77
$14.79
9.1
9.5
5.6
5.7
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
(1)
(2)
(3)
Same-Asset refers to those properties owned by H&R for the two-year period ended December 31, 2017.
Excludes properties sold in their respective year.
Primaris Occupancy and Occupancy-Same Asset as at December 31, 2017 includes eight Sears’ store locations totalling 609,749 square feet which closed and became vacant in January
2018. Primaris Occupancy would have been 84.9% had these eight Sears store locations become vacant as at December 31, 2017.
PORTFOLIO OVERVIEW
The geographic diversification of the portfolio of properties in which the Trusts have an interest and their related square footage, are disclosed at the Trusts’
proportionate share as at December 31, 2017 in the tables below:
Number of Properties(1)
Office
Primaris
H&R Retail
ECHO(2)
Industrial
Lantower Residential(3)
Total
Ontario
20
6
35
-
39
Canada
Alberta
5
18
2
-
18
100
43
Square Feet (in thousands)
Canada
Office
Primaris
H&R Retail
ECHO(2)
Industrial
Lantower Residential(3)
Total
Ontario
6,416
2,096
1,773
-
4,941
-
15,226
Alberta
2,960
3,859
240
-
1,895
-
8,954
Other
4
7
7
-
30
48
Other
893
2,095
707
-
2,053
-
5,748
United States
7
-
79
227
6
17
336
United States
2,023
-
4,455
3,150
1,068
5,309
16,005
Total
36
31
123
227
93
17
527
Total
12,292
8,050
7,175
3,150
9,957
5,309
45,933
(1) H&R has one parcel of vacant land and ownership interests in three development projects which are not included in the table above.
(2) ECHO has five parcels of vacant land and three development projects which are not included in the table above.
(3) Lantower Residential’s properties contain 5,633 multi-family units.
Page 7 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
LEASE MATURITY PROFILE
The following tables disclose H&R’s leases expiring in Canada and the United States at the Trusts’ proportionate share, excluding Lantower Residential.
Canadian Portfolio:
LEASE EXPIRIES
2018
2019
2020
2021
2022
Office
Primaris
H&R Retail
Industrial
Total
Rent per
sq.ft. ($)
on expiry
21.83
Sq.ft.
1,413,967
21.12
1,019,904
22.08
19.51
24.35
901,755
691,401
743,612
Rent per
sq.ft. ($)
on expiry
17.13
21.17
21.65
26.94
23.65
Rent per
sq.ft. ($)
on expiry
11.02
Sq.ft.
350,124
10.29
1,120,477
15.36
12.99
725,664
276,949
14.50
1,147,156
Rent per
sq.ft. ($)
on expiry
3.81
6.40
8.49
5.83
6.82
Sq.ft.
2,196,755
3,558,560
1,954,782
1,962,612
2,660,322
Sq.ft.
159,696
900,090
98,095
530,249
117,867
Sq.ft.
272,968
518,089
229,268
464,013
651,687
2,136,025
21.95
4,770,639
21.29
1,805,997
11.70
3,620,370
6.66 12,333,031
Rent per
sq.ft. ($)
on expiry
15.15
13.76
16.50
18.44
16.16
15.70
Total % of each segment
20.8%
59.3%
66.4%
40.7%
41.2%
During the year ended December 31, 2017, H&R renewed and/or re-leased 994,580 square feet of its 2018 lease expiries reported as at December 31,
2016. Included in the Primaris 2018 lease expiries above are eight Sears’ stores locations totalling 609,749 square feet which closed and became vacant
in January 2018.
U.S. Portfolio(1):
LEASE EXPIRIES
2018
2019
2020
2021
2022
Office
H&R Retail
ECHO
Industrial
Total
Rent per
sq.ft. ($)
on expiry
-
-
-
-
Sq.ft.
219,707
418,227
111,158
284,494
71.76
1,213,323
71.76
2,246,909
Rent per
sq.ft. ($)
on expiry
10.54
11.19
38.36
12.88
11.32
12.75
Sq.ft.
-
-
-
-
563
563
Rent per
sq.ft. ($)
on expiry
10.71
13.58
7.74
17.41
16.35
11.88
Rent per
sq.ft. ($)
on expiry
3.78
-
-
2.14
4.94
Sq.ft.
542,057
525,892
471,823
767,782
1,432,228
2.86
3,739,782
35.0%
Rent per
sq.ft. ($)
on expiry
8.79
11.68
14.95
8.94
11.68
11.11
Sq.ft.
145,056
-
-
341,396
54,654
541,106
50.7%
Sq.ft.
177,294
107,665
360,665
141,892
163,688
951,204
30.2%
Total % of each segment
0.0%
50.4%
(1)
U.S. dollars.
During the year ended December 31, 2017, H&R renewed and/or re-leased 152,642 square feet of its 2018 lease expiries reported as at December 31,
2016.
Page 8 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
TOP TWENTY SOURCES OF REVENUE BY TENANT
The following table discloses H&R’s top twenty tenants at the Trusts’ proportionate share:
Tenant
% of rentals
from investment
properties(1)
Number of
locations
H&R owned
sq.ft. (in 000’s)
Average lease term
to maturity (in
years)(2)
Credit Ratings
(S&P)
Encana Corporation(3)
Bell Canada
Hess Corporation
New York City Department of Health
Giant Eagle, Inc.
Lowe's Companies, Inc.(4)
Canadian Tire Corporation(5)
TransCanada Pipelines Limited
Canadian Imperial Bank of Commerce
1.
2.
3.
4.
5.
6.
7.
8.
9.
10. Corus Entertainment Inc.
11. Telus Communications
12. Government of Ontario
13. Shell Oil Products
14. Toronto-Dominion Bank
15. Public Works and Government Services, Canada
16. Empire Company Limited(6)
17.
18. Royal Bank of Canada
19. Publix Super Markets, Inc.
20. Wal-Mart Stores, Inc.
Loblaw Companies Limited(7)
Total
11.8%
8.3%
5.2%
3.6%
3.5%
2.6%
2.5%
2.1%
1.7%
1.7%
1.5%
1.2%
1.2%
1.0%
0.9%
0.9%
0.9%
0.9%
0.8%
0.7%
53.0%
2
24
2
1
191
22
19
2
9
1
18
4
17
8
5
15
20
4
16
10
390
2,016
2,539
848
660
1,900
2,664
2,636
542
555
472
426
370
223
280
307
565
287
244
555
859
18,948
BBB Negative
BBB+ Stable
BBB- Stable
AA Stable
Not Rated
A- Stable
BBB+ Stable
A- Negative
A+ Stable
BB Stable
BBB+ Stable
A+ Stable
A+ Positive
AA- Stable
AAA Stable
BB+ Stable
BBB Stable
AA- Negative
Not Rated
AA Stable
20.2
7.6
(8)
12.9
12.7
3.2
7.9
12.1
6.4
15.2
5.9
2.5
4.5
8.9
4.4
7.3
8.7
6.6
8.5
5.6
11.1
(1) The percentage of rentals from investment properties is based on estimated annualized gross revenue excluding straight-lining of contractual rent, rent amortization of tenant inducements
and capital expenditure recoveries.
(2) Average lease term to maturity is weighted based on net rent.
(3) Encana Corporation has sublet 27 floors to Cenovus Energy at The Bow located in Calgary, AB. Encana Corporation’s lease obligations expire on May 13, 2038.
(4) Lowe’s Companies, Inc. includes Rona.
(5) Canadian Tire Corporation includes Canadian Tire, Mark’s, Sport Chek, Atmosphere and Sports Experts.
(6) Empire Company Limited includes Sobeys, Sobey’s Liquor, Safeway and Lawtons Drugs.
(7) Loblaw Companies Limited includes Loblaw, No Frills and Shoppers Drug Mart.
(8) Due to the confidentiality under the tenant’s lease, the term is not disclosed.
Page 9 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
All Store Sales
(in thousands of Canadian dollars)
Rolling 12 month ended December 31
Same Store Sales
(per square foot)
Rolling 12 month ended December 31
2016
% Change
2017
$86,340
121,296
26,662
80,876
53,280
50,572
$87,874
113,645
25,269
77,355
56,263
55,125
167,793
166,362
84,789
71,857
94,301
87,527
70,615
96,936
104,257
105,982
81,109
46,079
31,365
112,683
96,237
81,410
49,122
29,729
109,822
100,791
$1,309,496
$1,313,827
(1.7%)
6.7
5.5
4.6
(5.3)
(8.3)
0.9
(3.1)
1.8
(2.7)
(1.6)
(0.4)
(6.2)
5.5
2.6
(4.5)
(0.3%)
2017
$526
2016
$510
689
455
537
482
394
699
624
669
461
413
560
497
474
621
499
683
443
525
507
421
691
617
635
464
407
563
509
486
614
497
$545
$542
% Change
3.1%
0.9
2.7
2.3
(4.9)
(6.4)
1.2
1.1
5.4
(0.6)
1.5
(0.5)
(2.4)
(2.5)
1.1
0.4
0.6%
Primaris Enclosed Shopping Centres
Cataraqui Town Centre(1)
Dufferin Mall
Grant Park(1)
Kildonan Place(1)
McAllister Place(1)
Medicine Hat Mall
Orchard Park Shopping Centre
Park Place Shopping Centre
Peter Pond Mall
Place d’Orleans(1)
Place du Royaume(1)
Regent Mall(1)
Sherwood Park Mall
St. Albert Centre
Stone Road Mall
Sunridge Mall
Total(2)(3)
(1) All store sales and same-store sales have been reported as if Primaris owned 100% of Cataraqui Town Centre, Grant Park, Kildonan Place, McAllister Place, Place d’Orleans, Place du
Royaume and Regent Mall for the entire rolling 12 months ended December 31, 2017 and 2016.
(2) The total same-store sales figures have been presented on a weighted average basis.
(3) Excludes Northland Village which is preparing for redevelopment.
STRATEGY UPDATE
H&R is pleased to report that it continued to make progress on its strategic initiatives, improving on three areas of focus: 1) governance, 2) assets, and 3)
its investment profile. These improvements add to the significant changes made over the past several years, and are discussed in greater detail in the letter
to unitholders accompanying H&R’s financial statements and management’s discussion and analysis.
Among the more notable conclusions reached in 2017 was a strategic decision to work towards streamlining H&R’s property portfolio by narrowing its focus
to fewer property types, which led to the plans to sell H&R’s U.S. industrial and retail property portfolios. Management expects that narrowing H&R’s focus
will streamline operations, while also making it easier for investors to understand and appreciate the business, strategy, and opportunity management and
the board of trustees see in H&R’s units.
In November 2017, H&R announced plans to sell all 79 of its wholly-owned U.S. retail properties and, together with its partners, 12 remaining
U.S. industrial properties. During Q4 2017, six U.S. industrial properties were sold for U.S. $106.1 million, at H&R’s ownership interest. The net proceeds
from these sales, after mortgage repayments, amounted to approximately U.S. $79.4 million, which were used to fund Lantower Residential acquisitions.
At December 31, 2017, H&R valued its U.S. retail assets (exclusive of its investment in ECHO) under International Financial Reporting Standards (“IFRS”)
at U.S. $752.7 million and its ownership interest of the six remaining U.S. industrial properties at approximately U.S. $45.2 million. H&R expects to achieve
aggregate sales proceeds approximating these values.
Management and the board of trustees of H&R will continue to evaluate all aspects of the business on an ongoing basis, looking for ways to create unitholder
value, best position the REIT for long-term success and enhance the profile of H&R among investors. In the pursuit of these objectives, H&R will continue
to be guided by its core goal of building a high quality portfolio of real estate in order to deliver strong per unit performance over the long-term.
Page 10 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
FINANCIAL AND OPERATING HIGHLIGHTS 2017
Financial Highlights
H&R continued to recycle capital by selling certain investment properties and equity accounted investments between January 1, 2016 and December 31,
2017 for total proceeds of $1.2 billion and acquiring $915.1 million in new properties during such period. These acquisitions were primarily in the multi-
family segment in the U.S.
Property operating income decreased by $23.3 million for the year ended December 31, 2017 compared to the respective 2016 period, primarily
due to net property dispositions discussed above.
Same-Asset property operating income (cash basis) increased by $3.7 million for the year ended December 31, 2017 compared to the respective
2016 period.
Net income increased by $279.1 million for the year ended December 31, 2017 compared to the respective 2016 period primarily due to lower
deferred income taxes, an increase in net income from equity accounted investments and fair value adjustments on financial instruments partially
offset by a decrease in fair value adjustments on real estate assets.
FFO was $1.84 per Stapled Unit for the year ended December 31, 2017 compared to $1.96 per Stapled Unit for the year ended December 31,
2016. The decrease is primarily due to $1.0 million received in lease settlement payments from Target in 2017 compared to $20.4 million
received in 2016 and the net property dispositions discussed above, partially offset by an $8.9 million realized gain on sale of investment in Q2
2017.
Although the net property dispositions have reduced overall rent, property operating income, net income before income taxes and FFO, the net proceeds
were used to repay debt and has strengthened H&R’s balance sheet. As at December 31, 2017, the debt to total asset ratio per the Trusts’ Financial
Statements was 44.6% compared to 46.2% as at December 31, 2015. The interest coverage ratio was 3.00 for the year ended December 31, 2017
compared to 2.81 for the year ended December 31, 2016.
Operating Highlights
Occupancy as at December 31, 2017 was 95.6% compared to 95.7% as at December 31, 2016. Commercial leases representing only 6.7% of total rentable
area will expire during 2018. H&R’s average remaining lease term to maturity as at December 31, 2017 was 9.1 years.
SUMMARY OF SIGNIFICANT 2017 ACTIVITY
Developments
H&R continues to make significant progress with its value creating development program.
The development of the 1,871 luxury residential rental units known as “Jackson Park” in Long Island City, NY, in which H&R has a 50% ownership interest,
is nearing completion. The project is on budget with approximately $197.8 million of costs remaining to complete of which will be funded from the
construction facility. To date, the first tower has obtained certificates of occupancy for 333 units. The leasing office for Jackson Park opened in November
2017 and lease-up is expected to occur throughout 2018 and 2019. To date, 125 leases have been entered into and 80 units are currently occupied. Part
of the amenity space is expected to open in April 2018. First occupancies in the second and third towers are expected to start during Q2 2018. The
property was appraised as of December 31, 2017 by a nationally recognized independent firm of appraisers for a value of U.S. $1.27 billion as compared
to total project costs at December 31, 2017 of U.S. $963.5 million resulting in a 2017 fair value increase of U.S. $197.4 million (December 31, 2016 - U.S.
$109.7 million). As H&R’s investment in Jackson Park is accounted for as an equity investment, this increase in fair value has been recorded as part of
net income from equity accounted investments and not as a fair value adjustment on real estate assets. Upon stabilized occupancy of all three towers,
the first year’s property operating income at H&R’s ownership interest is projected to be U.S. $36.9 million.
In January 2017, H&R acquired a mortgage receivable for U.S. $34.0 million secured against nine acres of land in Miami, FL. The urban in-fill development
site, known as “River Landing”, fronts immediately on the Miami River, adjacent to the Health District and in close proximity to downtown Miami, and is
zoned for a mixed-use development including approximately 480,000 square feet of retail and office space and over 500 multi-family units. As at December
31, 2017, the mortgage receivable outstanding was U.S. $67.1 million.
In Q2 2017, the development of two industrial properties in the Airport Road Business Park in Brampton, ON reached substantial completion and were
transferred from properties under development to investment properties. Each of these properties were pre-leased for 15 years to Solutions 2 Go Inc. and
Sleep Country Canada. The net leasable area of the property leased to Solutions 2 Go Inc. is 215,020 square feet and the tenant’s lease commenced in
May 2017. The net leasable area of the property leased to Sleep Country Canada is 127,040 square feet and the tenant’s lease commenced in September
2017.
Page 11 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
H&R has a 31.7% non-managing interest in 38.4 acres of land located in Hercules, CA, adjacent to the San Pablo Bay, northeast of San Francisco, for the
future development of multi-family units (“Hercules Project”). This waterfront, multi-phase, master-planned, in-fill mixed-use development surrounds a
future intermodal transit centre, including train and ferry service, and is adjacent to an 11 acre waterfront future regional park. The initial investment to
purchase the land was approximately U.S. $10.0 million (at H&R’s ownership interest). As at December 31, 2017, H&R’s investment was U.S. $12.5
million. Phase 1 of the Hercules Project will consist of 172 multi-family units and construction will commence in May 2018. The total budget for this phase
is expected to be U.S. $78.1 million at the 100% level. Construction financing of approximately U.S. $50.0 million is expected to be secured in Q1 2018.
In July 2017, H&R acquired a 33.3% non-managing ownership interest in approximately 5.0 acres of land in Austin, TX (“Koenig Project”) for the future
development of 391 multi-family units with construction expected to commence mid-2018. This multi-residential development site is close to major
technology employers like Apple, IBM, Oracle, and Samsung, as well as the University of Texas at Austin and downtown Austin. As at December 31,
2017, H&R’s investment was approximately U.S. $5.6 million.
As at December 31, 2017, H&R has a mortgage receivable outstanding of U.S. $42.8 million secured against an office property currently under construction
and against an adjacent 4.8 acres of land located in Dallas’s downtown core (“2217 Bryan St.”). This project includes the re-development of a 93,000
square foot existing historical building into state-of-the-art office space. To date, approximately 63.0% has been pre-leased. The 4.8 acres of excess land
is well located in the downtown core, and is expected to be developed into a multi-family property.
Lantower Residential
In April 2017, Lantower Residential acquired 375 multi-family units at 14233 The Lakes Blvd., in Austin, TX (“NXNE”) at a purchase price, excluding
transaction costs, of approximately U.S. $51.9 million or approximately U.S. $138,400 per unit.
In May 2017, Lantower Residential purchased a property under development at 14301 N. Interstate 35 in Austin, TX (“Ambrosio”) which is located adjacent
to NXNE. Ambrosio was substantially completed and transferred to investment properties in November 2017. The property is comprised of 370 units and
the total cost was U.S. $52.8 million or approximately U.S. $142,000 per unit. NXNE and Ambrosio provide Lantower Residential with a significant presence
in the Tech Ridge submarket of Austin.
In September 2017, Lantower Residential sold 12510 South Green Dr. in Houston, TX (“Parc at South Green”) for U.S. $32.2 million which it had purchased
in November 2014 for U.S. $28.0 million.
In October 2017, Lantower Residential acquired 451 multi-family units at 1810 Sweetbroom Circle in Tampa, FL (“Cypress Creek”) at a purchase price,
excluding transaction costs, of approximately U.S. $78.9 million or approximately U.S. $174,900 per unit.
In November 2017, Lantower Residential acquired 282 multi-family units at 11660 Westwood Blvd., in Orlando, FL (“Grande Pines”) at a purchase price,
excluding transaction costs, of approximately U.S. $59.5 million or approximately U.S. $211,000 per unit.
In December 2017, Lantower Residential acquired 450 multi-family units at 10440 Sanderling Shores Dr., in Lutz, FL (“Brandon Crossroads”) at a purchase
price, excluding transaction costs, of approximately U.S. $94.0 million or approximately U.S. $208,900 per unit.
In December 2017, Lantower Residential acquired 301 multi-family units at 2600 Lake Ridge Rd., Lewisville, TX (“Legacy Lakes”) at a purchase price,
excluding transaction costs, of approximately U.S. $49.7 million or approximately U.S. $165,000 per unit.
As at December 31, 2017, Lantower Residential had a portfolio of 17 properties in the U.S. comprised of 5,633 multi-family units, with an average age of
7.3 years along with two properties currently under construction (Jackson Park and the Hercules Project) which will, when completed, comprise an
additional 990 multi-family units, at H&R’s ownership interest.
Primaris
The enclosed mall portfolio same store sales productivity increased to $545 per square foot for the 12-month period ending December 31, 2017 an increase
from the $542 per square foot during the prior year. Primaris continues to realize strong tenant demand having completed 164 new lease transactions
during 2017, which has driven the occupancy rate to 92.6%, a substantial increase from the 87.4% at the beginning of the year. Including tenants
committed, but not yet open and adjusting for the closure of eight Sears’ stores in January 2018, the occupancy rate would be 86.2%.
In January 2017, H&R sold a 50% non-managing interest in two enclosed shopping centres; Cataraqui Town Centre in Kingston, ON and Place du
Royaume in Chicoutimi, QC for $211.6 million. The purchaser assumed 50% of the existing financing on the properties of approximately $126.6 million.
Page 12 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
Target:
For the year ended December 31, 2017, H&R spent approximately $70.3 million in redeveloping the former Target Canada Co. (“Target”) stores. The
following table is a summary of H&R’s leasing progress on the former Target space:
Former Target Canada space
Backfill progress:
Committed space in occupancy
Committed space not yet in occupancy
Conditional agreements
Advanced discussions
Total backfill progress
Space currently being marketed
Total gross leasable area (“GLA”) upon completion of redevelopment
Expected GLA to be converted to common area
Space for demolition/potential redevelopment
Total
Square Feet at
100%
1,062,676
Square Feet at
H&R’s Ownership
Interest
774,035
Annual Base Rent at
H&R’s Ownership
Interest
($ Millions)
$4.0
549,695
91,743
59,872
93,095
794,405
40,854
835,259
169,793
57,624
1,062,676
392,913
49,438
52,217
85,595
580,163
22,370
602,533
142,690
28,812
774,035
6.8
0.7
0.9
1.4
9.8
0.4
$10.2
N/A
N/A
H&R expects leases for most of the remaining space will be entered into by Q2 2018, with occupancy occurring between Q1 2018 and Q3 2020.
Sears:
Total Sears basic rent, at H&R’s ownership interest, amounted to $2.3 million which equates to an average net rent of $3.47 per square foot. At less than
0.4% of annualized gross revenue, management expects that Sears’ departure provides an opportunity to increase net operating income through
replacement of an unproductive anchor tenant paying rents well below market rates with tenants that will generate increased rent and traffic to the
properties. While disruptive in the short term, management is confident that the replacement of Sears will enhance the profile of these properties and
create value for unitholders.
The Trusts’ Internal Reorganization
On October 19, 2017, the Trusts announced a proposed internal reorganization (the “Reorganization”) intended to continue the benefits of the existing
Stapled Unit structure that has been in place since 2008. Joint meetings of Unitholders were held on December 7, 2017 to approve the Reorganization.
The Unitholders approved the proposed Reorganization, with approximately 99.8% of the Unitholders of each of H&R and Finance Trust, respectively,
voting in favour of the Reorganization.
On December 14, 2017, the Trusts received a final order from the Court of Queen’s Bench of Alberta approving the Reorganization. As a result of certain
considerations, including the enactment of the U.S. federal income tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (“U.S. Tax
Reform”), H&R has decided not to consummate the Reorganization in its original form as it has concluded that the Stapled Unit structure with H&R Finance
Trust is no longer necessary. Accordingly, H&R is in the process of seeking the necessary approvals to implement a modified Reorganization in 2018 with
the effect of unwinding the Stapled Unit structure.
Debt and Liquidity Highlights
During 2017, H&R issued the following debentures:
Senior Debentures
Series L Senior Debentures(1)
Series M Senior Debentures
Series N Senior Debentures
Maturity
May 6, 2022
July 23, 2019
January 30, 2024
Contractual
Interest Rate
2.92%
(2)
3.37%
Principal
Amount
$125,000
150,000
350,000
$625,000
(1)
(2)
In November 2016, H&R issued $200.0 million principal amount of 2.92% Series L senior debentures and the total principal amount outstanding is therefore $325.0 million.
Bears interest at a rate equal to 3-month Canadian Dealer Offered Rate plus 123 basis points.
Page 13 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
During 2017, H&R redeemed the following debentures:
Debentures
Series I Senior Debentures
Series B Senior Debentures
2018 Convertible Debentures (HR.DB.H)
Maturity/Redemption
January 23, 2017
February 3, 2017
September 21, 2017
Contractual
Interest Rate
2.54%
5.90%
5.40%
Principal
Amount
$60,000
115,000
74,394
$249,394
During 2017, H&R secured 10 new mortgages and increased an existing mortgage adding a total of $611.5 million of debt at a weighted average interest
rate of 3.6% for an average term of 8.6 years and repaid or had purchasers assume 12 mortgages totalling $579.7 million, which had a weighted average
interest rate of 4.4%. The weighted average interest rate on mortgages and debentures payable as at December 31, 2017 was 4.0% with an average term
to maturity of 4.5 years.
In March 2017, H&R, through Primaris, extended the maturity date of its $300.0 million secured operating facility which was originally due in December
2017 to July 2019. As at December 31, 2017, the Trusts had $42.3 million of cash on hand, $313.4 million available under its bank credit facilities and an
unencumbered property pool of approximately $3.6 billion. In January 2018, H&R obtained an additional $200.0 million unsecured revolving operating
facility maturing in January 2023.
SECTION III
FINANCIAL POSITION
(in thousands of Canadian dollars)
Assets
Real estate assets
Investment properties
Properties under development
Equity accounted investments
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
Bank indebtedness
Accounts payable and accrued liabilities
Unitholders’ equity
December 31,
December 31,
2017
2016
$13,074,123
$12,564,144
83,132
118,268
13,157,255
12,682,412
1,125,135
1,051,187
-
234,189
42,284
211,550
161,842
48,021
$14,558,863
$14,155,012
$3,958,631
$4,001,451
1,852,790
1,491,591
341,321
325,131
-
682,196
219,031
7,379,100
7,179,763
370,533
386,775
126,815
647,772
217,425
7,242,362
6,912,650
$14,558,863
$14,155,012
Page 14 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
ASSETS
Real Estate Assets:
2017 Acquisitions:
Property
14233 The Lakes Blvd., Austin, TX
14301 N. Interstate Hwy. 35, Austin, TX
1810 Sweetbroom Circle, Lutz, FL
11660 Westwood Blvd., Orlando, FL
10440 Sanderling Shores Dr., Tampa, FL
2600 Lake Ridge Rd., Lewisville, TX
Total
Year
Built
2016
2017
2010
2017
2016
2016
Segment
Date
Acquired
Number
of Units
Purchase
Price
($ Millions)(1)
Ownership
Interest
Acquired
Multi-family
Apr 7, 2017
Multi-family May 26, 2017
Multi-family
Oct 10, 2017
Multi-family
Nov 15, 2017
Multi-family
Dec 11, 2017
Multi-family
Dec 12, 2017
375
370
451
282
450
301
$69.5
71.3
98.6
76.2
121.3
64.1
100%
100%
100%
100%
100%
100%
2,229
$501.0
(1) U.S. acquisitions have been translated to Canadian dollars at the exchange rate as at the date acquired.
2016 Acquisitions:
Property
283009 Logistics Dr., Calgary, AB(1)
3767 Southwest Durham Dr., Durham, NC
4025 Huffines Blvd., Carrollton, TX
4504 W. Spruce St., Tampa, FL
327 W. Sunset Rd., San Antonio, TX
Total
Year
Built
2014
2014
2012
2014
2015
Segment
Date
Acquired
Number
of Units
Purchase Price
($ Millions)(2)
Industrial
Feb 23, 2016
Multi-family
Jun 22, 2016
Multi-family
Aug 15, 2016
Multi-family
Oct 19, 2016
Multi-family
Nov 30, 2016
N/A
322
312
300
312
$15.5
76.8
59.9
90.6
76.2
1,246
$319.0
Ownership
Interest
Acquired
50%
100%
100%
100%
100%
(1) Purchase price is stated at H&R’s ownership interest. The square footage at H&R’s ownership interest is 132,401.
(2) U.S. acquisitions have been translated to Canadian dollars at the exchange rate as at the date acquired.
2017 Dispositions:
Property
Place du Royaume, Chicoutimi, QC(1)(2)
Cataraqui Town Centre, Kingston, ON(1)(2)
914 E. North Ave., Belton, MO
2940 N. Broadway, Anderson, IN
8766 E. 96th St., Fishers, IN
2800 Skymark Ave., Mississauga, ON(3)
189/203 Queen St. N., Tilbury, ON(1)
Selling Price
($ Millions)(4)
Ownership
Interest Sold
Segment
Primaris
Primaris
Retail
Retail
Retail
Office
Date
Sold
Jan 16, 2017
Jan 16, 2017
Jan 27, 2017
Mar 31, 2017
Mar 31, 2017
Q2-Q3 2017
Square
Feet
301,859
310,311
88,248
$109.0
102.6
13.9
39,877
2.7
80,960
5.3
12,202
1.6
Industrial
Aug 21, 2017
85,068
3.8
50%
50%
100%
100%
100%
100%
50%
100%
12510 South Green Dr., Houston, TX(5)
Multi-family
Sep 27, 2017
Total
323,568
1,242,093
39.9
$278.8
(1) Square feet and selling price are based on the ownership interest disposed.
(2) H&R retained an ownership interest of 50% in these properties.
(3) As at December 31, 2017, all condominium units have been sold.
(4) U.S. dispositions have been translated to Canadian dollars at the exchange rate as at the date sold.
(5) Property consisted of 428 units.
Page 15 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
2016 Dispositions:
Property
2800 Skymark Ave., Mississauga, ON(1)
1929 N.E. Pine Island Rd., Cape Coral, FL
733 Pleasant Hill Rd., Lilburn, GA
1 Moyal Ct., Vaughan, ON(2)
150 New Jersey State Hwy Route 73, Voorhees, NJ
3712 Call Field Rd., Wichita Falls, TX
20600 Clark-Graham Ave., Montreal, QC(2)
110 S. Southwest Loop #323, Tyler, TX
Segment
Date
Sold
Square
Feet
Selling Price
($ Millions)(3)
Ownership
Interest Sold
Office
Q1-Q4 2016
H&R Retail
Mar 28, 2016
H&R Retail
Mar 30, 2016
Industrial
Apr 7, 2016
H&R Retail
Apr 11, 2016
H&R Retail
May 19, 2016
Industrial
Aug 31, 2016
H&R Retail
Sep 26, 2016
22,940
119,598
132,847
26,396
115,396
108,178
69,867
14,820
$3.2
24.1
6.0
3.0
24.8
14.7
4.2
11.2
257.4
$348.6
100%
100%
100%
50%
100%
100%
50%
100%
50%
450-1st St. S.W., (TransCanada Tower) Calgary, AB(2)(4)
Office
Nov 17, 2016
465,594
Total
1,075,636
(1) Sold as separate condominium units.
(2) Square feet and selling price are based on the ownership interest disposed.
(3) U.S. dispositions have been translated to Canadian dollars at the exchange rate as at the date sold.
(4) H&R retained an ownership interest of 50% in this property.
Change in Investment Properties:
The following table shows the change in investment properties from January 1, 2017 to December 31, 2017:
(in thousands of Canadian dollars)
Opening balance, beginning of year
Acquisitions, including transaction costs
Dispositions
Transfer from equity accounted investment
Operating capital
Capital expenditures
Leasing expenses and tenant inducements
Redevelopment (including capitalized interest)
Amortization of tenant inducements, straight-line rents and blend and extend rents included in revenue
Transfer of properties under development that have reached substantial completion to investment properties
Fair value adjustment on real estate assets
Change in foreign exchange
Closing balance, end of year
(1) The Trusts’ proportionate share is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.
Trusts'
Financial
Statements
Plus: equity
accounted
investments
Trusts'
proportionate
share(1)
$12,564,144
$1,046,539
$13,610,683
430,537
(70,062)
62,500
51,845
28,722
113,212
(1,478)
116,525
3,038
(224,860)
60,315
(146,197)
(62,500)
11,120
2,079
294
282
8,079
(14,963)
(58,617)
490,852
(216,259)
-
62,965
30,801
113,506
(1,196)
124,604
(11,925)
(283,477)
$13,074,123
$846,431
$13,920,554
Page 16 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
Investment Properties by Segment and Region:
The following tables disclose the fair values of the investment properties by operating segment and geographic location, excluding assets held for sale:
Segment (millions)
Office
Primaris
H&R Retail
ECHO
Industrial
Lantower Residential
Total
Trusts' Financial
Statements
December 31, 2017
Plus: equity
accounted
investments
December 31, 2016(1)
Trusts' proportionate
share(2)
Trusts' Financial
Statements
$6,562
2,946
1,400
-
979
1,187
$13,074
$ -
-
-
790
57
-
$847
$6,562
2,946
1,400
790
1,036
1,187
$6,433
2,943
1,547
-
886
755
$13,921
$12,564
(1)
(2)
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’ proportionate share is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.
Geographic Location (millions)
Ontario
Alberta
Other
Canada
United States
Total
Trusts' Financial
Statements
December 31, 2017
Plus: equity
accounted
investments
December 31, 2016(1)
Trusts' proportionate
share(2)
Trusts' Financial
Statements
$4,378
3,540
1,344
$9,262
3,812
$13,074
$ -
-
-
-
847
$847
$4,378
3,540
1,344
9,262
4,659
$13,921
$4,144
3,476
1,323
8,943
3,621
$12,564
(1)
(2)
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’ proportionate share is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.
H&R has utilized the following capitalization rates in estimating the fair value of the investment properties. The capitalization rates disclosed below are
reported by segment and geographic location at the Trusts’ proportionate share which differs from the Trusts’ Financial Statements.
Weighted Average Overall Capitalization Rates
Canada
United States
Office
Primaris
5.58%
5.36%
5.54%
-
H&R
Retail
6.38%
7.36%
ECHO
Industrial Residential
-
6.78%
5.85%
8.06%
-
5.12%
Total
5.63%
5.98%
December 31, 2017
Weighted Average Overall Capitalization Rates
Canada
United States
December 31, 2016
Office
Primaris
5.77%
5.39%
5.45%
-
H&R
Retail
6.55%
7.16%
ECHO
Industrial Residential
-
6.83%
6.20%
6.69%
-
5.33%
Total
5.75%
6.11%
Page 17 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
Properties under Development
Caledon Industrial Lands
H&R owns 144 acres of land held for development in Caledon, ON, which is expected to accommodate up to 2.7 million buildable square feet of industrial
space. This land is located adjacent to Highway 410 between Heartlake Road and Dixie Road. As at December 31, 2017, the carrying value of this property
under development was $83.1 million.
Development of Airport Road Project
In Q2 2017, the development of two industrial properties in the Airport Road Business Park in Brampton, ON reached substantial completion and were
transferred from properties under development to investment properties. Each of these properties were pre-leased for 15 years to Solutions 2 Go Inc. and
Sleep Country Canada. The net leasable area of the property leased to Solutions 2 Go Inc. is 215,020 square feet and the tenant’s lease commenced in
May 2017. The net leasable area of the property leased to Sleep Country Canada is 127,040 square feet and the tenant’s lease commenced in September
2017.
Ambrosio
In Q2 2017, H&R purchased a multi-family property under development in Austin, TX known as “Ambrosio”. This development was substantially completed
and transferred to investment properties in Q4 2017. The property is comprised of 370 multi-family units and the total cost was U.S. $52.8 million. Ambrosio
is located adjacent to H&R’s NXNE property, which will provide H&R with a significant presence in the Tech Ridge submarket of Austin.
Equity Accounted Investments
December 31, 2017
(in thousands of Canadian dollars)
ECHO
Jackson Park
Investment properties
Properties under development
Other assets
Cash and cash equivalents
Mortgages payable
Bank indebtedness
Other liabilities
$789,419
10,345
14,241
7,545
(180,253)
(166,930)
(37,061)
$ -
783,117
17,261
3,955
51,652
51,771
-
(18,297)
(248,105)
(32,306)
-
(635)
Six U.S.
Industrial
Properties
Hercules
Project
Koenig
Project
Scotia
Plaza(1)
Total(2)
December
31,
2016(2)
$57,012
$ -
$ -
$ -
$846,431
$1,046,539
-
15,410
6,600
62
268
-
-
(1)
95
399
-
-
-
-
105
882
-
-
815,472
510,527
83,416
64,820
41,000
34,303
(198,550)
(328,812)
(415,035)
(181,250)
(1,416)
(71,419)
(71,120)
Equity accounted investments
$437,306
$523,922
$141,503
$15,739
$7,094
($429)
$1,125,135
$1,051,187
(1)
(2)
Scotia Plaza includes 100 Yonge.
Each of these line items represent the Trusts’ proportionate share of equity accounted investments which are reconciled to the total equity accounted investments per the Trusts’ Financial
Statements. This is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.
ECHO
H&R owns a 33.6% interest in 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. ECHO reports its financial results to H&R one month in arrears. The above amounts include
ECHO’s financial information as at November 30, 2017 and November 30, 2016, respectively.
During the twelve months ended November 30, 2017, ECHO acquired 11 investment properties and three land parcels totalling 176,500 square feet for
an aggregate purchase price of U.S. $41.4 million, at H&R’s ownership interest. Major tenants at these properties include Acme Supermarket, Giant
Foods, Redner’s Supermarket, Publix Supermarket and Harris Teeter. During this period, Echo sold an investment property for gross proceeds of U.S.
$2.5 million, at H&R’s ownership interest.
During the twelve months ended November 30, 2016, ECHO acquired four investment properties, four properties under development and two land parcels
totaling 94,872 square feet for an aggregate purchase price of U.S. $16.4 million, at H&R’s ownership interest. Major tenants at these properties include
Giant Eagle, Inc. and Safeway Inc. During this period ECHO sold an investment property for gross proceeds of U.S. $1.7 million, at H&R’s ownership
interest.
Page 18 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
Long Island City Project-Jackson Park
The development of the 1,871 luxury residential rental units known as “Jackson Park” in Long Island City, NY, in which H&R has a 50% ownership interest,
is nearing completion. The project is on budget with approximately $197.8 million of costs remaining to complete of which will be funded from the
construction facility. To date, the first tower has obtained certificates of occupancy for 333 units. The leasing office for Jackson Park opened in November
2017 and lease-up is expected to occur throughout 2018 and 2019. To date, 125 leases have been entered into and 80 units are currently occupied. Part
of the amenity space is expected to open in April 2018. First occupancies in the second and third towers are expected to start during Q2 2018. The
property was appraised as of December 31, 2017 by a nationally recognized independent firm of appraisers for a value of U.S. $1.27 billion as compared
to total project costs at December 31, 2017 of U.S. $963.5 million resulting in a 2017 fair value increase of U.S. $197.4 million (December 31, 2016 - U.S.
$109.7 million). As H&R’s investment in Jackson Park is accounted for as an equity investment, this increase in fair value has been recorded as part of
net income from equity accounted investments and not as a fair value adjustment on real estate assets. Upon stabilized occupancy of all three towers,
the first year’s property operating income at H&R’s ownership interest is projected to be U.S. $36.9 million.
Six U.S. Industrial Properties
As at December 31, 2017, H&R owns a 50.5% interest in six industrial properties through a joint venture with its partners, all of which are located in the
United States (December 31, 2016 - 15 properties). During 2017, H&R sold its 50.5% ownership interest in the following properties:
Property(1)(2)
11 Cermak Blvd., Saint Peters, MO
827 Graham Dr., Fremont, OH
15573 Oakwood Dr., Romulus, MI
12090 Sage Point Ct., Reno, NV
930 Sherwin Pkwy., Buford, GA
One Nestle Crt., McDonough, GA
1915-B Fairview Dr., Dekalb, IL
13600 Independence Pkwy., Fort Worth, TX
950 Stelzer Rd., Columbus, OH
Total
Segment
Industrial
Industrial
Industrial
Industrial
Industrial
Industrial
Industrial
Industrial
Industrial
Date
Sold
Aug 21, 2017
Aug 21, 2017
Aug 21, 2017
Nov 30, 2017
Dec 14, 2017
Dec 14, 2017
Dec 14, 2017
Dec 14, 2017
Dec 14, 2017
Square
Feet
71,710
43,634
50,740
$5.9
2.9
4.2
348,450
18.7
231,679
15.8
395,195
25.9
434,774
35.1
264,747
25.9
242,785
14.5
2,083,714
$148.9
50.5%
50.5%
50.5%
50.5%
50.5%
50.5%
50.5%
50.5%
50.5%
Selling Price
($ Millions)
Ownership
Interest Sold
(1) Square feet and selling price are based on the ownership interest disposed.
(2) U.S. dispositions have been translated to Canadian dollars at the exchange rate as at the date sold.
As at December 31, 2017, this joint venture had cash on hand of $51.8 million and restricted cash of $51.5 million which is primarily due to Section 1031
exchanges and U.S. tax planning relating to the nine properties sold during 2017. In January 2018, these funds were disbursed to the respective partners.
In 2016, H&R sold its 50.5% ownership interest in one property located in Grove City, OH for $3.7 million.
Hercules Project
H&R has a 31.7% non-managing interest in 38.4 acres of land located in Hercules, CA, adjacent to the San Pablo Bay, northeast of San Francisco, for the
future development of multi-family units (“Hercules Project”). This waterfront, multi-phase, master-planned, in-fill mixed-use development surrounds a
future intermodal transit centre, including train and ferry service, and is adjacent to an 11 acre waterfront future regional park. The initial investment to
purchase the land was approximately U.S. $10.0 million (at H&R’s ownership interest). As at December 31, 2017, H&R’s investment was U.S. $12.5
million. Phase 1 of the Hercules Project will consist of 172 multi-family units and construction will commence in May 2018. The total budget for this phase
is expected to be U.S. $78.1 million at the 100% level. Construction financing of approximately U.S. $50.0 million is expected to be secured in Q1 2018.
Koenig Project
In July 2017, H&R acquired a 33.3% non-managing ownership interest in approximately 5.0 acres of land in Austin, TX (“Koenig Project”) for the future
development of 391 multi-family units with construction expected to commence mid-2018. This multi-residential development site is close to major
technology employers like Apple, IBM, Oracle, and Samsung, as well as the University of Texas at Austin and downtown Austin. As at December 31,
2017, H&R’s investment was approximately U.S. $5.6 million.
Page 19 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
F1RST Tower (formerly Telus Tower)
On January 1, 2017, H&R and its partner, Dream Office REIT, restructured their ownership agreement in F1RST Tower which resulted in the dissolution
of the partnership and the creation of a co-ownership arrangement. This resulted in a change in accounting presentation whereby this property, which was
previously treated as an equity accounted investment, is now being proportionately consolidated in the Trusts’ Financial Statements.
Scotia Plaza and 100 Yonge
On June 30, 2016, H&R sold its 33.3% freehold and leasehold interests in Scotia Plaza and 100 Yonge for approximately $438.3 million. The purchaser
assumed H&R’s share of the existing financing on the properties. H&R recorded a gain on sale, net of related costs, of $15.0 million.
Assets and Liabilities Classified as Held for Sale
As at December 31, 2017, there were no assets classified as held for sale. As at December 31, 2016, H&R had a 50% ownership interest in two Primaris
properties with a fair value of $211.6 million and liabilities of $126.8 million classified as held for sale. In January 2017, these assets were sold for $211.6
million and the purchaser assumed 50.0% of the existing financing on the properties of approximately $126.6 million.
Other Assets
(in thousands of Canadian dollars)
Mortgages receivable
Prepaid expenses and sundry assets
Restricted cash
Accounts receivable
Derivative instruments
December 31,
2017
December 31,
2016
$153,211
$43,817
33,554
25,311
15,739
6,374
92,975
11,275
12,999
776
$234,189
$161,842
Mortgages receivable increased by $109.4 million to $153.2 million as at December 31, 2017 primarily due to the new River Landing mortgage receivable
which had a balance outstanding of $84.6 million as at December 31, 2017 and an increase of $19.8 million relating to 2217 Bryan St. which had a balance
outstanding of $53.9 million as at December 31, 2017.
Prepaid expenses and sundry assets decreased by $59.4 million to $33.6 million as at December 31, 2017 primarily due to the sale of an investment
previously classified as held for trading.
Restricted cash increased by $14.0 million to $25.3 million as at December 31, 2017 primarily due to $13.3 million held in escrow from the sale of a U.S.
multi-family property in Q3 2017 due to a Section 1031 property exchange.
Page 20 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
LIABILITIES AND UNITHOLDERS’ EQUITY
Debt to total assets per the Trusts’ Financial Statements(1)
Debt to total assets at the Trusts’ proportionate share(1)(3)
Unencumbered assets(4) (in thousands of Canadian dollars)
Unsecured debt(4) (in thousands of Canadian dollars)
Unencumbered asset to unsecured debt coverage ratio(4)
Interest coverage ratio(3)
Weighted average interest rate of outstanding debt(5)
Weighted average term to maturity of outstanding debt (in years)(5)
December 31, 2017
December 31, 2016
44.6%(2)
46.6%(2)
$3,614,735
$2,144,992
1.69
3.00
4.0%
4.5
44.3%
46.0%
$2,968,480
$1,684,611
1.76
2.81
4.2%
4.6
(1) Debt includes mortgages payable, debentures payable and bank indebtedness.
(2) H&R had $115.1 million in restricted cash relating to Section 1031 U.S. property exchanges, at the Trusts’ proportionate share. These funds were released in January 2018 and were used
to repay bank indebtedness. Debt to total assets per the Trusts’ Financial Statements and at the Trusts’ proportionate share would have been 44.2% and 46.2%, respectively, as at
December 31, 2017 if these funds were available in 2017.
(3) These are non-GAAP measures. See the “Non-GAAP Financial Measures” section of this MD&A.
(4) Unencumbered assets are investment properties and properties under development without encumbrances for mortgages or bank indebtedness. Unsecured debt includes senior
debentures and H&R’s unsecured bank facilities.
(5) Outstanding debt includes mortgages and debentures payable.
Mortgages Payable
The following table shows the change in mortgages payable from January 1, 2017 to December 31, 2017:
(in thousands of Canadian dollars)
Opening balance, beginning of year
Principal repayments:
Scheduled amortization on mortgages
Mortgage repayments
New mortgages
Transfer from equity accounted investment
Effective interest rate accretion on mortgages
Change in foreign exchange rates
Closing balance, end of year
Trusts' Financial
Statements
Plus: Equity accounted
investments
Trusts' proportionate
share(1)
$4,001,451
$328,812
$4,330,263
(133,330)
(452,329)
588,094
39,854
(3,119)
(81,990)
$3,958,631
(20,837)
(52,059)
-
(39,854)
(271)
(17,241)
$198,550
(154,167)
(504,388)
588,094
-
(3,390)
(99,231)
$4,157,181
(1)
The Trusts’ proportionate share is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.
Page 21 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
The following table shows H&R’s mortgage maturity profile as at December 31, 2017:
MORTGAGES PAYABLE
2018
2019
2020
2021
2022
Thereafter
Periodic
Amortized
Principal
($000’s)
Principal on
Maturity
($000’s)
Total Principal
($000’s)
% of Total
Principal
Weighted
Average Interest
Rate on Maturity
$129,488
$135,308
$264,796
137,477
130,949
113,244
70,276
122,408
355,378
837,610
589,839
259,885
486,327
950,854
660,115
1,343,463
3,965,440
(6,809)
$3,958,631
5.0%
3.7%
4.4%
3.9%
4.0%
6.7
6.6
12.3
24.0
16.6
33.8
100%
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 costs 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, 2017 bear interest at a weighted average rate of 4.3% (December 31, 2016 - 4.4%) and mature between
2018 and 2033. The weighted average term to maturity of the Trusts’ mortgages is 5.4 years (December 31, 2016 - 5.5 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”.
Debentures Payable
The following table shows the change in debentures payable from January 1, 2017 to December 31, 2017:
Opening balance, beginning of year
Debenture issuances:
Series L Senior Debentures
Series M Senior Debentures
Series N Senior Debentures
Debenture redemptions:
Series I Senior Debentures
Series B Senior Debentures
2018 Convertible Debentures (HR.DB.H)
Conversion - 2020 Convertible Debentures
Gain on change in fair value
Change due to foreign exchange rates
Accretion adjustment
Closing balance, end of year
(in thousands of
Canadian dollars)
$ 1,491,591
122,445
149,461
347,393
(60,000)
(115,000)
(74,394)
(2)
(1,362)
(10,000)
2,658
$1,852,790
H&R has elected to measure the outstanding convertible debentures at fair value and uses the quoted prices on the TSX to determine the fair value of the
convertible debentures. The fluctuation in fair value between each period is recorded as a gain (loss) on change in fair value.
Page 22 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
Exchangeable Units
Certain of H&R’s subsidiaries have exchangeable units outstanding which are puttable instruments where H&R 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.
At the end of each period the fair value is determined by using the quoted prices of Stapled Units on the TSX as the exchangeable units are exchangeable
into Stapled Units at the option of the holder. Holders of all exchangeable units are entitled to receive the economic equivalent of distributions on a per
unit amount equal to a per Stapled Unit amount provided to holders of Stapled Units.
During the year ended December 31, 2017, 584,386 exchangeable units were exchanged for Stapled Units (December 31, 2016 - 100,000).
The following number of exchangeable units are issued and outstanding:
As at December 31, 2017
As at December 31, 2016
Number of
Exchangeable
Units
15,979,430
16,563,816
Quoted Price of
Stapled Units
Amounts per the
Trusts’ Financial
Statements
($000’s)
$21.36
$22.37
$341,321
$370,533
A subsidiary of H&R also holds 0.4 million Stapled Units to mirror certain of these exchangeable units. Therefore, when the approximately 0.4 million
exchangeable units are exchanged for Stapled Units, the number of outstanding Stapled Units will only increase by 15.5 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.
Deferred Tax Liability
H&R has certain subsidiaries in the United States that are subject to tax on their taxable income at a combined federal and state tax rate of approximately
37.5% in 2017 (December 31, 2016 - 37.5%). As a result of U.S. Tax Reform, deferred income taxes as at December 31, 2017 have been measured
based upon the newly enacted federal income tax rate. The income tax recovery for the year ended December 31, 2017 reflects the impact of U.S. Tax
Reform resulting from the reduction in the federal tax rate from 35% to 21% in 2018 (24% including state tax) and a reduction in certain deferred tax assets
related to deferred interest deductions.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
(in millions of Canadian dollars)
Deferred tax assets:
Net operating losses
Deferred interest deductions
Accounts payable and accrued liabilities
Other assets
Deferred liabilities:
Investment properties
Equity accounted investments
Deferred tax liability
December 31,
2017
December 31,
2016
$6.9
-
1.4
2.3
10.6
256.5
79.2
335.7
$17.2
$62.0
2.3
1.8
83.3
404.9
65.2
470.1
($325.1)
($386.8)
The deferred tax liability relating to the investment properties is derived on the basis that the U.S. investment properties will be sold at their current fair
value. The tax liability will only be realized upon an actual disposition. Deferred tax liability decreased by $61.7 million from $386.8 million as at December
Page 23 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
31, 2016 to $325.1 million as at December 31, 2017 primarily due to the enactment of U.S. Tax Reform on December 22, 2017. Refer to the discussion
under the heading “U.S. Tax Reform” in the “Risks and Uncertainties” section of this MD&A for further details on the implications to H&R.
Unitholders’ Equity
Unitholders’ equity increased by $267.1 million from $6,912.7 million as at December 31, 2016 to $7,179.8 million as at December 31, 2017. The increase
is primarily due to net income, proceeds from the issuance of Stapled Units under the DRIP and Unit Option Plan and exchangeable units converted into
Stapled Units, partially offset by distributions paid to unitholders and other comprehensive loss.
Other comprehensive loss consists of the unrealized loss on translation of U.S. denominated foreign operations and the transfer of realized losses on cash
flow hedges to net income. Fluctuations in other comprehensive loss is primarily due to changes in foreign exchange rates.
Normal Course Issuer Bid (“NCIB”)
On August 8, 2017, the Trusts received approval from the TSX for the renewal of their 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 August 14, 2018 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, 2017, the Trusts purchased and cancelled 755,420 Stapled Units
at a weighted average price of $21.10 per Stapled Unit, for a total cost of $15.9 million. During the year ended December 31, 2016, the Trusts purchased
and cancelled 141,800 Stapled Units at a weighted average price of $19.28 per Stapled Unit, for a total cost of $2.7 million.
Subsequent to December 31, 2017, the Trusts purchased and cancelled 2,945,120 Stapled Units at a weighted average price of $21.00 per unit, for a total
cost of $61.8 million.
RESULTS OF OPERATIONS
(in thousands of Canadian dollars)
Property operating income:
Rentals from investment properties
Property operating costs
Net income from equity accounted investments
Other income
Finance costs - operations
Finance income
Trust expenses
Fair value adjustments on financial instruments
Fair value adjustments on real estate assets
Loss on sale of real estate assets
Gain (loss) on foreign exchange
Transaction costs
Net income before income taxes
Income tax recovery (expense)
Net income
Other comprehensive income (loss):
Items that are or may be reclassified subsequently to net income
Unrealized gain (loss) on translation of U.S. denominated foreign operations
Transfer of realized loss on cash flow hedges to net income
Three months ended December 31
Year ended December 31
2017
2016
2017
2016
$298,042
$305,500
$1,168,454
$1,196,011
(98,628)
199,414
118,337
1,040
(69,003)
1,407
(4,383)
9,553
3,984
(70)
2,263
-
262,542
62,671
325,213
10,245
8
10,253
(103,134)
(427,013)
(431,271)
202,366
82,176
1,454
(69,861)
925
(7,014)
6,198
(32,488)
(7,816)
6,695
-
182,635
(42,019)
140,616
741,441
167,407
1,040
764,740
48,341
20,353
(270,358)
(287,325)
4,999
(18,111)
27,049
1,796
(7,729)
(17,903)
-
629,631
38,239
667,870
4,715
(29,852)
(33,830)
133,738
(8,167)
(8,944)
(13,483)
590,286
(201,541)
388,745
40,363
(131,302)
(38,397)
8
40,371
30
(131,272)
$536,598
30
(38,367)
$350,378
Total comprehensive income attributable to unitholders
$335,466
$180,987
Page 24 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
Net income before income taxes increased by $79.9 million for the three months ended December 31, 2017 compared to the three months ended December
31, 2016 primarily due to an increase in fair value adjustments on real estate assets and net income from equity accounted investments.
Net income before income taxes increased by $39.3 million for the year ended December 31, 2017 compared to the year ended December 31, 2016
primarily due to an increase in net income from equity accounted investments and fair value adjustments on financial instruments partially offset by a
decrease in fair value adjustments on real estate assets.
Income tax recovery increased by $104.7 million and $239.8 million for the three months and year ended December 31, 2017, respectively, compared to
the respective 2016 periods primarily due to the enactment of U.S. Tax Reform on December 22, 2017 which is further described in the “Risks and
Uncertainties” section of this MD&A and fair value increases in 2016 to multiple properties, including Two Gotham Center in Long Island City, NY and Hess
Tower in Houston, TX which were externally appraised.
PROPERTY OPERATING INCOME
Property operating income consists of rentals from investment properties less property operating costs. Management believes that property operating
income is a useful measure for investors in assessing the performance of H&R’s properties 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 (cash basis) adjusts property operating
income to exclude straight-lining of contractual rent and realty taxes accounted for under IFRIC 21. This non-GAAP measure adjusts property operating
income for non-cash items which allows investors to better understand H&R’s operating performance and is a key input in determining the value of the
portfolio. Property operating income (cash basis) at the Trusts’ proportionate share adjusts property operating income to exclude straight-lining of
contractual rent and realty taxes accounted for under IFRIC 21, and also adjusts property operating income to include the Trusts’ proportionate share of
property operating income (cash basis) from equity accounted investments. Management believes this non-GAAP measure is important for investors as
it is consistent with how the Trusts’ review and assess operating performance of their entire portfolio. “Same-Asset” refers to those properties owned by
H&R for the entire two-year period ended December 31, 2017. “Transactions” refers to property operating income earned related to properties acquired,
disposed of or transferred from properties under development to investment properties during the two-year period ended December 31, 2017.
Three months ended December 31, 2017
Three months ended December 31, 2016
(in thousands of Canadian dollars)
Same-Asset
Transactions
Total
Same-Asset
Transactions
Total
Rentals
Property operating costs
Property operating income
Straight-lining of contractual rent
Realty taxes in accordance with IFRIC 21
$281,202
$16,840
$298,042
$288,553
$16,947
$305,500
(92,733)
188,469
1,095
(8,914)
(5,895)
10,945
(201)
(1,783)
(98,628)
199,414
894
(10,697)
(96,482)
192,071
(1,061)
(8,719)
(6,652)
10,295
245
(855)
(103,134)
202,366
(816)
(9,574)
Property operating income (cash basis)(1)
180,650
8,961
189,611
182,291
9,685
191,976
Property operating income (cash basis) from equity
accounted investments(1)
Property operating income (cash basis) at the Trusts'
proportionate share(1)(2)
11,876
2,595
14,471
12,804
3,926
16,730
$192,526
$11,556
$204,082
$195,095
$13,611
$208,706
(1)
(2)
Property operating income (cash basis) is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.
The Trusts’ proportionate share is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.
Total property operating income decreased by $3.0 million for the three months ended December 31, 2017 compared to the three months ended December
31, 2016, primarily due to the strengthening of the Canadian dollar compared to the U.S. dollar. The average exchange rate for the three months ended
December 31, 2017 was $1.27 for each U.S. $1.00 (Q4 2016 - $1.32).
Same-Asset property operating income (cash basis) decreased by $1.6 million for the three months ended December 31, 2017 compared to the three
months ended December 31, 2016, primarily due to the strengthening of the Canadian dollar compared to the U.S. dollar. The average exchange rate for
the three months ended December 31, 2017 was $1.27 for each U.S. $1.00 (Q4 2016 - $1.32).
Property operating income (cash basis) from Transactions decreased by $0.7 million for the three months ended December 31, 2017 compared to the
three months ended December 31, 2016, primarily due to properties sold during the last two years. For a list of properties purchased and sold, please
refer to pages 15 and 16 of this MD&A.
Page 25 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
Refer to the “Segmented Information” section of this MD&A for further details on Same-Asset property operating income (cash basis), disclosed at the
Trusts’ proportionate share.
Year ended December 31, 2017
Year ended December 31, 2016
(in thousands of Canadian dollars)
Same-Asset
Transactions
Total
Same-Asset
Transactions
Total
Rentals
Property operating costs
Property operating income
Straight-lining of contractual rent
$1,113,300
$55,154
$1,168,454
$1,126,244
$69,767
$1,196,011
(400,083)
(26,930)
(427,013)
(403,537)
(27,734)
(431,271)
713,217
7,355
28,224
(537)
741,441
6,818
722,707
(5,828)
42,033
1,047
764,740
(4,781)
Property operating income (cash basis)(1)
720,572
27,687
748,259
716,879
43,080
759,959
Property operating income (cash basis) from equity
accounted investments(1)
Property operating income (cash basis) at the Trusts'
proportionate share(1)(2)
54,705
13,895
68,600
50,163
30,156
80,319
$775,277
$41,582
$816,859
$767,042
$73,236
$840,278
(1)
(2)
Property operating income (cash basis) is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.
The Trusts’ proportionate share is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.
Total property operating income decreased by $23.3 million for the year ended December 31, 2017 compared to the year ended December 31, 2016,
primarily due to properties sold during the last two years. For a list of properties sold, refer to pages 15 and 16 of this MD&A.
Same-Asset property operating income (cash basis) increased by $3.7 million for the year ended December 31, 2017 compared to the year ended
December 31, 2016, primarily due to contractual rental escalations at H&R’s office properties, partially offset by the strengthening of the Canadian dollar
compared to the U.S. dollar. The average exchange rate for the year ended December 31, 2017 was $1.30 (December 31, 2016 - $1.32).
Property operating income (cash basis) from Transactions decreased by $15.4 million for the year ended December 31, 2017 compared to the year ended
December 31, 2016, primarily due to properties sold during the last two years. For a list of properties purchased and sold, please refer to pages 15 and
16 of this MD&A.
Refer to the “Segmented Information” section of this MD&A for further details on Same-Asset property operating income (cash basis), disclosed at the
Trusts’ proportionate share.
SEGMENTED INFORMATION
H&R’s strategy to mitigate risk includes diversification both by asset class and geographic location.
Operating Segments:
The Trusts have six reportable operating segments (Office, which also includes the Trusts’ head office and Finance Trust), Primaris, H&R Retail, ECHO,
Industrial and Residential (operating as Lantower Residential)), in two geographic locations (Canada and the United States). The operating segments
derive their revenue primarily from rental income from leases. The 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”) of the Trusts. The CEO measures and evaluates the performance
of the Trusts based on property operating income and on a proportionately consolidated basis for the Trusts’ equity accounted investments. Further
disclosure of segmented information for property operating income can be found in the Trusts’ Financial Statements.
Page 26 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
Property operating income
Occupancy
Three months ended December 31
Year ended December 31
As at December 31
(in thousands of Canadian dollars)
Office(1)
Primaris
H&R Retail
Industrial
2017
2016
$101,370
$101,899
41,814
27,290
14,351
44,977
29,527
13,949
2017
$390,366
157,264
95,784
57,375
2016
$397,314
170,908
112,463
55,548
Lantower Residential
The Trusts' Financial Statements
14,589
199,414
12,014
202,366
40,652
741,441
28,507
764,740
2017
97.0%
92.6%
97.4%
98.2%
90.0%
95.6%
2016
96.9%
87.4%
98.6%
99.7%
93.1%
95.4%
Includes the Trusts’ head office.
(1)
Property Operating Income per the Trusts’ Financial Statements decreased by $3.0 million for the three months ended December 31, 2017 compared to
the respective 2016 period primarily due to the strengthening of the Canadian dollar compared to the U.S dollar. The average exchange rate for the three
months ended December 31, 2017 was $1.27 for each U.S. $1.00 (Q4 2016 - $1.32).
Property Operating Income per the Trusts’ Financial Statements decreased by $23.3 million for the year ended December 31, 2017 compared to the
respective 2016 period primarily due to properties sold across all segments throughout 2016 & 2017.
The following segmented information has been presented at the Trusts’ proportionate share. The Trusts’ proportionate share is a non-GAAP measure
defined in the “Non-GAAP Financial Measures” section of this MD&A.
Same-Asset property operating income (cash basis)(1)
Occupancy (same asset)
Three months ended December 31
Year ended December 31
As at December 31
(in thousands of Canadian dollars)
Office(2)
Primaris
H&R Retail
ECHO
Industrial
Lantower Residential
2017
$95,549
41,461
25,027
10,720
14,899
4,870
2016
2017
2016
$94,206
$383,507
$376,815
41,731
26,570
11,577
15,206
5,805
155,696
104,193
49,893
60,861
21,127
157,749
105,880
45,265
60,092
21,241
The Trusts' proportionate share (page 25-26)
$192,526
$195,095
$775,277
$767,042
(1)
(2)
Same-Asset property operating income (cash basis) is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.
Includes the Trusts’ head office.
2017
98.3%
92.6%
97.4%
93.8%
98.3%
93.9%
96.5%
2016
98.3%
87.4%
98.6%
94.2%
99.7%
94.5%
96.1%
Same-Asset property operating income (cash basis) from the Office segment increased by $1.3 million and $6.7 million, respectively, for the three months
and year ended December 31, 2017 compared to the respective 2016 periods primarily due to contractual rental escalations.
Same-Asset property operating income (cash basis) from the Primaris segment decreased by $0.3 million and $2.1 million, respectively, for the three
months and year ended December 31, 2017 compared to the respective 2016 periods primarily due to the closing of several large format stores including
Future Shop and Safeway previously at Garden City Square, along with several smaller tenant bankruptcies/restructurings. Included in Same-Asset
property operating income (cash basis) for the three months and year ended December 31, 2017 is $1.6 million (Q4 2016 - $0.2 million) and $3.3 million
(December 31, 2016 - $0.4 million), respectively, relating to rent from the former Target space.
Same-Asset property operating (cash basis) income from the H&R Retail segment decreased by $1.5 million and $1.7 million, respectively, for the three
months and year ended December 31, 2017 compared to the respective 2016 periods primarily due to the strengthening of the Canadian dollar compared
to the U.S dollar and Marsh Supermarkets, a former tenant at seven of H&R’s properties, filing for Chapter 11 bankruptcy protection in May 2017. The
average exchange rate for the three months ended December 31, 2017 was $1.27 for each U.S. $1.00 (Q4 2016 - $1.32). The average exchange rate for
the year ended December 31, 2017 was $1.30 for each U.S. $1.00 (December 31, 2016 - $1.32).
Same-Asset property operating income (cash basis) from the ECHO segment increased by $4.6 million for the year ended December 31, 2017 compared
to the respective 2016 period primarily due to ECHO receiving lease termination payments of $5.5 million at H&R’s ownership interest.
Same-Asset property operating income (cash basis) from the Lantower Residential segment decreased by $0.9 million and $0.1 million, respectively, for
the three months and year ended December 31, 2017 compared to the respective 2016 periods primarily due to one-time start-up costs relating to the
internalization of Lantower Residential’s property management of $0.5 million and $0.8 million for the three months and year ended December 31, 2017
Page 27 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
and the strengthening of the Canadian dollar compared to the U.S dollar. The average exchange rate for the three months ended December 31, 2017 was
$1.27 for each U.S. $1.00 (Q4 2016 - $1.32). The average exchange rate for the year ended December 31, 2017 was $1.30 for each U.S. $1.00 (December
31, 2016 - $1.32).
Geographic Locations:
The Trusts operate in two geographic locations: Canada and the United States.
Same-Asset property operating income (cash basis)(1)
Occupancy (same asset)
Three months ended December 31
Year ended December 31
As at December 31
(in thousands of Canadian dollars)
Ontario(2)
Alberta
Other Canada
Total – Canada
United States(2)
2017
$63,694
51,075
20,715
135,484
57,042
2016
2017
2016
$61,837
$249,821
$243,719
51,139
21,373
134,349
60,746
201,028
80,294
531,143
244,134
200,939
80,497
525,155
241,887
The Trusts' proportionate share (page 25-26)
$192,526
$195,095
$775,277
$767,042
(1)
(2)
Same-Asset property operating income (cash basis) is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.
Property operating income relating to corporate entities has been included in Ontario for Canadian properties and the United States for U.S. properties.
2017
96.2%
97.4%
95.9%
96.5%
96.6%
96.5%
2016
96.8%
93.2%
95.9%
95.5%
97.4%
96.1%
Same-Asset property operating income (cash basis) from Canada increased by $1.1 million and $6.0 million, respectively, for the three months and year
ended December 31, 2017 compared to the respective 2016 periods, primarily due to contractual rental escalations at H&R’s Toronto and Calgary office
properties.
Same-Asset property operating income (cash basis) from the U.S. decreased by $3.7 million for the three months ended December 31, 2017 compared to
the respective 2016 period primarily due to the strengthening of the Canadian dollar compared to the U.S dollar. The average exchange rate for the three
months ended December 31, 2017 was $1.27 for each U.S. $1.00 (Q4 2016 - $1.32).
Same-Asset property operating income (cash basis) from the U.S. increased by $2.2 million for the year ended December 31, 2017 compared to the
respective 2016 period primarily due to ECHO receiving lease termination payments of $5.5 million, at H&R’s ownership interest in Q3 2017, partially offset
by the strengthening of the Canadian dollar compared to the U.S. dollar. The average exchange rate for the year ended December 31, 2017 was $1.30
for each U.S. $1.00 (December 31, 2016 - $1.32).
The Trusts have provided the table below to disclose the United States region in U.S. dollars to eliminate the effect of fluctuations in foreign exchange.
The table below discloses Same-Asset property operating income (cash basis) at the Trusts’ proportionate share by operating segment, which is a non-
GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A:
United States:
(in thousands of U.S. dollars)
Office(2)
H&R Retail
ECHO
Industrial
Lantower Residential
U.S. total in U.S. dollars
Same-Asset property operating income (cash basis)(1)
Occupancy (same asset)
Three months ended December 31
Year ended December 31
As at December 31
2017
$17,905
13,843
8,476
911
3,842
2016
$17,470
14,452
8,770
930
4,398
2017
$72,194
57,269
38,379
3,701
16,252
2016
$71,336
57,818
34,292
3,710
16,092
$44,977
$46,020
$187,795
$183,248
2017
100.0%
97.4%
93.8%
100.0%
93.9%
96.6%
2016
100.0%
99.0%
94.2%
100.0%
94.5%
97.4%
(1) Same-Asset property operating income (cash basis) is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.
(2)
Includes the Trusts’ head office.
Same-Asset property operating income (cash basis) from the U.S. region decreased by U.S. $1.0 million for the three months ended December 31, 2017
compared to the respective 2016 period primarily due to Marsh Supermarkets, a former tenant at seven of H&R’s properties, filing for Chapter 11 bankruptcy
protection in May 2017, and one-time start-up costs of U.S. $0.4 million, relating to the internalization of Lantower Residential’s property management.
This was partially offset by contractual rent escalations across H&R’s U.S. Office properties.
Page 28 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
Same-Asset property operating income (cash basis) from the U.S. region increased by $4.5 million for the year ended December 31, 2017 compared to
the respective 2016 period primarily due to lease termination payments received by ECHO and contractual rent escalations across H&R’s U.S. Office
properties. This was partially offset by Marsh Supermarkets, a former tenant at seven of H&R’s properties, filing for Chapter 11 bankruptcy protection in
May 2017, and one-time start-up costs of U.S. $0.6 million, relating to the internalization of Lantower Residential’s property management.
NET INCOME, FFO AND AFFO FROM EQUITY ACCOUNTED INVESTMENTS(1)
The following table provides a breakdown of H&R’s net income from equity accounted investments which is further reconciled to FFO and AFFO from
equity accounted investments:
Three Months Ended December 31
Year ended December 31
(in thousands of Canadian dollars)
Rentals from investment properties
Property operating costs
Net income from equity accounted investments
Finance cost - operations
Finance income
Trust expenses
Fair value adjustments on financial instruments
Fair value adjustment on real estate assets
Gain (loss) on sale of real estate assets
Income tax expense
Non-controlling interest
Net income from equity accounted investments
Realty taxes in accordance with IFRIC 21
2017
$20,642
(4,576)
16,066
81
(4,332)
109
(565)
3,402
103,834
89
(61)
(286)
118,337
(1,306)
2016
$22,351
(4,008)
18,343
111
(4,511)
(18)
(382)
9,588
59,931
(571)
(145)
(170)
82,176
(1,306)
2017
88,458
(18,413)
70,045
587
(18,807)
403
(2,291)
4,222
114,996
(677)
(185)
(886)
167,407
-
Fair value adjustments on real estate assets and financial instruments
(107,236)
(69,519)
(119,218)
(Gain) loss on sale of real estate assets
Deferred income taxes expense
Incremental leasing costs
Notional interest capitalization(2)
FFO from equity accounted investments
Straight-lining of contractual rent
Capital expenditures
Leasing expenses and tenant inducements
Incremental leasing costs
AFFO from equity accounted investments
(89)
-
63
3,342
13,111
(289)
(3,016)
(1,787)
(63)
571
153
-
3,724
15,799
(307)
(2,744)
(318)
-
677
-
203
13,799
62,868
(1,445)
(11,120)
(2,079)
(203)
$7,956
$12,430
$48,021
$51,462
2016
$114,157
(33,061)
81,096
528
(22,341)
461
(1,611)
(1,039)
(22,489)
14,484
(290)
(458)
48,341
-
23,528
(14,484)
153
-
13,994
71,532
(777)
(12,307)
(6,986)
-
(1)
(2)
Each of these line items represent the Trusts’ proportionate share of equity accounted investments which are reconciled to net income from equity accounted investments per the Trusts’
Financial Statements, which is further reconciled to FFO and AFFO from equity accounted investments. These are non-GAAP measures defined in the “Non-GAAP Financial Measures”
section of this MD&A.
Represents an adjustment to add general or indirect interest incurred in respect of properties under development held in and through equity accounted investments.
Net income from equity accounted investments for the three months and year ended December 31, 2017 compared to the respective 2016 periods
increased by $36.2 million and $119.1 million, respectively, primarily due to the fair value adjustments on real estate assets. In Q4 2017, the value of
Jackson Park increased by U.S. $98.7 million at H&R’s ownership interest which was supported by an independent third party appraisal. For the year
ended December 31, 2017 compared to the respective 2016 period, the above noted increase was partially offset by the sale of Scotia Plaza and 100
Yonge in June 2016.
FFO from equity accounted investments for the three months ended December 31, 2017 compared to the respective 2016 period decreased by $2.7 million
primarily due to the sale of nine U.S. industrial properties throughout 2017 and $0.7 million of marketing expenses incurred in Q4 2017 relating to Jackson
Park.
Page 29 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
FFO from equity accounted investments for the year ended December 31, 2017 compared to the respective 2016 period decreased by $8.7 million primarily
due to the decreases explained above as well as the sale of Scotia Plaza and 100 Yonge in 2016 and the change in the legal structure of F1RST Tower
resulting in the property now being accounted for as a proportionately consolidated investment property in the Trusts’ Financial Statements effective
January 1, 2017. This was partially offset by ECHO receiving lease termination payments of $5.5 million at H&R’s ownership interest from four tenants
who terminated their leases in Q3 2017.
OTHER INCOME AND EXPENSE ITEMS
The other income and expense items section of this MD&A provides management’s commentary on the Results of Operations per the Trusts’ Financial
Statements.
Other Income
Three months ended December 31
Year ended December 31
(in thousands of Canadian dollars)
2017
2016
Change
2017
2016
Change
Other income
$1,040
$1,454
($414)
$1,040
$20,353
($19,313)
On January 15, 2015, Target Corporation announced plans to discontinue operating stores in Canada through its subsidiary, Target. As at December 31,
2016, Primaris had an interest in nine malls where 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 were guaranteed by Target Corporation, the U.S. parent of Target. In March 2016, Primaris entered into binding agreements with
Target and Target Corporation concluding the terms of settlement relating to the leases that were disclaimed pursuant to the Companies’ Creditors
Arrangement Act. The binding agreements were approved by the courts in June 2016. Distributions in respect of the settlement proceeds in the amount
of $1.0 million was received in 2017 (December 31, 2016 - $20.4 million).
Finance Costs
(in thousands of Canadian dollars)
Finance costs – operations:
Three months ended December 31
Year ended December 31
2017
2016
Change
2017
2016
Change
Contractual interest on mortgages payable
($43,083)
($46,964)
$3,881
($174,492)
($196,228)
$21,736
Contractual interest on debentures payable
(16,095)
(14,543)
Effective interest rate accretion
Bank interest and charges
Exchangeable unit distributions
Capitalized interest
Finance income
Fair value adjustments on financial instruments
(920)
(3,588)
(5,464)
401
(4,023)
(5,630)
(1,552)
(1,321)
435
166
(62,565)
(1,808)
(11,877)
(22,254)
(60,019)
2,595
(13,302)
(22,480)
(2,546)
(4,403)
1,425
226
(69,150)
(70,759)
1,609
(272,996)
(289,434)
16,438
147
898
(69,003)
(69,861)
1,407
9,553
925
6,198
(751)
858
482
2,638
2,109
(270,358)
(287,325)
4,999
4,715
3,355
27,049
(33,830)
529
16,967
284
60,879
($58,043)
($62,738)
$4,695
($238,310)
($316,440)
$78,130
The decrease in contractual interest on mortgages payable of $3.9 million and $21.7 million, respectively, for the three months and year ended December
31, 2017 compared to the respective 2016 periods is primarily due to the repayment of mortgages upon maturity or assumption of mortgages on sale.
The increase in contractual interest on debentures payable of $1.6 million and $2.5 million, respectively, for the three months and year ended December
31, 2017 compared to the respective 2016 periods is primarily due to the issuance of an aggregate of $825.0 million of Senior Debentures since November
2016. This was offset by the repayment of an aggregate of $504.4 million of senior and convertible debentures since July 2016.
The increase in fair value adjustments on financial instruments of $60.9 million for the year ended December 31, 2017 compared to the respective 2016
period is primarily due to the gain (loss) on fair value of exchangeable units whereby at the end of each period, the fair value is determined using the
quoted prices of Stapled Units on the TSX, as the exchangeable units are exchangeable into Stapled Units at the option of the holder. For the year ended
December 31, 2017, the change in fair value is based on the quoted price of Stapled Units which was $21.36 as at December 31, 2017 (December 31,
2016 - $22.37). For the year ended December 31, 2016, the change in fair value is based on the quoted price of Stapled Units which was $22.37 as at
December 31, 2016 (December 31, 2015 - $20.05). In addition, during the year ended December 31, 2017, H&R realized a gain of $8.8 million (December
31, 2016 - nil) on the sale of an investment previously classified as held for trading.
Page 30 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
Trust Expenses
Three months ended December 31
Year ended December 31
(in thousands of Canadian dollars)
2017
2016
Change
2017
2016
Change
Other expenses
Unit-based compensation
Trust expenses
($3,700)
($3,249)
($451)
($13,242)
($11,936)
($1,306)
(683)
(3,765)
3,082
(4,869)
(17,916)
13,047
($4,383)
($7,014)
$2,631
($18,111)
($29,852)
$11,741
Other expenses are primarily comprised of salaries, professional fees, trustee fees and corporate overhead expenses. Other expenses increased by $0.5
million for the three months ended December 31, 2017 compared to the respective 2016 period primarily due reorganization costs relating to the proposed
Reorganization. Other expenses increased by $1.3 million for the year ended December 31, 2017 compared to the respective 2016 period primarily due
to reorganization costs relating to the proposed Reorganization and an increase in salaries and corporate expenses relating to Lantower Residential.
Unit-based compensation is comprised of the following two compensation plans: the Unit Option Plan and the Incentive Unit Plan. Both plans are
considered to be cash-settled under IFRS 2, Share-based Payments and as a result, are measured at each reporting period and settlement date at their
fair value as defined by IFRS 2 based on the quoted prices of Stapled Units on the TSX. The fair value adjustment to unit-based compensation was $0.3
million and ($2.5 million), respectively, for the three months ended December 31, 2017 and 2016 and ($1.3 million) and ($12.7 million), respectively, for
the year ended December 31, 2017 and 2016.
Fair Value Adjustments on Real Estate Assets
Three months ended December 31
Year ended December 31
(in thousands of Canadian dollars)
2017
2016
Change
2017
2016
Change
Fair value adjustments on real estate assets
$3,984
($32,488)
$36,472
$1,796
$133,738
($131,942)
H&R records its real estate assets at fair value. Fair value adjustments on real estate assets are determined based on the movement of various parameters,
including changes in capitalization rates, discount rates and future cash flow projections. Changes in fair value can also occur due to the following factors:
(i) realty taxes in accordance with IFRIC 21, (ii) capital and tenant expenditures, (iii) redevelopment costs and (iv) straight-lining of contractual rent.
Fair value adjustment on real estate assets for the year ended December 31, 2016 of $133.7 million was primarily due to fair value increases in two office
properties, Two Gotham Center in Long Island City, NY and Hess Tower in Houston, TX. Independent third party appraisals were obtained for these
properties in Q2 2016. This was partially offset by fair value decreases to H&R’s Alberta office portfolio as a result of the overall weakening of the Alberta
economy.
Loss on Sale of Real Estate Assets
(in thousands of Canadian dollars)
Loss on sale of real estate assets
Three months ended December 31
Year ended December 31
2017
($70)
2016
Change
2017
2016
Change
($7,816)
$7,746
($7,729)
($8,167)
$438
During the year ended December 31, 2017, H&R sold three retail properties, a 50% ownership interest in two Primaris properties, a 50% ownership interest
in one industrial property, one multi-family residential property and one office property and recognized a loss on sale of real estate assets of $7.7 million.
The loss on sale of real estate assets includes mark-to-market adjustments on the purchasers’ assumption of mortgage of $3.5 million.
During the year ended December 31, 2016, H&R sold five retail properties, a 50% ownership interest in two industrial properties, a 50% non-managing
ownership interest in an office property and a portion of an office property (sold as separate condominium units) and recognized a loss on sale of real
estate assets of $8.2 million. This was primarily due to the sale of a 50% non-managing ownership interest in TransCanada Tower in November 2016.
For a list of properties sold in 2017 and 2016, please refer to pages 15 and 16 in this MD&A.
Page 31 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
Gain (loss) on Foreign Exchange
(in thousands of Canadian dollars)
Gain (loss) on foreign exchange
Three months ended December 31
Year ended December 31
2017
2016
Change
2017
2016
Change
$2,263
$6,695
($4,432)
($17,903)
($8,944)
($8,959)
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 H&R as U.S. Holdco is a subsidiary of H&R and forms part of its net investment
in the United States. U.S. Holdco is not a subsidiary of Finance Trust. The exchange rate as at December 31, 2017 was $1.26 for each U.S. $1.00
(September 30, 2017 - $1.25, December 31, 2016 - $1.34). The exchange rate as at December 31, 2016 was $1.34 for each U.S. $1.00 (September 30,
2016 - $1.31, December 31, 2015 - $1.38).
Transaction Costs
Three months ended December 31
Year ended December 31
(in thousands of Canadian dollars)
2017
2016
Change
2017
2016
Change
Transaction costs
$ -
$ -
$ -
$ -
($13,483)
$13,483
On February 18, 2016, the Ontario Ministry of Finance (the “Ministry”) announced retroactive amendments to the regulations under the Land Transfer Act
(Ontario) that impact the availability of an exemption from Ontario land transfer tax for certain transactions involving trusts (including real estate investment
trusts) and partnerships. On March 24, 2016, the Ministry announced relieving measures that limited the reassessment period to dispositions that occurred
on or after February 18, 2012 and provided a voluntary disclosure program (including interest and penalty relief) that expired on June 30, 2017. The
voluntary disclosure program was further extended to August 31, 2017. H&R has complied with the retroactive amendments.
Income Tax Recovery (Expense)
Three months ended December 31
Year ended December 31
(in thousands of Canadian dollars)
2017
2016
Change
2017
2016
Change
Income tax computed at the Canadian statutory rate of nil applicable
to H&R for 2017 and 2016
Current U.S. income taxes
$ -
(376)
$ -
(997)
$ -
621
$ -
(1,538)
$ -
(1,950)
$ -
412
Deferred income taxes applicable to U.S. Holdco:
Impact of U.S. Tax Reform
Other
87,970
-
(24,923)
(41,022)
87,970
16,099
87,970
-
87,970
(48,193)
(199,591)
151,398
63,047
(41,022)
104,069
39,777
(199,591)
239,368
Income tax recovery (expense)
$62,671
($42,019)
$104,690
$38,239
($201,541)
$239,780
H&R 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 H&R for tax purposes. H&R’s current income tax expense is primarily due to U.S. state taxes.
H&R’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 income
taxes recovery increased by $104.1 million and $239.4 million for the three months and year ended December 31, 2017 compared to the respective 2016
periods, primarily due to the enactment of U.S. Tax Reform on December 22, 2017 which is further described in the “Risks and Uncertainties” section of
this MD&A and fair value increases in 2016 to multiple properties, including Two Gotham Center in Long Island City, NY and Hess Tower in Houston, TX
which were externally appraised.
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, 2017, H&R had net deferred tax liabilities of $325.1 million (December 31, 2016 - $386.8 million) primarily related to taxable temporary
differences between the tax and accounting bases of U.S. investment properties.
Page 32 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
FUNDS FROM OPERATIONS AND ADJUSTED FUNDS FROM OPERATIONS
The Trusts’ present their combined FFO and AFFO calculations in accordance with REALpac’s February 2017 White Paper on Funds From Operations
and Adjusted Funds From Operations for IFRS. FFO and AFFO are non-GAAP measures defined in the “Non-GAAP Financial Measures” section of this
MD&A.
FFO AND AFFO
Three Months Ended December 31
Year ended December 31
(in thousands of Canadian dollars except per unit amounts)
Net income per the Trusts' Financial Statements
Realty taxes in accordance with IFRIC 21
FFO adjustments from equity accounted investments (page 30)
Exchangeable unit distributions
Fair value adjustments on real estate assets and financial instruments(1)
Fair value adjustment to unit-based compensation
Loss on sale of real estate assets
(Gain) loss on foreign exchange
Transaction costs
Deferred income taxes applicable to U.S. Holdco
Incremental leasing costs
FFO
Straight-lining of contractual rent
Capital expenditures
Leasing expenses and tenant inducements
Incremental leasing costs
AFFO adjustments from equity accounted investments (page 30)
2017
$325,213
(10,697)
(105,226)
5,464
(13,537)
(317)
70
(2,263)
-
(63,047)
1,787
$137,447
894
(14,874)
(9,394)
(1,787)
(5,155)
2016
$140,616
(9,574)
(66,377)
5,630
26,290
2,450
7,816
(6,695)
-
41,022
1,721
$142,899
(816)
(17,795)
(7,038)
(1,721)
(3,369)
2017
$667,870
-
(104,539)
22,254
(19,910)
1,307
7,729
17,903
-
(39,777)
7,253
$560,090
6,818
(51,845)
(28,722)
(7,253)
(14,847)
2016
$388,745
-
23,191
22,480
(99,908)
12,652
8,167
8,944
13,483
199,591
6,956
$584,301
(4,781)
(58,924)
(34,682)
(6,956)
(20,070)
AFFO
$107,131
$112,160
$464,241
$458,888
Weighted average number of Stapled Units (in thousands of basic Stapled Units
adjusted for conversion of exchangeable Stapled Units)(2)
Diluted weighted average number of Stapled Units (in thousands of Stapled Units) for
the calculation of FFO(2)(3)(4)(5)(6)
Diluted weighted average number of Stapled Units (in thousands of Stapled Units) for
the calculation of AFFO(2)(3)(5)(6)
FFO per basic Stapled Unit (adjusted for conversion of exchangeable units)
FFO per diluted Stapled Unit
AFFO per basic Stapled Unit (adjusted for conversion of exchangeable units)
AFFO per diluted Stapled Unit
Distributions per Stapled Unit
Payout ratio per Stapled Unit as a % of FFO
306,629
300,482
304,462
298,404
311,836
312,142
312,433
310,072
307,595
$0.45
$0.45
$0.35
$0.35
$0.35
77.8%
312,142
$0.48
$0.47
$0.37
$0.37
$0.34
70.8%
312,433
$1.84
$1.82
$1.52
$1.51
$1.38
75.0%
310,072
$1.96
$1.93
$1.54
$1.52
$1.35
68.9%
(1) During the year ended December 31, 2017, H&R realized a gain of U.S. $8.9 million (December 31, 2016 – nil) on the sale of an investment previously classified as held for trading which
has not been added back above.
(2) For the three months ended December 31, 2017 and 2016, included in the weighted average and diluted weighted average number of Stapled Units are exchangeable units of 15,546,256
and 16,130,642 respectively. For the year ended December 31, 2017 and 2016, included in the weighted average and diluted weighted average number of Stapled Units are exchangeable
units of 15,674,341 and 16,188,019, respectively.
(3) For the three months ended December 31, 2017 and 2016, 966,301 Stapled Units and 1,493,059 Stapled Units, respectively, are included in the determination of diluted FFO and AFFO
with respect to H&R’s Unit Option Plan and Incentive Unit Plan. For the years ended December 31, 2017 and 2016, 1,555,465 Stapled Units and 1,501,069 Stapled Units, respectively,
are included in the determination of diluted FFO and AFFO with respect to H&R’s Unit Option Plan and Incentive Unit Plan.
(4) The 2020 convertible debentures are dilutive for the three months ended December 31, 2017. Therefore, debenture interest of $1.5 million is added to FFO and 4,240,511 Stapled Units are
included in the diluted weighted average number of Stapled Units outstanding for this period.
(5) The 2018 and 2020 convertible debentures are dilutive for the year ended December 31, 2017. Therefore, debenture interest of $8.8 million is added to FFO and AFFO and 6,416,361
Stapled Units is included in the diluted weighted average number of Stapled Units outstanding for these periods.
(6) The 2016, 2018 and 2020 convertible debentures are dilutive for the three months and year ended December 31, 2016. Therefore, debenture interest of $3.3 million and $13.3 million,
respectively, are added to FFO and AFFO and 10,167,061 Stapled Units and 10,167,115 Stapled Units, respectively, are included in the diluted weighted average number of Stapled Units
outstanding for these periods.
Page 33 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
Included in FFO at the Trusts’ proportionate share are the following items which can be a source of variances between periods:
(in thousands of Canadian dollars)
Lease termination payments
Mortgage prepayment penalties
Jackson Park marketing expenses
Adjustment to straight-lining of contractual rent
Other income
Realized gain on sale of investment
Three months ended December 31
Year ended December 31
2017
$4
(404)
(708)
(252)
1,040
-
2016
Change
2017
2016
Change
$91
-
-
-
1,454
-
($87)
(404)
(708)
(252)
(414)
-
$5,989
$5,855
(952)
(708)
-
-
$134
(952)
(708)
(5,892)
(2,535)
(3,357)
1,040
8,935
20,353
(19,313)
-
8,935
($320)
$1,545
($1,865)
$8,412
$23,673
($15,261)
Excluding the above items, FFO would have been $137.8 million for the three months ended December 31, 2017 (Q4 2016 - $141.4 million) and $0.45 per
basic Stapled Unit (Q4 2016 - $0.47 per basic Stapled Unit). For the year ended December 31, 2017, FFO would have been $551.7 million (Q4 2016 -
$560.6 million) and $1.81 per basic Stapled Unit (Q4 2016 - $1.88 per basic Stapled Unit).
Included in AFFO at the Trusts’ proportionate share are the following items which can be a source of variances between periods:
Three months ended December 31
Year ended December 31
(in thousands of Canadian dollars)
Lease termination payments
Mortgage prepayment penalties
Jackson Park marketing expenses
Other income
Realized gain on sale of investment
Capital expenditures
2017
$4
(404)
(708)
1,040
-
2016
Change
2017
2016
Change
$5,989
$5,855
$91
-
-
1,454
-
($87)
(404)
(708)
(414)
-
(952)
(708)
1,040
8,935
-
-
-
$134
(952)
(708)
8,935
8,266
20,353
(19,313)
(17,890)
(20,539)
2,649
(62,965)
(71,231)
Leasing expenses and tenant inducements
(11,181)
(7,356)
(3,825)
(30,801)
(41,668)
10,867
Additional current year capital expenditure recoveries net of
capital expenditures
632
341
291
2,297
1,962
335
($28,507)
($26,009)
($2,498)
($77,165)
($84,729)
$7,564
Excluding the above items, AFFO would have been $135.6 million for the three months ended December 31, 2017 (Q4 2016 - $138.2 million) and $0.44 per
basic Stapled Unit (Q4 2016 - $0.46 per basic Stapled Unit). For the year ended December 31, 2017, AFFO would have been $541.4 million (Q4 2016 -
$543.6 million) and $1.78 per basic Stapled Unit (Q4 2016 - $1.82 per basic Stapled Unit).
Page 34 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
The following is a breakdown of H&R’s capital and tenant expenditures by operating segment:
(in thousands of Canadian dollars)
2017
2016
Change
2017
2016
Change
Three months ended December 31
Year ended December 31
Office:
Capital expenditures
$10,307
$11,595
($1,288)
$33,675
$48,517
($14,842)
Leasing expenditures and tenant inducements
5,400
5,393
7
17,179
29,288
(12,109)
Primaris:
Capital expenditures
Leasing expenditures and tenant inducements
H&R Retail:
Capital expenditures
Leasing expenditures and tenant inducements
ECHO:
Capital expenditures
Leasing expenditures and tenant inducements
Industrial:
Capital expenditures
Leasing expenditures and tenant inducements
Lantower Residential:
Capital expenditures
2,924
2,777
-
705
752
914
2,343
1,385
3,737
1,790
-
152
1,127
11
2,219
10
(813)
987
10,264
8,822
11,756
(1,492)
8,153
669
-
553
(375)
903
124
1,375
1,065
1,170
2,366
1,206
9,694
2,424
182
1,182
2,616
560
2,941
2,485
883
(12)
(250)
646
6,753
(61)
682
-
1,564
1,861
(297)
5,901
5,219
Leasing expenditures and tenant inducements
-
-
-
-
-
Total at the Trusts' proportionate share
Less: equity accounted investments
29,071
27,895
1,176
93,766
112,899
(19,133)
(4,803)
(3,062)
(1,741)
($13,199)
(19,293)
6,094
Total per the Trusts' Financial Statements(1)
$24,268
$24,833
($565)
$80,567
$93,606
($13,039)
(1)
Equal to the sum of capital expenditures and leasing expenses and tenant inducements per the Trusts’ Financial Statements.
H&R’s current largest office project is at 160 Elgin St., in Ottawa, ON which is undergoing a complete renovation of the lobby and all of the retail space.
Total capital and tenant expenditures spent during the three months and year ended December 31, 2017 were $6.7 million and $27.3 million, respectively,
compared to the three months and year ended December 31, 2016 of $8.8 million and $29.1 million, respectively. H&R expects to spend an additional
$4.8 million to complete these projects and an additional $2.2 million for elevator upgrades.
Capital and tenant expenditures from the Office segment decreased by $27.0 million for the year ended December 31, 2017 compared to the respective
2016 period, primarily due to the completion of projects at 310-320-330 Front St., in Toronto, ON and Scotia Plaza.
Capital expenditures from the Industrial segment increased by $0.1 million and $6.8 million for the three months and year ended December 31, 2017
compared to the respective 2016 periods, primarily due to re-paving work at two U.S. industrial properties tenanted by Nestle USA. These two properties
were subsequently sold in December 2017.
Page 35 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
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.
(in thousands of Canadian dollars)
Cash provided by operations
Net income
Total distributions(1)
Excess cash provided by operations over total distributions
Excess (shortfall) of net income over total distributions
Three months ended
December 31,
2017
Year ended
December 31,
2017
Year ended
December 31,
2016
Year ended
December 31,
2015
$128,512
$479,239
$424,196
$467,354
325,213
100,344
28,168
224,869
667,870
397,908
81,331
269,962
388,745
381,106
43,090
7,639
340,148
373,072
94,282
(32,924)
(1) Total distributions include cash distributions to unitholders and unit distributions issued under the DRIP.
Unit distributions issued under the DRIP were $26.1 million and $107.4 million, respectively, for the three months and year ended December 31, 2017,
which are non-cash distributions. Total distributions include cash distributions to unitholders and unit distributions issued under the DRIP of $106.8 million
and $105.4 million, respectively, for the years ended December 31, 2016 and 2015, which are non-cash distributions. 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 for the year ended December 31, 2015 primarily due to non-cash items. Non-
cash items relating to the fair value adjustments on financial instruments and real estate assets, amortization, unrealized gain (loss) on foreign exchange
and deferred income tax expense are deducted from or added to net income and have no impact on cash available to pay current distributions.
Major Cash Flow Components
(in thousands of Canadian dollars)
Cash and cash equivalents, beginning of period
Cash flows from operating activities
Cash flows from (used) in investing activities
Cash flows from (used) in financing activities
Cash and cash equivalents, end of period
Three months ended December 31
Year ended December 31
2017
2016 Source/(Use)
2017
2016 Source/(Use)
$51,727
$47,808
128,512
(425,489)
98,020
32,796
$3,919
30,492
$48,021
$38,287
479,239
424,196
$9,734
55,043
(458,285)
(625,635)
(1,247)
(624,388)
287,534
(130,603)
418,137
140,659
(413,215)
553,874
$42,284
$48,021
($5,737)
$42,284
$48,021
($5,737)
Cash flows from operating activities increased by $30.5 million and $55.0 million for the three months and year ended December 31, 2017, respectively,
compared to the respective 2016 periods primarily due to changes in non-cash operating working capital and a one-time mortgage prepayment penalty of
$13.9 million relating to the 50% non-managing interest sale of TransCanada Tower in Q4 2016.
Cash flows from (used) in investing activities decreased by $458.3 million for the three months ended December 31, 2017 compared to the respective
2016 period, primarily due to an increase in cash spent on acquisitions and a decrease in cash received as a result of lower dispositions in Q4 2017. Cash
flows from (used) investing activities decreased by $624.4 million for the year ended December 31, 2017 compared to the respective 2016 period, primarily
due to an increase in cash spent on acquisitions, properties under development and mortgages receivable and a decrease in cash received as a result of
lower dispositions in 2017.
Cash flows from (used) in financing activities increased by $418.1 million for the three months ended December 31, 2017 compared to the respective 2016
period, primarily due to an increase in bank indebtedness. Cash flows from (used) in financing activities increased by $553.8 million for the year ended
December 31, 2017 compared to the respective 2016 period, primarily due to the issuance of mortgages and debentures payable of which proceeds were
used to repay bank indebtedness.
Page 36 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
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, 2017, the Trusts
are not in default or arrears on any of their obligations including interest or principal payments on debt and any debt covenant.
The Trusts have cash and cash equivalents on hand of $42.3 million and have the following bank credit facilities as at December 31, 2017:
Bank Credit Facilities
(in thousands of Canadian Dollars)
Maturity
Date
Total
Facility
Bank
Indebtedness
Outstanding
Letters of Credit
Available
Balance
Unsecured operating facilities:
H&R unsecured operating facility #1(a)
H&R unsecured operating facility #2(b)
Sub-total unsecured facilities
December 18, 2018
$500,000
($208,713)
($31,928)
$259,359
March 17, 2021
200,000
700,000
(186,629)
(395,342)
-
(31,928)
13,371
272,730
Secured operating facilities*:
Primaris secured operating facility(a)
H&R and CrestPSP secured operating facility(a)
July 1, 2019
February 19, 2019
H&R Retail co-ownership secured operating facility
September 30, 2019
Sub-total secured facilities
300,000
25,000
3,514
328,514
(283,340)
-
(3,514)
(286,854)
(891)
(105)
-
(996)
15,769
24,895
-
40,664
$1,028,514
($682,196)
($32,924)
$313,394
*
Secured by certain investment properties.
The bank credit facilities bear interest at a rate approximating the prime rate of a Canadian chartered bank.
(a)
(b)
Can be drawn in either Canadian or U.S. dollars.
The total facility as at December 31, 2017 is $200.0 million, plus a 3.00% allowance relating to the fluctuation of the foreign exchange rate, and can be drawn in either Canadian or U.S.
dollars. H&R entered into an interest rate swap agreement to economically fix the interest rate at 2.56% per annum on U.S. $130.0 million of the U.S. dollar denominated borrowing of
this facility.
In January 2018, H&R obtained an additional $200.0 million unsecured revolving operating facility due on January 31, 2023.
As at December 31, 2017, H&R had 108 unencumbered properties, with a fair value of approximately $3.6 billion. Also, due to H&R’s 21-year history and
management’s conservative strategy of securing long-term financing on individual properties, H&R had numerous other properties with very low loan to
value ratios. As at December 31, 2017, H&R had 49 properties valued at approximately $1.3 billion which are encumbered with mortgages totalling $235.7
million. In this pool of assets, the average loan to value is 18.3%, the minimum loan to value is 1.2% and the maximum loan to value is 29.3%.
The following is a summary of material contractual obligations at the Trusts’ proportionate share (unless otherwise stated) including payments due as at
December 31, 2017 for the next five years and thereafter:
Payments Due by Period
Contractual Obligations(1)
(in thousands of Canadian dollars)
2018
2019-
2020
2021-
2022
2023 and
thereafter
Total
Mortgages payable
$284,884
$789,606
$1,636,272
$1,451,441
$4,162,203
Convertible Debentures
Senior Debentures
Bank indebtedness
-
557,500
208,713
99,652
525,000
701,889
-
325,000
186,629
-
350,000
-
99,652
1,757,500
1,097,231
Total contractual obligations
$1,051,097
$2,116,147
$2,147,901
$1,801,441
$7,116,586
(1) The amounts in the above table are the principal amounts due under the contractual agreements.
Page 37 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
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 H&R has a credit rating of BBB (high) with a Stable trend as at December 31, 2017. This is a 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.
H&R has no material capital or operating lease obligations.
Funding of Future Commitments
Management believes that as at December 31, 2017, through cash on hand of $42.3 million and the combined amount available under its general operating
facilities of $313.4 million and its unencumbered property pool of approximately $3.6 billion, H&R has sufficient funds for future commitments.
The following summarizes the estimated loan to value ratios on properties whose mortgages mature over the next five years:
Year
2018
2019
2020
2021
2022
Number of
Properties
Mortgage Debt due
on Maturity ($000’s)(1)
Weighted Average
Interest Rate on Maturity
Fair Value of Investment
Properties ($000’s)(1)
Loan to
Value
34
16
16
13
48
127
$135,308
122,408
355,378
837,610
589,839
$2,040,543
5.0%
3.7%
4.4%
3.9%
4.0%
4.1%
$384,798
334,386
981,762
3,520,012
3,255,798
$8,476,756
35%
37%
36%
24%
18%
24%
(1) Converting U.S. dollars to Canadian dollars at an exchange rate of $1.26 as at December 31, 2017.
Based on the low percentage of the projected loan to values of the maturing mortgages, H&R is confident it will be able to refinance these mortgages upon
maturity should it choose to do so.
OFF-BALANCE SHEET ITEMS
In the normal course of operations, H&R has issued letters of credit in connection with developments, financings, operations and acquisitions. As at
December 31, 2017, H&R has outstanding letters of credit totalling $32.9 million (December 31, 2016 - $34.3 million), including $15.1 million (December
31, 2016 - nil) which has been pledged as security for certain mortgages payable. The letters of credit are secured in the same manner as the bank
indebtedness.
H&R has co-owners and partners in various projects. As a rule H&R 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 H&R in the event of a default of the co-owners
and partners. In such case, H&R would have a claim against the underlying real estate investment. However, in certain circumstances, subject to
compliance with H&R’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 H&R has provided guarantees, such guarantees will be provided. At December 31, 2017, such guarantees amounted
to $369.2 million expiring between 2020 and 2029 (December 31, 2016 - $171.1 million, expiring between 2020 and 2029), and no amount has been
provided for in the Trusts’ Financial Statements for these items. These amounts arise where H&R has guaranteed a co-owner’s share of the mortgage
liability. H&R, however, customarily guarantees or indemnifies the obligations of its nominee companies which hold separate title to each of its properties
owned.
In addition, H&R continued 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 H&R’s guarantee. At December 31, 2017, the estimated amount of debt subject to such
guarantees, and therefore the maximum exposure to credit risk is approximately $119.3 million, expiring between 2018 and 2020 (December 31, 2016 -
$133.0 million, expiring between 2017 and 2020). There have been no defaults by the primary obligors for debts on which H&R has provided its guarantees,
and as a result, no contingent loss on these guarantees has been recognized in the Trusts’ Financial Statements.
Page 38 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS
Where appropriate, H&R, including ECHO and Jackson Park, uses forward contracts to lock-in lending rates on certain anticipated mortgages, debentures
and bank borrowings. This strategy provides certainty to the rate of interest on borrowings when H&R 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, H&R uses forward exchange contracts to lock-in foreign exchange rates. This strategy manages risks related to foreign exchange
rates on transactions that will occur in the future. H&R did not enter into any forward exchange contracts during the year ended December 31, 2017.
As at December 31, 2017, H&R had the following interest rate swaps outstanding:
Debenture interest rate swap
Debenture interest rate swap
Bank indebtedness interest rate swap
Fair value asset (liability)*
Net gain (loss) on derivative contracts
December 31
December 31
Year ended December 31
(a)
(b)
(c)
2017
$2,231
177
3,966
$6,374
2016
$776
(407)
(3,384)
($3,015)
2017
$1,455
584
7,350
$9,389
2016
$776
(407)
(3,384)
($3,015)
(a) To fix the interest rate at 2.36% per annum for the Series K senior debentures, which mature on March 1, 2019.
(b) To fix the interest rate at 2.54% per annum for the Series I senior debentures (settled when these debentures matured on January 23, 2017) and, to fix the interest rate at 2.04%
per annum for the Series J senior debentures, which mature on February 9, 2018.
(c) To fix the interest rate at 2.56% per annum on U.S. $130.0 million of bank indebtedness, maturing on March 17, 2021.
*
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.
SECTION IV
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
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 Trusts’ Financial Statements and reported amounts of revenue and expenses
during the reporting period.
For a description of the accounting policies that management believes are subject to greater estimation and judgement, as well as 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; 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 H&R. 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.
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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 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 in the Trusts’ Financial Statements and this MD&A.
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
H&R’s policy for property rental revenue recognition is described in note 2(f) of the December 31, 2017 Trusts’ Financial Statements. H&R makes
judgements in determining whether certain leases, in particular those tenant leases with long contractual terms and long-term ground leases where
H&R is the lessor, are operating or finance leases. H&R has determined that all of its leases are operating leases.
Income taxes
H&R 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 H&R as at December 31, 2017 in respect of its Canadian entities.
H&R 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. H&R currently distributes, and is required to distribute,
all of its income to its unitholders. Accordingly, for financial statement reporting purposes, the tax deductibility of H&R’s distributions is treated as an
exemption from taxation.
Impairment of equity accounted investments
H&R determines at each reporting date whether there is any objective evidence that the equity accounted investments are impaired. If so, H&R
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.
NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED
Standards issued but currently not yet effective are described below. The Trusts’ intend to adopt these standards when they become effective.
(i) Share-Based Payment (“IFRS 2”)
In 2016, the IASB issued amendments to IFRS 2 Share-based Payment, clarifying how to account for certain types of share-based payment
transactions. The Trusts intend to adopt the amendments to IFRS 2 in their combined financial statements for the annual period beginning on January
1, 2018.
(ii) Financial Instruments: Classification and Measurement (“IFRS 9”)
The Trusts will adopt IFRS 9, Financial Instruments: Classification and Measurement, which replaces IAS 39 Financial Instruments: Recognition and
Measurement (“IAS 39”), in the combined financial statements beginning on January 1, 2018, the mandatory effective date. The adoption of IFRS 9
will generally be applied retrospectively, without restatement of comparative information.
IFRS 9 contains a new classification and measurement approach which requires financial assets to be classified and measured based on the business
model in which they are held and the characteristics of their contractual cash flows. IFRS 9 contains three principal classification categories for
financial assets: measured at amortized cost, fair value through other comprehensive income and fair value through profit or loss, and eliminates the
existing IAS 39 categories of held to maturity, loans and receivables and available for sale.
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For impairment of financial assets, IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ model. The new
impairment model will apply to financial assets measured at amortized cost or fair value through other comprehensive income, except for investments
in equity instruments, and to contract assets.
IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. However, under IAS 39 all fair value changes of
liabilities designated as fair value through profit or loss are recognized in profit or loss, whereas under IFRS 9 the amount of change in fair value
attributable to changes in the credit risk of the liability is presented in other comprehensive income, and the remaining amount of change in fair value
is presented in profit or loss.
IFRS 9 also includes a new general hedge accounting standard which aligns hedge accounting more closely with risk management. The Trusts do
not currently apply hedge accounting.
Management does not expect the adoption of IFRS 9 to have a material impact on the combined financial statements.
(iii) Revenue from Contracts with Customers (“IFRS 15”)
IFRS 15, Revenue from Contracts with Customers is effective for annual periods beginning on or after January 1, 2018, and will replace all existing
guidance in IFRS related to revenue, including (but not limited to) IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 15 Agreements for the
Construction of Real Estate.
IFRS 15 contains a single, control-based model that applies to contracts with customers and two approaches to recognizing revenue: at a point in
time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is
recognized. IFRS 15 also includes additional disclosure requirements for revenue accounted for under the standard.
The Trusts will adopt IFRS 15 in the combined financial statements for the annual period beginning January 1, 2018. The Trust plans to adopt IFRS
15 using the cumulative effect method, with the effect of initially applying this standard recognized at January 1, 2018. As a result, the Trusts will not
apply the requirements of IFRS 15 to the comparative period presented. Management does not expect that the adoption of IFRS 15 will have a
material impact on the combined financial statements. However, additional disclosure requirements may result in separate disclosure of revenue
for service components that are part of a lease (i.e. a non-lease component).
(iv) Leases (“IFRS 16”)
IFRS 16, Leases will replace existing lease guidance in IFRS and related interpretations, and requires lessees to bring most leases on-balance sheet.
Lessor accounting remains similar to the current standard. The new standard is effective for years beginning on January 1, 2019.
The Trusts are still evaluating the impact of IFRS 16. In particular, the Trusts are assessing how the new standard may impact the identification of
lease and non-lease components, including the allocation of consideration to each lease and non-lease component. The standard requires this
allocation to be completed in accordance with the guidance in IFRS 15, that is, on the basis of relative standalone selling prices.
(v)
IFRIC Interpretation 23, Uncertainty over Income Tax Treatments
On June 7, 2017, the IASB issued IFRIC Interpretation 23 Uncertainty over Income Tax Treatments. The Interpretation provides guidance on the
accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. The
Interpretation is applicable for annual periods beginning on or after January 1, 2019 with early adoption permitted. The Interpretation requires the
Trusts to: a) contemplate whether uncertain tax treatments should be considered separately, or together as a group, based on which approach
provides better predictions of the resolution; b) determine if it is probable that the tax authorities will accept the uncertain tax treatment and c) if it is
not probable that the uncertain tax treatment will be accepted, measure the tax uncertainty based on the most likely amount or expected value,
depending on whichever method better predicts the resolution of the uncertainty. The Trusts intend to adopt the Interpretation in their combined
financial statements for the annual period beginning on January 1, 2019. The extent of the impact of adoption of the Interpretation has not yet been
determined.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING
Each Trust’s CEO and Chief Financial Officer (“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) information required to be disclosed in the annual filings, interim filings or other reports filed or submitted under securities legislation
is recorded, processed, summarized and reported within the time periods specified in securities legislation. The Trusts’ CEO and CFO have evaluated,
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or caused to be evaluated under their supervision, the effectiveness of the Trusts’ disclosure controls and procedures as at December 31, 2017, and based
upon that evaluation have each concluded that such disclosure controls and procedures were appropriately designed and were operating effectively as at
December 31, 2017. The Trusts’ Financial Statements and this MD&A were reviewed and approved by H&R’s Audit Committee and the Board of Trustees
prior to this publication.
Management of each Trust has reviewed its respective internal control over financial reporting on an annual basis. The Trusts’ management, under the
supervision of the CEO and the CFO, has evaluated the effectiveness of internal control over financial reporting as at December 31, 2017 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, the CEO and the CFO have concluded that internal control over financial
reporting was effective as of December 31, 2017. No changes were made to either Trust’s internal control over financial reporting during the three month
period ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Trusts’ internal controls 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.
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 H&R’s portfolio. The major risk factors including detailed
descriptions are outlined below and in H&R’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 H&R’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 H&R 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
H&R’s investment may be incurred. Furthermore, at any time, a tenant of any of the properties in which H&R 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 H&R.
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. For the year ended December 31, 2017, approximately 25.9% of H&R’s Same-Asset property operating income (cash basis) was generated from
Alberta. Accordingly, any continuing decline or prolonged weakness in commodity prices, could adversely affect those tenants of H&R that are involved
in the oil and gas industry, thereby increasing the credit risk of such tenants to H&R which in turn may adversely affect H&R’s operating results.
With respect to the Primaris segment, 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 segment, 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 H&R 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 H&R’s financial condition.
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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 H&R 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.
H&R 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 H&R have early termination provisions and such termination rights are generally exercisable at a cost to the tenant only. The amount of space in H&R’s
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 H&R’s portfolio is, however, expected by management to be
sufficient to cover any cash flow shortfalls on such a property.
Credit Risk and Tenant Concentration
H&R is exposed to credit risk in the event that borrowers default on the repayment of the amounts owing to H&R. Management mitigates this risk by
ensuring adequate security has been provided in support of mortgages receivable.
H&R 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 H&R’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 H&R are Encana Corporation, Bell Canada and
Hess Corporation. All of these companies have a public debt rating that is rated with at least a BBB- Stable rating by a recognized rating agency.
Lease Rollover Risk
Lease rollover risk arises from the possibility that H&R 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 39.6% of H&R’s total commercial leasable area will expire in the next 5 years.
Interest and Other Debt-Related Risk
H&R 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, H&R negotiates fixed rate term debt with
staggered maturities on the portfolio. Derivative financial instruments may be utilized by the H&R in the management of its interest rate exposure. In
addition, H&R’s Declaration of Trust restricts total indebtedness permitted on the portfolio.
Construction Risks
It is likely that, subject to compliance with H&R’s Declaration of Trust, H&R will be involved in various development projects. H&R’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 H&R 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, H&R’s debt on these properties is also denominated in U.S. dollars to act as a natural hedge.
H&R is exposed to foreign exchange fluctuations as a result of the U.S. Holdco Notes, Series J senior debentures and the U.S. bank indebtedness each
being denominated in U.S. dollars.
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Liquidity Risk
Real property investments tend to be relatively illiquid, with the degree of liquidity generally fluctuating in relationship with demand for and the perceived
desirability of such investments. Such illiquidity will tend to limit H&R’s ability to vary its portfolio promptly in response to changing economic or investment
conditions. If for whatever reason, liquidation of assets is required, there is a risk that sale proceeds realized might be less than the previously estimated
market value of H&R’s investments or that market conditions would prevent prompt disposition of assets.
Cyber Security Risk
Cyber security has become an increasingly problematic issue for issuers and businesses in Canada and around the world, including H&R. Cyber attacks
against large organizations are increasing in sophistication and are often focused on financial fraud, compromising sensitive data for inappropriate use or
disrupting business operations. A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of H&R's
information resources. More specifically, a cyber-incident is an intentional attack or an unintentional event that can include gaining unauthorized access
to information systems to disrupt operations, corrupt data or steal confidential information. As H&R's reliance on technology has increased, so have the
risks posed to its systems. H&R's primary risks that could directly result from the occurrence of a cyber-incident include operational interruption, damage
to its reputation, damage to H&R’s business relationships with its tenants, disclosure of confidential information regarding its tenants, employees and third
parties with whom H&R interacts, and may result in negative consequences, including remediation costs, loss of revenue, additional regulatory scrutiny
and litigation. H&R has implemented processes, procedures and controls to help mitigate these risks, but these measures, as well as its increased
awareness of a risk of a cyber-incident, do not guarantee that its financial results will not be negatively impacted by such an incident.
Financing Credit Risk
H&R is also exposed to credit risk as a lender on the security of real estate in the event that a borrower is unable to make the contracted payments. Such
risk is mitigated through credit checks and related due diligence of the borrowers and through careful evaluation of the worth of the underlying assets.
Environmental Risk
As an owner and manager of real estate assets in Canada and the United States, H&R 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 H&R or on
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. H&R 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.
Co-Ownership Interest in Properties
In certain situations, H&R may be adversely affected by a default by a co-owner of a property under the terms of a mortgage, lease or other agreement.
Although all co-owners agreements entered into by H&R provide for remedies to H&R in such circumstances, such remedies may not be exercisable in all
circumstances, or may be insufficient or delayed, and may not cure a default in the event that such default by a co-owner is deemed to be a default of
H&R.
Joint Arrangement Risks
H&R has several investments in joint ventures and investments in associates. H&R 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. H&R 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.
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 H&R 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 H&R. 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
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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 H&R 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 H&R will also fluctuate in order to result in an
aggregate monthly cash distribution as previously outlined. Although H&R 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 H&R will depend on numerous factors
including monthly cash distributions paid by Finance Trust, capital market conditions, the financial performance of the properties, H&R’s debt covenants
and obligations, its working capital requirements, its future capital requirements, its development commitments and fluctuations in interest rates. Cash
available to H&R 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. H&R 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 H&R and/or Finance Trust suspends
or reduces distributions. H&R’s trustees retain the right to re-evaluate the distribution policy from time to time as they consider appropriate.
Ability to Access Capital Markets
As H&R distributes a substantial portion of its income to unitholders, H&R may need to obtain additional capital through capital markets and H&R’s ability
to access the capital markets through equity issues and forms of secured or unsecured debt financing may affect the operations of H&R 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 H&R’s Unit Option Plan and Incentive Unit Plan. In addition, the Trusts issue Stapled Units pursuant to the DRIP and Unit
Purchase 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 H&R 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 H&R 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 entitlement of holders of units of H&R to receive cash upon the redemption of their units is subject to the
limitations that: (i) the total amount payable by H&R in respect of those units and all other units of H&R tendered for redemption in the same calendar
month does not exceed $50,000 (subject to certain adjustments and provided that the trustees of H&R may waive this limitation at their sole discretion),
(ii) at the time such units are tendered for redemption, the outstanding Stapled Units shall be listed for trading or quoted on a stock exchange or traded or
quoted on another market which the trustees consider, in their sole discretion, provides representative fair market value prices for the Stapled Units; and
(iii) the normal trading of the units of H&R is not suspended or halted on any stock exchange on which the Stapled Units are listed (or, if not so listed, on
any market on which the Stapled Units are quoted for trading) on the redemption date or for more than five trading days during the ten-day trading period
commencing immediately prior to such date. In certain circumstances, H&R’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 H&R 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.
Debentures
The likelihood that purchasers of the 2020 convertible debentures and the Series C, E, F, G, J, K, L, M, N, O and P Senior Debentures will receive payments
owing to them under the terms of such debentures will depend on the financial health of H&R and its creditworthiness. In addition, such debentures are
unsecured obligations of H&R and are subordinate in right of payment to all H&R’s existing and future senior indebtedness as defined in each such
respective trust indenture. Therefore, if H&R becomes bankrupt, liquidates its assets, reorganizes or enters into certain other transactions, H&R’s assets
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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 H&R’s subsidiaries except to the extent H&R 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 H&R. 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 H&R, holders of indebtedness of H&R (including holders of the convertible debentures), may become subordinate to lenders to the
subsidiaries of H&R. The indentures governing such debentures do not prohibit or limit the ability of H&R 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 H&R.
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 H&R’s assets and revenues, management believes that H&R satisfied the tests to qualify for the REIT Exemption for 2017.
Management of H&R intends to conduct the affairs of H&R 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 H&R 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 H&R and
Finance Trust has reviewed the Stapled Security Rules and has concluded that the Stapled Security Rules should not materially adversely affect H&R,
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 H&R 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), H&R 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 H&R 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, H&R 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.
H&R operates in the United States through U.S. Holdco which is capitalized with debt and equity provided by H&R and debt in the form of U.S. Holdco
Notes owed to Finance Trust and H&R Portfolio Limited Partnership. As at December 31, 2017, Finance Trust holds U.S. $223.9 million of U.S. Holdco
Notes. During 2017, H&R made loans to U.S. Holdco (“U.S. Holdco Loans”) to indirectly fund additional U.S. Holdco acquisitions of income generating
real property and Management anticipates that U.S. Holdco will continue to borrow funds from H&R in the future for similar purposes, to fund its operations
or to refinance existing loans. U.S. Holdco treats the U.S. Holdco Notes and U.S. Holdco Loans as indebtedness for U.S. federal income tax purposes.
If the IRS or a court were to determine that the U.S. Holdco Notes and/or the U.S. Holdco Loans should be treated for U.S. federal income tax purposes
as equity rather than debt, the interest on the U.S. Holdco Notes and/or the U.S. Holdco Loans could be treated as a dividend, and interest on the U.S.
Holdco Notes and/or the U.S. Holdco Loans 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 and/or the U.S. Holdco Loans 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 and/or the U.S. Holdco Loans or H&R’s ability to make distributions on its units.
Page 46 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
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.
On October 13, 2016, the U.S. Treasury and the Internal Revenue Service (“IRS”) issued final and temporary regulations under section 385 of the Code
(“Section 385 Regulations”) that could potentially apply to recharacterize as equity certain related party indebtedness issued after April 4, 2016. Generally,
the Section 385 Regulations (i) establish threshold documentation requirements that must be satisfied for related party indebtedness issued after January
1, 2018 (however, the effective date of this provision has been delayed one year and is only applicable for debt issues after January 1, 2019 per IRS Notice
2017-36) in order for such related party indebtedness to be treated as debt for U.S. federal income tax purposes, (ii) treat related party indebtedness as
equity for U.S. federal income tax purposes if such related party indebtedness was issued in certain transactions, including in exchange for stock of a
related party or in a distribution and (iii) recharacterize related party indebtedness as equity for U.S. federal income tax purposes in certain circumstances
including where the debtor corporation pays a distribution after April 4, 2016 in excess of the accumulated earnings and profits for tax years ending after
April 4, 2016, during which the debtor corporation is related to the holder of the debt. In general, the Section 385 Regulations only apply to related party
indebtedness debt issued by U.S. corporations after April 4, 2016 and so most of the U.S. Holdco Notes should not be impacted by the Section 385
Regulations. However, the Section 385 Regulations could apply to U.S. Holdco Notes that are refinanced in the future and/or to any issuances of related
party indebtedness issued after April 4, 2016, including the U.S. Holdco Loans issued after this date. Management believes that the Section 385
Regulations should not apply to treat the existing U.S. Holdco Loans as equity as the U.S. Holdco Loans were not issued in exchange for stock of a related
party or otherwise in a transaction described in the Section 385 Regulations and U.S. Holdco has not paid any distributions to H&R since April 4, 2016 or
engaged in any other transaction that would cause such loans to be recharacterized under the Section 385 Regulations. Management does not currently
anticipate causing U.S. Holdco to pay distributions in excess of U.S. Holdco’s earnings and profits accumulated in tax years ending after April 4, 2016 or
engaging in any other transactions that will cause indebtedness of U.S. Holdco to be treated or recharacterized as equity. However, there can be no
assurance that such a distribution or transaction will not occur in the future. In the event that any indebtedness of U.S. Holdco were recharacterized as
equity, any interest paid or accrued on such indebtedness would not be deductible by U.S. Holdco and any payments made by U.S. Holdco thereon could
be treated as dividends subject to U.S. withholding tax.
For taxable years beginning before January 1, 2018, Section 163(j) of the Code (prior to its amendment by U.S. Tax Reform, “Prior Section 163(j)”) applied
to limit the deduction of interest paid to a related party, including debt financing provided by H&R to U.S. Holdco (e.g., the U.S. Holdco Loans or by acquiring
U.S. Holdco Notes). With respect to the U.S. Holdco Notes, H&R took the position 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 was treated as having been paid to the holders of the Finance Trust Units and
was therefore not subject to Prior Section 163(j). If Prior Section 163(j) applied to interest paid to H&R and/or 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 for years subject to Prior Section 163(j).
As discussed below in “U.S. Tax Reform”, Prior Section 163(j) has been repealed and replaced with a new section 163(j) that is applicable to taxable years
beginning after December 31, 2017. New section 163(j) applies to both related and third party debt and there is no debt to equity ratio safe harbor. New
section 163(j) limits all interest deductions (related and third party) to 30% of “adjusted taxable income” (defined similarly to earnings before interest, taxes,
depreciation and amortization for taxable years beginning before January 1, 2022, and earnings before interest and taxes thereafter). However, there is
an exception to the limitation of new section 163(j) for certain “real property trades or businesses” that make an irrevocable election. If such an election is
made, the real property trade or business is required to use the alternative depreciation system (ADS) that applies to tax-exempt use property to depreciate
certain assets for U.S. federal income tax purposes. As discussed below, it is expected that H&R’s U.S. subsidiaries are eligible for the real property trade
or business exception and may elect out of section 163(j) if the interest deduction limitation would cause adverse tax results.
U.S. Tax Reform
Overview
U.S. Tax Reform was signed into law by the president on December 22, 2017. Therefore, U.S. Tax Reform is enacted as of the date of the Trusts’ Financial
Statements and it directly affects the valuation and assessment of H&R’s deferred income tax assets or liabilities. Therefore, Management has considered
the material effects of tax reform on the Trusts’ Financial Statements (if any).
U.S. corporate rate reduction
The U.S. federal corporate income tax rate has been reduced to 21% effective January 1, 2018. Therefore, the U.S. federal corporate income tax rate
applied to the gross deferred income tax assets or liabilities is 21% (24% including the effect of state taxes) instead of 35% (37.5% including the effect of
state taxes). The change in rate, after all other changes to the deferred tax assets or liabilities for the year ended December 31, 2017, has resulted in a
one-time recovery of income tax of $136.1 million.
Section 163(j) carryover
Under the tax reform bill, Prior Section 163(j) has been repealed and replaced with a new section 163(j) effective January 1, 2018. H&R has U.S. $154.4
million of Prior Section 163(j) interest carryover that was recorded as a deferred tax asset under the old regime. The IRS has not yet provided specific
guidance on how to treat a deferred interest carryover under the old regime. Accordingly, H&R has taken a reserve against its Prior Section 163(j)
Page 47 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
carryover, which has resulted in a one-time expense of $ $48.1 million (after taking into account the reduction in value due to the rate change described
above). Management continues to monitor guidance from the IRS to determine the future deductibility, if any, of the deferred interest carryover.
New Section 163(j)
As mentioned above, a new section 163(j) has been enacted. However, a real property trade or business may elect out of this new regime. A real property
trade or business is defined as an “any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation,
management, leasing, or brokerage trade or business”. With input from its tax advisors, H&R has taken the view that the U.S. subsidiaries of H&R are
engaged in real property trades or businesses and therefore are eligible to elect out of section 163(j) with respect to such businesses. Once an election
is made, the election is irrevocable. If such an election is made, the real property trade or business is required to use the alternative depreciation system
(“ADS”) that applies to tax-exempt use property to depreciate certain assets for U.S. federal income tax purposes. It is expected that treasury regulations
will be released to provide guidance on the timing and manner of making the election.
Risks relating to tax reforms
As the new U.S. tax law moves through the implementation process, there is risk that regulatory, administrative or legislative actions could have a materially
adverse effect on H&R’s deferred income tax assets or liabilities. Management continues to monitor ongoing developments and IRS guidance.
Additional Tax Risks Applicable to Unitholders
H&R 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 H&R are managed by subsidiaries of H&R rather than directly by its
own employees. Although H&R's officers and employees oversee the activities of the managers, it is unclear whether H&R will be characterized as a PFIC
for U.S. federal income tax purposes. If H&R 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 H&R Units, any distributions in respect of H&R Units which are treated as “excess distribution” under the applicable rules and
any gain on a sale or other disposition of H&R Units would be treated as ordinary income and would be subject to special tax rules, including an interest
charge. In addition, if H&R were treated as a PFIC, then dividends paid on H&R Units will not qualify for the reduced 20% U.S. 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 H&R 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). H&R 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 income taxation at a maximum
marginal rate of 39.6% (37% for taxable years beginning after December 31, 2017 and beginning January 1, 2026) plus an additional 3.8% tax that applies
to investment income earned by certain high income non-corporate taxpayer. Interest on the U.S. Holdco Notes paid 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.
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.
Page 48 of 49
H&R REIT AND H&R FINANCE TRUST - MD&A – DECEMBER 31, 2017
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 H&R 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 H&R 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 7, 2018, there were 289,859,263 Stapled Units issued
and outstanding (each comprised of an H&R unit and a Finance Trust unit).
As at December 31, 2017, the maximum number of units authorized to be issued under H&R’s Unit Option Plan was 28,000,000. Of this amount,
21,402,296 options had been granted, 452,170 have expired and 7,049,874 remain to be granted. Of the amount originally granted, 10,091,913 had been
exercised and expired and therefore, 11,310,383 options to purchase Stapled Units were outstanding. As at February 7, 2018, there were 11,310,383
options to purchase Stapled Units outstanding of which 6,497,292 are fully vested.
As at December 31, 2017, the maximum number of units authorized to be granted under H&R’s Incentive Unit Plan was 5,000,000. Of this amount,
651,026 had been granted, of which 39,731 had been expired, 179,762 have been settled. 4,388,705 remain to be granted and therefore, 431,533
incentive units remain outstanding. As at February 7, 2018, there were 285,342 incentive units outstanding.
As at December 31, 2017, there were 15,979,430 exchangeable units outstanding of which 9,500,000 exchangeable units are accompanied by special
voting units. As at February 7, 2018, there were 15,979,430 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 H&R’s convertible debentures as at February 7, 2018, and the number of Stapled Units
required to convert the convertible debentures to equity:
Convertible Debentures
2020 Convertible Debentures (HR.DB.D)
ADDITIONAL INFORMATION
Principal outstanding as at
February 7, 2018
Maximum number of Stapled
Units issuable
$99.7 million
4,240,510
Additional information relating to H&R and Finance Trust, including H&R’s Annual Information Form, is available on SEDAR at www.sedar.com
SUBSEQUENT EVENTS
(a)
In January 2018, H&R secured a U.S. $51.4 million mortgage for a term of 10 years.
(b)
In January 2018, H&R issued $250.0 million principal amount of Series O senior debentures maturing on January 23, 2023.
(c)
In January 2018, H&R obtained an additional $200.0 million unsecured revolving operating facility due on January 31, 2023.
(d)
In February 2018, H&R repaid all of its Series E and Series J senior debentures upon maturity for a cash payment of $100.0 million and U.S. $125.0
million, respectively.
(e)
In February 2018, H&R issued U.S. $125.0 million principal amount of Series P senior debentures maturing on February 13, 2020.
Page 49 of 49
Combined Financial Statements of
H&R REAL ESTATE INVESTMENT TRUST
and
H&R FINANCE TRUST
Years ended December 31, 2017 and 2016
KPMG LLP
Bay Adelaide Centre
333 Bay Street, Suite 4600
Toronto ON M5H 2S5
Canada
Tel 416-777-8500
Fax 416-777-8818
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, 2017 and
2016, 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.
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.
Page 2
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, 2017 and
2016, 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 14, 2018
Toronto, Canada
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Combined Statements of Financial Position
(In thousands of Canadian dollars)
Note
December 31
2017
December 31
2016
$ 13,074,123
83,132
13,157,255
$ 12,564,144
118,268
12,682,412
1,125,135
-
234,189
42,284
1,051,187
211,550
161,842
48,021
$ 14,558,863
$ 14,155,012
$ 3,958,631
1,852,790
341,321
325,131
-
682,196
219,031
$ 4,001,451
1,491,591
370,533
386,775
126,815
647,772
217,425
7,379,100
7,242,362
7,179,763
6,912,650
$ 14,558,863
$ 14,155,012
Assets
Real estate assets:
Investment properties
Properties under development
Equity accounted investments
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
Bank indebtedness
Accounts payable and accrued liabilities
Unitholders' equity
Commitments and contingencies
3
3
4
5
6
7
8
9
10
23
5
7
11
24
Subsequent events
13(f), 26
See accompanying notes to the combined financial statements.
Approved on behalf of the Board of Trustees:
“Edward Gilbert”
“Thomas J. Hofstedter”
Trustee
Trustee
1
H&R REAL ESTATE INVESTMENT TRUST
H&R FINANCE TRUST
Combined Statements of Comprehensive Income
(In thousands of Canadian dollars)
Years ended December 31, 2017 and 2016
Property operating income:
Rentals from investment properties
Property operating costs
Net income from equity accounted investments
Other income
Finance cost - operations
Finance income
Trust expenses
Fair value adjustments on financial instruments
Fair value adjustment on real estate assets
Loss on sale of real estate assets, net of related costs
Loss on foreign exchange
Transaction costs
Net income before income taxes
Income tax recovery (expense)
Net income
Other comprehensive loss:
Items that are or may be reclassified subsequently to net income
Unrealized loss on translation of U.S. denominated foreign operations
Transfer of realized loss on cash flow hedges to net income
Note
2017
2016
15
4
16
17
17
17
3
3
23
14
$ 1,168,454 $ 1,196,011
(431,271)
764,740
(427,013)
741,441
167,407
1,040
(270,358)
4,999
(18,111)
27,049
1,796
(7,729)
(17,903)
-
629,631
48,341
20,353
(287,325)
4,715
(29,852)
(33,830)
133,738
(8,167)
(8,944)
(13,483)
590,286
38,239
667,870
(201,541)
388,745
(131,302)
30
(131,272)
(38,397)
30
(38,367)
Total comprehensive income attributable to unitholders
$ 536,598
$ 350,378
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, 2017 and 2016
UNITHOLDERS' EQUITY
Unitholders' equity, January 1, 2016
Proceeds from issuance of units
Net income
Distributions to unitholders
Conversion of convertible debentures
Units repurchased and cancelled
Other comprehensive loss
Unitholders' equity, December 31, 2016
Proceeds from issuance of units
Net income
Distributions to unitholders
Conversion of convertible debentures
Units repurchased and cancelled
Other comprehensive loss
Note
Value of
Units
Accumulated
net income
Accumulated
distributions
Accumulated other
comprehensive
income (loss)
(note 14)
Total
$ 5,236,472 $ 4,163,529 $ (2,921,668)
-
-
(381,106)
-
-
-
(3,302,774)
121,175
-
-
17
(2,734)
-
5,354,930
-
388,745
-
-
-
-
4,552,274
144,360
-
-
2
(15,939)
-
-
667,870
-
-
-
-
-
-
(397,908)
-
-
-
13(d)
9(c)
13(f)
13(d)
9(c)
13(f)
$ 346,587 $ 6,824,920
121,175
388,745
(381,106)
17
(2,734)
(38,367)
6,912,650
-
-
-
-
-
(38,367)
308,220
-
-
-
-
-
(131,272)
144,360
667,870
(397,908)
2
(15,939)
(131,272)
Unitholders' equity, December 31, 2017
$ 5,483,353 $ 5,220,144 $ (3,700,682)
$ 176,948 $ 7,179,763
See accompanying notes to the combined financial statements.
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, 2017 and 2016
Cash provided by (used in):
Operations:
Net income
Finance cost - operations
Interest paid
Items not affecting cash:
Net income from equity accounted investments
Rent amortization of tenant inducements
Loss on foreign exchange
Fair value adjustment on real estate assets
Fair value adjustments on financial instruments
Loss on sale of real estate assets, net of related costs
Unit-based compensation
Deferred income taxes
Change in other non-cash operating items
Investing:
Properties under development:
Acquisitions
Additions
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
Proceeds from sale of investment
Restricted cash
Financing:
Bank indebtedness
Mortgages payable:
New mortgages payable
Principal repayments
Repayment of loan payable
Redemption of debentures payable
Proceeds from issuance of debentures payable
Proceeds from issuance of units, net of issue costs
Units repurchased and cancelled
Distributions to unitholders
Increase (decrease) 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 18).
See accompanying notes to the combined financial statements.
4
Note
2017
2016
17
4
15
3
17
3
13(c)
23
18
3
3, 18
3, 18
3, 18
3
3
6, 18
7
8
8
9(c)
9(c)
13(f)
13(d)
7
7
$ 667,870
270,358
(258,328)
$ 388,745
287,325
(299,533)
(167,407)
2,354
17,903
(1,796)
(27,049)
7,729
4,869
(39,777)
2,513
479,239
(71,260)
(14,479)
115,432
(417,428)
(111,986)
(51,845)
(28,722)
6,169
(107,233)
56,597
(880)
(625,635)
(48,341)
2,241
8,944
(133,738)
33,830
8,167
17,916
199,591
(40,951)
424,196
-
(20,104)
347,454
(325,169)
(65,814)
(58,924)
(34,682)
92,447
58,363
-
5,182
(1,247)
69,704
331,359
588,094
(585,659)
-
(249,394)
619,299
5,051
(15,939)
(290,497)
140,659
(5,737)
48,021
$ 42,284
131,949
(489,891)
(54,102)
(254,983)
198,185
1,266
(2,734)
(274,264)
(413,215)
9,734
38,287
$ 48,021
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, 2017 and 2016
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 14, 2018.
(b) 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.
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, 2017 and 2016
1.
Basis of preparation (continued):
(c) Basis of measurement
The combined financial statements have been prepared on the historical cost basis except for the following 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.
(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); and
Deferred tax asset (liability) (note 23).
(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.
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, 2017 and 2016
1.
Basis of preparation (continued):
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.
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 cash flows 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.
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, 2017 and 2016
2. Significant accounting policies (continued):
The foreign exchange gain (loss) recorded in net income as a result of translating 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, under IAS 40, Investment Property (“IAS
40”).
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.
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 included in 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. 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.
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, 2017 and 2016
2. Significant accounting policies (continued):
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 considered to be 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 are classified separately from other assets and other liabilities in the statement of financial
position. These amounts are not offset or presented as a single amount.
(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 as accrued rent receivable,
which is included in the investment property balance. 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.
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.
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, 2017 and 2016
2. Significant accounting policies (continued):
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 from 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 2017 and the 2016 comparative year.
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 the REIT’s and Finance Trust's distributions are treated as an exemption
from taxation as the REIT and Finance Trust have distributed and are committed to continue distributing all of their taxable income to their
unitholders.
(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
13(c). 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 investment in U.S. Holdco, a wholly owned subsidiary of the REIT in the United States (“foreign operations”), as a
U.S. dollar functional currency 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 senior debenture and bank
indebtedness are 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 these obligations are recorded as a foreign currency translation adjustment in accumulated other
comprehensive income (loss).
Assets and liabilities denominated in a currency other than the functional currency are translated into the functional currency 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, with any gain (loss) recorded in net income, unless the asset or liability is designated as a hedge.
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, 2017 and 2016
2. Significant accounting policies (continued):
(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.
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, 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 their contractual obligations are discharged or cancelled or expire.
(iii) Derivative financial instruments
The REIT holds derivative financial instruments to hedge its 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, as described in note 12, are accounted for
as hedges.
(iv) Financial liabilities measured at fair value through profit or loss
A financial liability is classified at fair value through profit or loss 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 profit or loss 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, 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.
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, 2017 and 2016
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’ interests in their 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.
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.
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, 2017 and 2016
2. Significant accounting policies (continued):
(r) Levies:
Under IFRS Interpretations Committee Interpretation, 21, Levies (“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.
(s) Subsidiaries
Subsidiaries are entities controlled by the Trusts. The Trusts control an entity when it is exposed to, or has rights to, variable returns from their
involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries
are included in the combined financial statements from the date on which control commences until the date on which control ceases.
(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) Share-Based Payment (“IFRS 2”)
In 2016, the IASB issued amendments to IFRS 2 Share-based Payment, clarifying how to account for certain types of share-based
payment transactions. The Trusts intend to adopt the amendments to IFRS 2 in its combined financial statements for the annual period
beginning on January 1, 2018. The Trusts do not expect the standard to have a material impact on the financial statements.
(ii) Financial Instruments: Classification and Measurement (“IFRS 9”)
The Trusts will adopt IFRS 9, Financial Instruments: Classification and Measurement, which replaces IAS 39 Financial Instruments:
Recognition and Measurement (“IAS 39”), in the combined financial statements beginning on January 1, 2018, the mandatory effective
date. The adoption of IFRS 9 will generally be applied retrospectively, without restatement of comparative information.
IFRS 9 contains a new classification and measurement approach which requires financial assets to be classified and measured based
on the business model in which they are held and the characteristics of their contractual cash flows. IFRS 9 contains three principal
classification categories for financial assets: measured at amortized cost, fair value through other comprehensive income and fair value
through profit or loss, and eliminates the existing IAS 39 categories of held to maturity, loans and receivables and available for sale.
For impairment of financial assets, IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ model.
The new impairment model will apply to financial assets measured at amortized cost or fair value through other comprehensive income,
except for investments in equity instruments, and to contract assets.
IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. However, under IAS 39 all fair value
changes of liabilities designated as fair value through profit or loss are recognized in profit or loss, whereas under IFRS 9 the amount of
change in fair value attributable to changes in the credit risk of the liability is presented in other comprehensive income, and the remaining
amount of change in fair value is presented in profit or loss.
IFRS 9 also includes a new general hedge accounting standard which aligns hedge accounting more closely with risk management. The
Trusts do not currently apply hedge accounting.
Management does not expect the adoption of IFRS 9 to have a material impact on the combined financial statements.
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, 2017 and 2016
2. Significant accounting policies (continued):
(iii) Revenue from Contracts with Customers (“IFRS 15”)
IFRS 15, Revenue from Contracts with Customers is effective for annual periods beginning on or after January 1, 2018, and will replace
all existing guidance in IFRS related to revenue, including (but not limited to) IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 15
Agreements for the Construction of Real Estate.
IFRS 15 contains a single, control-based model that applies to contracts with customers and two approaches to recognizing revenue: at
a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and
when revenue is recognized. IFRS 15 also includes additional disclosure requirements for revenue accounted for under the standard.
The Trusts will adopt IFRS 15 in the combined financial statements for the annual period beginning January 1, 2018. The Trust plans to
adopt IFRS 15 using the cumulative effect method, with the effect of initially applying this standard recognized at January 1, 2018. As a
result, the Trusts will not apply the requirements of IFRS 15 to the comparative period presented. Management does not expect that the
adoption of IFRS 15 will have a material impact on the combined financial statements. However, additional disclosure requirements may
result in separate disclosure of revenue for service components that are part of a lease (i.e. a non-lease component).
(iv) Leases (“IFRS 16”)
IFRS 16, Leases will replace existing lease guidance in IFRS and related interpretations, and requires lessees to bring most leases on-
balance sheet. Lessor accounting remains similar to the current standard. The new standard is effective for years beginning on January
1, 2019.
The Trusts are still evaluating the impact of IFRS 16. In particular, the Trusts are assessing how the new standard may impact the
identification of lease and non-lease components, including the allocation of consideration to each lease and non-lease component. The
standard requires this allocation to be completed in accordance with the guidance in IFRS 15, that is, on the basis of relative standalone
selling prices.
(v)
IFRIC Interpretation 23, Uncertainty over Income Tax Treatments
On June 7, 2017, the IASB issued IFRIC Interpretation 23 Uncertainty over Income Tax Treatments. The Interpretation provides guidance
on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax
treatments. The Interpretation is applicable for annual periods beginning on or after January 1, 2019 with early adoption permitted. The
Interpretation requires: a) the Trusts to contemplate whether uncertain tax treatments should be considered separately, or together as a
group, based on which approach provides better predictions of the resolution; b) determine if it is probable that the tax authorities will
accept the uncertain tax treatment and c) if it is not probable that the uncertain tax treatment will be accepted, measure the tax uncertainty
based on the most likely amount or expected value, depending on whichever method better predicts the resolution of the uncertainty.
The Trusts intend to adopt the Interpretation in their combined financial statements for the annual period beginning on January 1, 2019.
The extent of the impact of adoption of the Interpretation 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, 2017 and 2016
3. Real estate assets:
Opening balance, beginning of year
Acquisitions, including transaction costs
Dispositions
Transfer from equity accounted investment
Transfer of investment properties to assets classified as held for sale
Operating capital
Capital expenditures
Leasing expenses and tenant inducements
Development capital
Redevelopment (including capitalized interest)
Amortization of tenant inducements, straight-line rents and blend and
extend rents included in revenue
Transfer of properties under development that have reached substantial
completion to investment properties
Fair value adjustment on real estate assets
Change in foreign exchange
Closing balance, end of year
December 31, 2017
December 31, 2016
Investment
Properties
Properties
Under
Development
Investment
Properties
Properties
Under
Development
$ 12,564,144
$ 118,268
$ 12,576,075
$ 97,504
430,537
(70,062)
62,500
-
51,845
28,722
113,212
71,260
-
-
-
-
-
-
325,169
(337,428)
(211,550)
58,924
34,682
62,729
-
(1,478)
-
5,585
116,525
3,038
(224,860)
(116,525)
(1,242)
(4,184)
-
133,738
(83,780)
-
-
-
-
-
-
20,764
-
-
-
-
$ 13,074,123
$ 83,132
$ 12,564,144
$ 118,268
Additions to properties under development (including capitalized interest)
-
15,555
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. 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, 2017 and 2016
3. Real estate assets (continued):
Asset acquisitions:
During the year ended December 31, 2017, the REIT acquired five residential properties and one residential property under development which
was transferred to investment properties upon substantial completion (year ended December 31, 2016 – four residential properties and a 50%
ownership interest in one industrial 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 purchase price plus transaction costs of the assets and liabilities as at the respective dates of acquisition:
Assets
Investment properties
Property under development
Liabilities
Mortgage payable
Total net assets settled in cash
December 31
2017
December 31
2016
$ 430,516
$ 323,877
71,260
501,776
-
323,877
-
-
$ 501,776
$ 323,877
During the year ended December 31, 2017, the REIT incurred additional costs of $21 (December 31, 2016 - $1,292) in respect of prior year
acquisitions which are not included in the above table.
Asset dispositions:
During the year ended December 31, 2017, the REIT sold three retail properties, a 50% ownership interest in two Primaris properties, a 50%
interest in one industrial property, one residential property and one office property and recognized a loss on sale of real estate assets of $7,729.
The loss on sale of real estate assets includes mark-to-market adjustments on the purchaser’s assumption of a mortgage of $3,544.
During the year ended December 31, 2016, the REIT sold five retail properties, a 50% ownership interest in two industrial properties, a 50% non-
managing interest in one office property and a portion of an office property (sold as separate condominium units) and recognized a loss on sale of
real estate assets of $8,167.
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) Discounted cash flow analyses which are 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 and
capital expenditures for the property utilizing appropriate discount rates and terminal capitalization rates, generally over a projection period
of ten years;
(iii) The direct capitalization method which calculates fair value by applying a capitalization rate to the normalized net operating income.
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, 2017 and 2016
3. Real estate assets (continued):
(iv) External independent appraisals. During the year ended December 31, 2017, certain properties were valued by professional external
independent appraisers. These properties represent 32.3% of the fair value of investment properties as at December 31, 2017 (year ended
December 31, 2016 - 30.2%). The remainder of the portfolio was valued by the REIT’s internal valuation team. The properties that were
externally appraised are 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 for mortgage
financing purposes.
The REIT utilizes external industry sources to determine a range of capitalization and discount rates. To the extent that externally provided
capitalization and discount rates ranges change from one reporting period to the next, the fair value of the investment properties is increased or
decreased accordingly.
The following table highlights the significant assumptions used in determining the fair value of the REIT’s investment properties:
Overall Capitalization Rates
Discount Rates
Terminal Capitalization Rates
Canada
5.63%
5.73%
United
States
5.78%
5.92%
Total Canada
5.67%
5.79%
6.46%
6.66%
United
States
6.60%
6.78%
Total Canada
6.50%
6.69%
5.88%
6.09%
United
States
6.08%
6.24%
Total
5.94%
6.13%
December 31, 2017
December 31, 2016
Fair value sensitivity:
The REIT’s investment properties are classified as level 3 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, 2017:
Capitalization Rate
Sensitivity
Increase (Decrease)
(0.75%)
(0.50%)
(0.25%)
December 31, 2017
0.25%
0.50%
0.75%
Overall
Capitalization Rate
Fair Value of
Investment Properties
4.92%
5.17%
5.42%
5.67%
5.92%
6.17%
6.42%
$ 15,067,130
$ 14,338,545
$ 13,677,173
$ 13,074,123
$ 12,522,006
$ 12,014,632
$ 11,546,772
Fair Value
Variance
$ 1,993,007
$ 1,264,422
$ 603,050
$ -
$ (552,117)
$ (1,059,491)
$ (1,527,351)
% Change
15.24%
9.67%
4.61%
0.00%
(4.22%)
(8.10%)
(11.68%)
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, 2017 and 2016
4. 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’s arrangements fall into two categories: a) joint ventures, where the REIT has
joint control over the operations, where 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, 2017, the REIT: (i) acquired a 33.3% net interest in the Koenig Lane Development LP (“Koenig”), a joint
venture, for $6,413; (ii) disposed of nine industrial properties; and (iii) commenced accounting for F1RST Tower as a proportionately consolidated
investment property in the combined financial statements, as the legal structure of F1RST Tower, formerly Telus Tower, changed effective January
1, 2017 from a partnership that was an equity accounted investment to a co-ownership which is proportionately consolidated.
During the year ended December 31, 2016, the REIT: (i) acquired a 31.7% net interest in the Hercules Development Partners LP (“Hercules”), a
joint venture, for $13,694; (ii) disposed of its 33.3% ownership interests in 100 Yonge and Scotia Plaza for a gain on sale of investment in joint
venture at the REIT’s share of $14,965; and (iii) disposed of one industrial property.
Investments in joint ventures:(a)
100 Yonge
Scotia Plaza
F1RST Tower
6 industrial properties
Hercules
Koenig
Investments in associates:(b)
ECHO Realty LP ("ECHO")
LIC Operator Co., L.P. ("LIC")
Location
Principal activity
Toronto, Ontario
Own and operate investment property
Toronto, Ontario
Own and operate investment property
Calgary, Alberta
Own and operate investment property
United States
United States
United States
Own and operate investment property
Develop, own and operate investment property
Develop, own and operate investment property
United States
United States
Own and operate investment properties
Develop, own and operate investment property
Ownership interest
December 31
December 31
2017
2016
N/A
N/A
(d)
50.5%
31.7%
33.3%
33.6%
50.0%
(c)
(c)
50.0%
50.5%
31.7%
-
33.6%
50.0%
(a) 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.
(b) Where the REIT has significant influence over the investment but does not have joint control over the operations.
(c) The REIT disposed of its 33.3% ownership interests in 100 Yonge and Scotia Plaza in June 2016.
(d) Commencing January 1, 2017, the REIT proportionately consolidates F1RST Tower due to a change in the legal structure of the investment.
18
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, 2017 and 2016
4. Equity accounted investments (continued):
The following tables summarize the total amounts of the financial information of the equity accounted investments 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:
Equity accounted investments:
Investment properties
Properties under development
Other assets
Loan receivable
Cash and cash equivalents
Mortgages payable
Deferred tax liability
Bank indebtedness
Accounts payable and accrued liabilities
Non-controlling interest
Net assets
December 31, 2017
December 31, 2016
Investments in
joint ventures
Investments in
associates
Total
Investments in
joint ventures
Investments in
associates
Total
$ 112,896
$ 2,328,749
$ 2,441,645
$ 553,633
$ 2,262,258
$ 2,815,891
1,596,490
1,664,712
76,940
179,996
68,222
103,056
-
107,205
(36,232)
(310)
-
30,383
(536,907)
-
-
(993,432)
(4,393)
-
(99,794)
(74,428)
-
137,588
(573,139)
(310)
(993,432)
(104,187)
(74,428)
43,336
2,636
17,200
7,115
1,002,968
1,046,304
93,304
-
90,978
95,940
17,200
98,093
(208,636)
(666,763)
(875,399)
(330)
-
(7,888)
-
-
(479,807)
(111,302)
(57,671)
(330)
(479,807)
(119,190)
(57,671)
350,444
2,328,001
2,678,445
407,066
2,133,965
2,541,031
REIT's share of net assets
Elimination of intercompany loans
163,907
961,228
1,125,135
-
-
-
196,721
(8,600)
863,066
1,059,787
-
(8,600)
Amount in the combined statements of
financial position
$ 163,907
$ 961,228
$ 1,125,135
$ 188,121
$ 863,066
$ 1,051,187
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, 2017 and November 30, 2016, respectively. In December 2016, ECHO acquired three properties
for approximately $23,500, at the REIT’s share.
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, 2017 and 2016
4. Equity accounted investments (continued):
Year ended December 31, 2017
Year ended December 31, 2016
Investments in
joint ventures
Investments in
associates
Total
Investments in
joint ventures
Investment in
associates
Total
Net income (loss) from equity accounted
investments:
Rentals from investment properties
$ 31,506
$ 216,095
$ 247,601
$ 131,627
$ 178,715
$ 310,342
Property operating costs
(4,855)
(46,852)
(51,707)
(51,122)
(39,055)
(90,177)
Net income from equity accounted investments
Finance income
Finance cost - operations
Trust expenses
Fair value adjustments on financial instruments
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 owners
REIT's share of net income (loss) attributable
to shareholders
REIT's share of gain on sale of investment in
joint venture*
Elimination of intercompany loan interest
Amount in the combined statements of
comprehensive income (loss)
-
87
(5,431)
(293)
-
(30,517)
(1,993)
(236)
(11,732)
-
(11,732)
1,750
1,071
(47,874)
(6,387)
9,213
1,750
1,158
(53,305)
(6,680)
9,213
-
1,758
(20,943)
(381)
-
262,840
232,323
(220,908)
802
(197)
(1,191)
(433)
(105)
(501)
390,461
378,729
(160,575)
(2,640)
387,821
(2,640)
376,089
-
(160,575)
1,573
1,487
1,573
3,245
(40,481)
(61,424)
(4,212)
(1,857)
129,436
(1,273)
(111)
224,222
(1,365)
222,857
(4,593)
(1,857)
(91,472)
(1,378)
(612)
63,647
(1,365)
62,282
(5,854)
173,261
167,407
(63,903)
98,194
34,291
-
-
-
-
-
-
14,965
(826)
-
(89)
14,965
(915)
$ (5,854)
$ 173,261
$ 167,407
$ (49,764)
$ 98,105
$ 48,341
* During the year ended December 31, 2016, the REIT disposed of its 33.3% ownership interests in 100 Yonge and Scotia Plaza for a gain on sale of investment in joint venture
at the REIT’s share of $14,965.
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, 2016 to November 30, 2017 and December 1, 2015 to November 30, 2016, respectively.
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, 2017 and 2016
5. Assets and liabilities classified as held for sale:
As at December 31, 2017, the REIT has no properties (December 31, 2016 – 50% ownership interest in two Primaris properties) classified 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
6. Other assets:
Mortgages receivable*
Prepaid expenses and sundry assets
Restricted cash
Accounts receivable
Derivative instruments
December 31
2017
December 31
2016
$ -
$ 211,550
$ -
$ 126,567
-
248
$ -
$ 126,815
Note
12
December 31
December 31
2017
$ 153,211
33,554
25,311
15,739
6,374
2016
$ 43,817
92,975
11,275
12,999
776
$ 234,189
$ 161,842
* As at December 31, 2017, mortgages receivable bear interest at effective rates between 3.25% and 9.00% per annum (December 31, 2016 - between 4.40% and 9.00%
per annum) with a weighted average effective rate of 7.42% per annum (December 31, 2016 - 7.99%), and mature between 2018 and 2026 (December 31, 2016 -
mature between 2020 and 2026).
Future repayments are as follows:
Years ending December 31:
2018
2019
2020
2021
2022
Thereafter
21
December 31
2017
$ 84,566
4,304
16,072
37,848
-
10,421
$ 153,211
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, 2017 and 2016
7. Cash and cash equivalents and bank indebtedness:
Cash and cash equivalents at December 31, 2017 includes cash on hand of $42,022 (December 31, 2016 - $47,760) and bank term deposits of
$262 (December 31, 2016 - $261) at a rate of interest of 0.85% (December 31, 2016 – 0.43%).
The Trusts have the following bank credit facilities as at December 31, 2017:
Maturity Date
Total
Facility
Bank
Indebtedness
Outstanding
Letters of
Credit
Available
Balance
December 18, 2018
$ 500,000
$ (208,713)
$ (31,928)
$ 259,359
March 17, 2021
200,000
700,000
(186,629)
(395,342)
-
(31,928)
13,371
272,730
Unsecured operating facilities:
H&R REIT unsecured operating facility #1
H&R REIT unsecured operating facility #2
Sub-total unsecured facilities
Secured operating facilities*:
Primaris secured operating facility
H&R REIT and CrestPSP secured operating facility
(a)
(b)
(a)
(a)
H&R REIT co-ownership secured operating facility
September 30, 2019
Sub-total secured facilities
July 1, 2019
300,000
(283,340)
February 19, 2019
25,000
3,514
-
(3,514)
328,514
(286,854)
(891)
(105)
-
(996)
15,769
24,895
-
40,664
$ 1,028,514
$ (682,196)
$ (32,924)
$ 313,394
*
Secured by certain investment properties.
The bank credit facilities bear interest at a rate approximating the prime rate of a Canadian chartered bank.
(a) Can be drawn in either Canadian or U.S. dollars.
(b) The total facility as at December 31, 2017 is $200,000, plus a 3% allowance relating to the fluctuation of the foreign exchange rate, and can be drawn in either Canadian
or U.S. dollars. The REIT entered into an interest swap agreement to fix the interest rate at 2.56% per annum on U.S. $130,000 of the U.S. dollar denominated
borrowing of this facility (note 12).
Included in bank indebtedness at December 31, 2017 are U.S. dollar denominated amounts of $467,000 (December 31, 2016 – U.S. $441,000).
The Canadian equivalent of these amounts is $588,420 (December 31, 2016 - $590,940).
The following table shows the change in bank indebtedness from January 1, 2017 to December 31, 2017:
Opening balance, beginning of year
Net proceeds from bank credit facilities
Change in foreign exchange
Closing balance, end of year
In January 2018, the REIT obtained an additional $200,000 unsecured revolving operating facility due on January 31, 2023.
December 31
2017
$ 647,772
69,704
(35,280)
$ 682,196
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, 2017 and 2016
8. Mortgages payable:
The mortgages payable are secured by real estate assets and letters of credit in certain cases, that generally bear fixed interest rates with a
contractual weighted average rate of 4.26% (December 31, 2016 - 4.41%) per annum and mature between 2018 and 2033 (December 31, 2016
- maturing between 2017 and 2033). Included in mortgages payable at December 31, 2017 are U.S. dollar denominated mortgages of U.S.
$1,189,793 (December 31, 2016 - U.S. $1,024,869). The Canadian equivalent of these amounts is $1,499,139 (December 31, 2016 - $1,373,324).
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:
Years ending December 31:
2018
2019
2020
2021
2022
Thereafter
Financing costs and mark-to-market adjustment arising on acquisitions
The following table shows the change in mortgages payable from January 1, 2017 to December 31, 2017:
Opening balance, beginning of year
Principal repayments:
Scheduled amortization on mortgages
Mortgage repayments
New mortgages
Transfer from equity accounted investment
Effective interest rate accretion on mortgages
Change in foreign exchange rates
Closing balance, end of year
December 31
2017
$ 264,796
259,885
486,327
950,854
660,115
1,343,463
3,965,440
(6,809)
$ 3,958,631
December 31
2017
$ 4,001,451
(133,330)
(452,329)
588,094
39,854
(3,119)
(81,990)
$ 3,958,631
23
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, 2017 and 2016
9. Debentures payable:
The full terms of the debentures are contained in the trust indenture and supplemental trust indentures; the following table summarizes the key terms:
Contractual
interest
rate
Effective
interest
rate
Maturity
Conversion
price
Principal
amount
Carrying
value
Carrying
value
December 31 December 31
2017
2016
Convertible Debentures (a)
2018 Convertible Debentures (HR.DB.H)
2020 Convertible Debentures (HR.DB.D)
June 30, 2020
Senior Debentures (b)
Series I Senior Debentures
Series B Senior Debentures
Series E Senior Debentures(5)
Series J Senior Debentures(5)
Series G Senior Debentures
Series C Senior Debentures
Series K Senior Debentures
Series M Senior Debentures
Series F Senior Debentures
Series L Senior Debentures
Series N Senior Debentures
(1)
February 2, 2018
February 9, 2018
June 20, 2018
December 1, 2018
March 1, 2019
July 23, 2019
March 2, 2020
May 6, 2022
January 30, 2024
5.40%
5.90%
5.90%
2.54%
5.90%
4.90%
2.04%
3.34%
5.00%
2.36%
2.66%
4.45%
2.92%
3.37%
3.30%
5.40%
5.90%
5.90%
(1)
6.06%
5.22%
(2)
3.54%
5.30%
(3)
(4)
4.58%
3.11%
3.45%
3.49%
24.73 $ -
$ -
$ 76,254
23.50
-
-
-
-
-
-
-
-
-
-
-
99,652
99,652
-
-
100,000
157,500
175,000
125,000
200,000
150,000
175,000
325,000
350,000
103,140
103,140
102,644
178,898
-
-
99,971
157,480
174,847
124,690
199,633
149,683
174,519
321,158
347,669
59,992
114,992
99,705
167,278
174,511
124,350
199,331
-
174,316
198,218
-
1,757,500
1,749,650
1,312,693
3.44%
3.62%
$1,857,152
$ 1,852,790
$ 1,491,591
The Convertible Debentures are measured at fair value, with fair value determined using the quoted price on the TSX on December 31, 2017 and
December 31, 2016.
(1) Bore interest at a rate equal to 3-month Canadian Dealer Offered Rate plus 165 basis points. The REIT entered into an interest rate swap on the Series I senior debentures
to fix the interest rate at 2.54% per annum (note 12). In January 2017, the REIT repaid all of its Series I senior debentures upon maturity for a cash payment of $60,000.
(2) Denominated as $125,000 U.S. dollars and bears interest at a rate equal to 3-month London Interbank Offered Rate plus 108 basis points. The REIT entered into an
interest rate swap on the Series J senior debentures to fix the interest rate at 2.04% (note 12).
(3) Bears interest at a rate equal to 3-month Canadian Dealer Offered Rate plus 143 basis points. The REIT entered into an interest rate swap on the Series K senior
debentures to fix the interest rate at 2.36% per annum (note 12).
(4) Bears interest at a rate equal to 3-month Canadian Dealer Offered Rate plus 123 basis points. The interest rate for the period from October 23, 2017 to December 31,
2017 is 2.66%.
(5)
In February 2018, the REIT repaid all of its Series E and Series J senior debentures upon maturity for a cash payment of $100,000 and U.S. $125,000, respectively.
In January 2018, the REIT issued $250,000 principal amount of Series O senior debentures maturing on January 23, 2023.
In February 2018, the REIT issued U.S. $125,000 principal amount of Series P senior debentures maturing on February 13, 2020.
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, 2017 and 2016
9.
Debentures payable (continued):
(a)
2018 Convertible Debentures and 2020 Convertible Debentures:
In July 2010, the REIT completed a public offering of $100,000 Series D convertible unsecured subordinated debentures (the “2020
Convertible Debentures”). 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.
Each 2020 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 2020 Convertible Debentures, at
a specified conversion price, subject to adjustment upon the occurrence of certain events in accordance with the indenture governing the
2020 Convertible Debentures.
On redemption or maturity of the 2020 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 2020 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 2020 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.
On April 4, 2013, the REIT assumed all of Primaris’s outstanding convertible debentures (the “2018 Convertible Debentures”). In September
2017, the REIT redeemed all of the outstanding 2018 Convertible Debentures for a cash payment of $74,394.
(b) Senior Debentures:
In January 2017, the REIT issued $150,000 Series M unsecured senior debentures (the “Series M Senior Debentures”). On issuance, the
REIT recorded a liability of $149,461 net of issue costs of $539.
In January 2017 and April 2017, the REIT issued $200,000 and $150,000 Series N unsecured senior debentures (the “Series N Senior
Debentures”), respectively. On issuance, the REIT recorded an aggregate liability of $347,393 net of aggregate issuance costs of $2,607.
In August 2017, the REIT issued an additional $125,000 Series L unsecured senior debentures (the “Series L Senior Debentures”) bringing
the total principal amount outstanding to $325,000. On issuance of the additional $125,000, the REIT recorded a liability of $122,445 net
of issue costs of $2,555.
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, 2017 and 2016
9.
Debentures payable (continued):
At its option, the REIT may redeem any of the fixed rate Senior Debentures, in whole at any time, or in part from time to time (i) in the case of the
Series N and Series O senior debentures, prior to the specified par call date; and (ii) in the case of any other fixed rate senior debentures, 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. Between the specified par call date and
maturity, the applicable Senior Debentures may be redeemed on payment of a redemption price equal to par. 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.
(c) A summary of the changes in the carrying value of debentures payable is as follows:
Convertible Debentures
Carrying value, beginning of year
Conversion - 2016 Convertible Debentures
Conversion - 2020 Convertible Debentures
Redemption - 2016 Convertible Debentures (HR.DB.E)
Redemption - 2018 Convertible Debentures (HR.DB.H)
(Gain) loss on change in fair value
Carrying value, end of year
Senior Debentures
Carrying value, beginning of year
Redemption - Series I Senior Debentures
Redemption - Series D Senior Debentures
Redemption - Series B Senior Debentures
Issuance - Series M Senior Debentures
Issuance - Series N Senior Debentures
Issuance - Series L Senior Debentures
Change due to foreign exchange rates
Accretion adjustment
Carrying value, end of year
December 31
December 31
2017
2016
$ 178,898
$ 253,349
-
(2)
-
(74,394)
(1,362)
103,140
(17)
-
(74,983)
-
549
178,898
1,312,693
(60,000)
1,297,420
-
-
(180,000)
(115,000)
149,461
347,393
122,445
(10,000)
2,658
-
-
-
198,185
(4,987)
2,075
1,749,650
1,312,693
$ 1,852,790
$ 1,491,591
(1)
(1)
(1)
(1)
(1)
(2)
(2)
(2)
(1) During the year ended December 31, 2017, the REIT redeemed debentures payable of $249,394 (2016 - $254,983).
(2) During the year ended December 31, 2017, the REIT issued debentures payable of $619,299 (2016 - $198,185).
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, 2017 and 2016
10. Exchangeable units:
Certain of the REIT’s subsidiaries have in aggregate 15,979,430 (December 31, 2016 - 16,563,816) exchangeable units outstanding which are
puttable instruments where, upon redemption, the REIT has a contractual obligation to issue Stapled Units. A subsidiary of the REIT also holds
433,174 (December 31, 2016 - 433,174) Stapled Units to mirror these exchangeable units. Therefore, when such exchangeable units are
exchanged for Stapled Units, the number of outstanding Stapled Units will not increase. Holders of all exchangeable units are entitled to receive
the economic equivalence of distributions on a per unit amount equal to a per Stapled Unit amount provided to holders of Stapled Units. These
puttable instruments are classified as a liability under IFRS and are measured at fair value through net income. Fair value is determined by using
the quoted prices for the Stapled Units as the exchangeable units are exchangeable into Stapled Units at the option of the holder. The quoted
price as at December 31, 2017 was $21.36 per Stapled Unit (December 31, 2016 - $22.37).
A summary of the carrying value of exchangeable units is as follows:
Carrying value, beginning of year
Exchanged for Stapled Units
(Gain) loss on fair value of exchangeable units
Carrying value, end of year
December 31
December 31
2017
2016
$ 370,533
$ 334,110
(13,324)
(15,888)
(2,295)
38,718
$ 341,321
$ 370,533
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.
11. Accounts payable and accrued liabilities:
Current:
Other accounts payable and accrued liabilities
Mortgage interest payable
Prepaid rent
Debenture interest payable
Derivative instruments
Unit-based compensation payable:
Options
Incentive units
Non-current:
Security deposits
Unit-based compensation payable:
Options
Incentive units
December 31
December 31
Note
2017
2016
$ 149,282
$ 141,984
9,376
23,059
13,295
-
2,249
3,156
10,595
20,757
10,495
3,791
6,451
3,981
5,752
4,932
10,297
2,565
11,461
2,978
$ 219,031
$ 217,425
12
13(c)
13(c)
13(c)
13(c)
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, 2017 and 2016
12. Derivative instruments:
Debenture interest rate swap
Debenture interest rate swap
Bank indebtedness interest rate swap
(a)
(b)
(c)
The REIT entered into interest rate swaps as follows:
Fair value asset (liability)*
Net gain (loss) on derivative contracts
December 31
December 31
December 31
December 31
2017
2016
2017
2016
$ 2,231
$ 776
$ 1,455
$ 776
177
3,966
(407)
(3,384)
584
7,350
(407)
(3,384)
$ 6,374
$ (3,015)
$ 9,389
$ (3,015)
(a) To fix the interest rate at 2.36% per annum for the Series K senior debentures, which mature on March 1, 2019.
(b) To fix the interest rate at 2.54% per annum for the Series I senior debentures (settled when these debentures matured on January 23, 2017) and, to fix the interest
rate at 2.04% per annum for the Series J senior debentures, which mature on February 9, 2018.
(c) To fix the interest rate at 2.56% per annum on U.S. $130 million of bank indebtedness, maturing on March 17, 2021.
*
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.
13. 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.
(a) Description of 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, 2017, 9,500,000 special voting units are issued and outstanding (December 31,
2016 - 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 13(e)).
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, 2017 and 2016
13. Unitholders’ equity (continued):
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).
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.
(b) Unit Purchase Plan and Dividend Reinvestment Plan (the “DRIP”):
The Trusts offer holders of Stapled Units and holders of exchangeable units resident in Canada the opportunity to participate in its DRIP.
The DRIP allows participants to have their monthly cash distributions reinvested in additional Stapled Units 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.
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, 2017 and 2016
13. Unitholders’ equity (continued):
Changes in the issued and outstanding number of Stapled Units during the years ended December 31, 2017 and 2016 are as follows:
As at January 1, 2016
Issuance of units:
Issued under the Dividend Reinvestment Plan and Unit Purchase Plan (the "DRIP")
Options exercised
Exchangeable units exchanged into Stapled Units
Conversion of convertible debentures
Units repurchased and cancelled
As at December 31, 2016
Issuance of units:
Issued under the DRIP
Issued upon exercise of options
Incentive units settled in Stapled Units
Exchangeable units exchanged into Stapled Units
Conversion of convertible debentures
Units repurchased and cancelled
As at December 31, 2017
Note
13(f)
13(f)
279,610,123
5,610,389
100,334
100,000
661
(141,800)
285,279,707
5,557,815
652,291
1,354
584,386
85
(755,420)
291,320,218
The weighted average number of basic Stapled Units for the year ended December 31, 2017 is 288,787,282 (December 31, 2016 -
282,215,659).
(c) 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, 2017, a maximum of 28,000,000 (December 31, 2016 - 28,000,000) options to purchase Stapled Units were
authorized to be issued, of which 21,402,296 options (December 31, 2016 - 21,402,296 options) have been granted, 452,170 options
(December 31, 2016 - 343,422 options) have expired and 7,049,874 options (December 31, 2016 - 6,941,126 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.
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, 2017 and 2016
13. Unitholders’ equity (continued):
A summary of the status of the unit option plan and the changes during the respective years are as follows:
Outstanding, beginning of year
Granted
Exercised
Expired
Outstanding, end of year
December 31, 2017
December 31, 2016
Units
Weighted average
exercise price
Units
Weighted average
exercise price
13,820,539
-
(2,401,408)
(108,748)
11,310,383
$ 20.26
-
(19.15)
(19.65)
6,575,006
7,345,867
(100,334)
-
$ 21.57
18.98
11.74
-
$ 20.51
13,820,539
$ 20.26
Options exercisable, end of year
6,008,045
$ 21.62
5,186,652
$ 21.66
The options outstanding at December 31, 2017 are exercisable at varying prices ranging from $15.42 to $23.18 (December 31, 2016
- $9.30 to $23.18) with a weighted average remaining life of 6.8 years (December 31, 2016 - 7.7 years). The vested options are
exercisable at varying prices ranging from $15.42 to $23.18 (December 31, 2016 - $9.30 to $23.18) with a weighted average remaining
life of 5.7 years (December 31, 2016 – 5.6 years).
(ii)
Incentive unit plan:
As at December 31, 2017, a maximum of 5,000,000 (December 31, 2016 - 5,000,000) incentive units exchangeable into Stapled Units
were authorized to be issued under the incentive unit plan. Of this amount, 651,026 incentive units (December 31, 2016 - 419,025
incentive units) have been granted, of which 39,731 incentive units (December 31, 2016 - 11,665 incentive units) have expired and
179,762 incentive units (December 31, 2016 - nil incentive units) have been settled. 4,388,705 incentive units (December 31, 2016 -
4,592,640 incentive units) remain to be granted and 431,533 incentive units remain outstanding (December 31, 2016 - 407,360
incentive units).
Incentive units are recognized based on the grant date fair value. The grant agreements provide that the awards will be satisfied in
cash, unless the holder elects to have them satisfied in Stapled Units issued from treasury, 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.
The Trusts grant performance units under the incentive unit plan with a three-year performance period for certain senior executives.
The performance units will be subject to both internal and external measures consisting of both absolute and relative performance
over a three-year period, which upon vesting are cash settled.
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, 2017 and 2016
13. Unitholders’ equity (continued):
A summary of the status of the incentive unit plan and the changes during the respective years are as follows:
Outstanding, beginning of year
Granted
Settled
Expired
Outstanding, end of year
December 31
December 31
2017
Units
407,360
232,001
(179,762)
(28,066)
431,533
2016
Units
302,990
104,370
-
-
407,360
The fair values of the unit options and incentive units, included in accounts payable and accrued liabilities, are as follows:
Options
Incentive units
Unit-based compensation expense included in trust expenses is as follows:
Options
Incentive units
(d) Distributions:
December 31
December 31
2017
$ 12,546
5,721
$ 18,267
2016
$ 17,912
6,959
$ 24,871
2017
$ 2,127
2,742
$ 4,869
2016
$ 14,323
3,593
$ 17,916
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 method of payment is at the discretion of the
trustees.
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.
For the year ended December 31, 2017, the Trusts declared distributions per Stapled Unit of $1.38 (December 31, 2016 - $1.35).
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, 2017 and 2016
13. Unitholders’ equity (continued):
The details of the distributions are as follows:
Cash distributions to unitholders
Unit distributions (issued under the DRIP)
(e) Support agreement:
2017
2016
$ 290,497
$ 274,264
107,411
106,842
$ 397,908
$ 381,106
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, Incentive Unit 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.
(f) Normal course issuer bid:
On August 8, 2017, the Trusts received approval from the TSX for the renewal of their 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 August 14, 2018 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, 2017, the Trusts purchased and cancelled 755,420 Stapled Units at a weighted average price of $21.10 per Stapled Unit, for a total cost
of $15,939. During the year ended December 31, 2016, under a previous NCIB, the Trusts purchased and cancelled 141,800 Stapled Units
at a weighted average price of $19.28 per Stapled Unit, for a total cost of $2,734.
Subsequent to December 31, 2017, the Trusts purchased and cancelled 2,945,120 Stapled Units at a weighted average price of $21.00 per
unit, for a total cost of $61,846.
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, 2017 and 2016
14. Accumulated other comprehensive income:
Items that are or may be reclassified subsequently to net income:
Balance as at January 1, 2016
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, 2016
Transfer of realized loss on cash flow hedges to net income
Unrealized loss on translation of U.S. denominated foreign operation
Cash flow
hedges
Foreign
operations
Total
$ (342)
$ 346,929
$ 346,587
30
-
(312)
30
-
-
(38,397)
308,532
30
(38,397)
308,220
-
30
(131,302)
(131,302)
Balance as at December 31, 2017
$ (282)
$ 177,230
$ 176,948
15. Rentals from investment properties:
Rental income
Straight-lining of contractual rent
Rent amortization of tenant inducements
Operating Leases:
2017
2016
$ 1,177,626
$ 1,193,471
(6,818)
(2,354)
4,781
(2,241)
$ 1,168,454
$ 1,196,011
The REIT leases its investment properties under operating leases (note 2(f)). The future minimum lease payments under non-cancellable leases
are as follows:
Less than 1 year
Between 1 and 5 years
More than 5 years
16. Other income:
2017
2016
$ 712,256
2,270,517
3,451,321
$ 665,873
2,324,926
3,827,411
$ 6,434,094
$ 6,818,210
On January 15, 2015, Target Corporation announced plans to discontinue operating stores in Canada through its subsidiary Target Canada Co.
(“Target”). As at December 31, 2016, Primaris had an interest in nine malls where 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 were guaranteed by Target Corporation, the U.S. parent of Target.
In March 2016, Primaris entered into binding agreements with Target and Target Corporation concluding the terms of settlement relating to the
leases that were disclaimed pursuant to the Companies’ Creditors Arrangement Act. The binding agreements were approved by the courts in June
2016.
Distributions in respect of the settlement proceeds, in the amount of $1,040, were received in 2017 (2016 - $20,353).
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, 2017 and 2016
17. Finance costs:
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*
Finance income
Fair value adjustments on financial instruments**
2017
2016
$ 174,492
$ 196,228
62,565
1,808
11,877
22,254
272,996
(2,638)
270,358
(4,999)
(27,049)
60,019
(2,595)
13,302
22,480
289,434
(2,109)
287,325
(4,715)
33,830
$ 238,310
$ 316,440
*
The weighted average rate of borrowings for the capitalized interest is 4.0% (December 31, 2016 - 4.75%).
** During the year ended December 31, 2017, the Trusts realized a gain of U.S. $6,718 (2016 – nil) on the sale of an investment previously classified as held for
trading.
18. Supplemental cash flow information:
Straight-lining of contractual rent
Prepaid expenses and sundry assets
Accounts receivable
Accounts payable and accrued liabilities
2017
2016
$ (876)
8
(2,728)
6,109
$ (7,828)
(69,808)
1,687
34,998
$ 2,513
$ (40,951)
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, 2017 and 2016
18. Supplemental cash flow information (continued):
The following amounts have been excluded from operating, investing and financing activities in the combined statements of cash flows:
Non-cash items:
Non-cash distributions to unitholders in the form of DRIP units
Non-cash conversion of convertible debentures
Non-cash distributions to exchangeable unitholders in the form of DRIP units
Non-cash adjustment to proceeds
Non-cash assumption of mortgage payable on disposition of investment properties
Mortgages receivable from the sale of investment properties
Restricted cash from the disposition of investment properties
Restricted cash used for the acquisition of investment properties
Exchangeable units exchanged for Stapled Units
Other items:
Decrease in accounts payable on redevelopment
(Increase) Decrease in accounts payable included in finance cost - operations
Capitalized interest on redevelopment
Capitalized interest on properties under development
19. Capital risk management:
The REIT’s primary objectives when managing capital are:
Note
13(d)
9(c)
10
17
17
2017
2016
$ 107,411
$ 106,842
2
11,051
7,523
(126,567)
4,200
26,265
(13,109)
13,324
336
(1,809)
(1,562)
(1,076)
17
9,767
1,005
-
-
-
-
2,295
4,534
3,341
(1,449)
(660)
(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:
Mortgages payable
Debentures payable
Exchangeable units
Bank indebtedness
Unitholders' equity
December 31
December 31
2017
2016
$ 3,958,631
1,852,790
341,321
682,196
$ 4,001,451
1,491,591
370,533
647,772
7,179,763
6,912,650
$ 14,014,701
$ 13,423,997
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.
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, 2017 and 2016
19. Capital risk management (continued):
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, Convertible Debentures and U.S. Holdco notes payable to Finance Trust). As at
December 31, 2017, this ratio was 43.9% (December 31, 2016 - 43.1%). Management uses this ratio as a key indicator in managing the REIT’s
capital.
In addition to the above key ratio, the REIT’s bank credit facilities (note 7), debentures payable (note 9) and certain mortgages have various
covenants calculated as defined within these agreements. The REIT monitors these covenants and was in compliance as at December 31, 2017
and December 31, 2016.
20. 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 REIT has two tenants which individually account for more than 5% of the rentals from investment
properties of the REIT: Encana Corporation and Bell Canada. Both of these companies have a public debt rating that is rated with at least
a BBB Negative rating by a recognized rating agency.
The REIT’s exposure to credit risk on receivables is as follows:
Mortgages receivable
Accounts receivable
(b)
Liquidity risk:
Note
6
6
December 31
2017
December 31
2016
$ 153,211
$ 43,817
15,739
12,999
$ 168,950
$ 56,816
The Trusts are subject to liquidity risk whereby they may not be able to refinance or pay their debt obligations when they become due.
The Trusts manage liquidity risk by:
Ensuring appropriate lines of credit available are available. As at December 31, 2017 the combined amounts available under their
bank credit facilities was $313,394 (note 7);
Maintaining a large unencumbered asset pool. As at December 31, 2017, there were 108 unencumbered properties with a fair value
of approximately $3,614,735; and
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, 2017 and 2016
20. Risk management (continued):
Structuring their financing so as to stagger the maturities of its debt, thereby minimizing exposure to liquidity risk in any one year
(notes 7, 8 and 9).
Management monitors the Trusts’ liquidity risk through review of financial covenants contained in bank credit facility agreements, debt
agreements and compliance with the REIT’s Declaration of Trust.
The Trusts’ obligations are as follows:
Mortgages payable*
Debentures payable*
Bank indebtedness*
Accounts payable and accrued liabilities**
Note
8
9
7
11
2018
Thereafter
Total
$ 264,796
$ 3,700,644
$ 3,965,440
557,500
208,713
198,168
1,299,652
1,857,152
473,483
8,317
682,196
206,485
$ 1,229,177
$ 5,482,096
$ 6,711,273
Amounts in the above table only include the principal amount for each debt obligation.
*
** Excludes options payable.
(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:
Foreign exchange risk is the risk that the fair value or future cash flows of an exposure will fluctuate because of changes in foreign
exchange rates. 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 denominated in U.S. dollars to act as a natural hedge. Additionally, the REIT has designated the Series J senior
debentures and the U.S. bank indebtedness as part of the net investment hedge of its U.S. operations.
A $0.10 weakening of the U.S. dollar against the average Canadian dollar exchange rate of $1.30 for the year ended December 31,
2017 (December 31, 2016 - $1.32) as well as the Canadian dollar exchange rate as at December 31, 2017 of $1.26 (December 31,
2016 - $1.34) would have decreased other comprehensive loss by approximately $146,900 (December 31, 2016 - $116,600) and
decreased net income by approximately $21,600 (December 31, 2016 - $26,700). 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, 2016
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, 2017, the percentage of fixed rate debt to total debt was 88.2% (December 31, 2016 – 91.1%). 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.
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, 2017 and 2016
20. Risk management (continued):
As at December 31, 2017, bank indebtedness of $518,396 is subject to variable interest rates. An increase in interest rates of 100 basis
points for the year ended December 31, 2017 would have decreased net income by approximately $2,200 (December 31, 2016 -
$3,800). This analysis assumes that all other variables, in particular foreign exchange rates, remain constant.
The floating rate Series J and K senior debentures are subject to variable rates, however the REIT entered into interest rate swaps to
reduce exposure to fluctuations in interest rates. In 2017, the floating rate Series M senior debentures were subject to variable interest
rates. An increase in interest rates of 100 basis points for the year ended December 31, 2017 would have decreased net income by
approximately $1,300. This analysis assumes that all other variables, in particular foreign exchange rates, remain constant.
As at December 31, 2017, the floating rate mortgages payable of $96,966 are subject to variable interest rates. An increase in interest
rates of 100 basis points for the year ended December 31, 2017 would have decreased net income by approximately $1,300 (December
31, 2016 - $1,000). 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 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.
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.
The fair value of the Senior Debentures 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.
(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:
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).
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, 2017 and 2016
20. Risk management (continued):
December 31, 2017
Assets measured at fair value
Investment properties
Properties under development
Derivative instruments
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
Bank indebtedness
Note
Level 1
Level 2
Level 3
Total
fair value
Carrying
value
3
3
12
6
9
10
8
9
7
$ -
-
-
$ - $ 13,074,123 $ 13,074,123 $ 13,074,123
83,132
6,374
83,132
-
-
6,374
83,132
6,374
-
-
-
-
155,621
155,621
153,211
6,374
13,312,876
13,319,250
13,316,840
(103,140)
(341,321)
-
-
-
(444,461)
-
-
-
-
-
-
-
-
(103,140)
(341,321)
-
(103,140)
(341,321)
(4,067,657)
(1,779,043)
(680,095)
(6,526,795)
(4,067,657)
(1,779,043)
(680,095)
(6,971,256)
(3,958,631)
(1,749,650)
(682,196)
(6,834,938)
$ (444,461)
$ 6,374
$ 6,786,081
$ 6,347,994
$ 6,481,902
December 31, 2016
Note
Level 1
Level 2
Level 3
Total
fair value
Carrying
value
Assets measured at fair value
Investment properties
Properties under development
Derivative instruments
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
Bank indebtedness
3
3
12
6
9
10
12
8
9
7
$ -
-
-
$ - $ 12,564,144 $ 12,564,144 $ 12,564,144
118,268
776
118,268
-
-
776
118,268
776
-
-
-
-
776
47,402
12,729,814
47,402
12,730,590
43,817
12,727,005
(178,898)
(370,533)
-
-
-
-
(549,431)
-
-
(3,791)
-
-
-
(3,791)
-
-
-
(178,898)
(370,533)
(3,791)
-
(178,898)
(370,533)
(3,791)
(4,181,006)
(1,352,637)
(645,746)
(6,179,389)
(4,181,006)
(1,352,637)
(645,746)
(6,732,611)
(4,001,451)
(1,312,693)
(647,772)
(6,515,138)
$ (549,431)
$ (3,015)
$ 6,550,425
$ 5,997,979
$ 6,211,867
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, 2017 and 2016
21. Compensation of key management personnel:
Key management personal are those individuals that have the authority and responsibility for planning, directing and controlling the REIT’s activities,
directly or indirectly.
Salaries and short-term employee benefits
Unit-based compensation
22. Segmented disclosures:
(i) Operating segments:
2017
2016
$ 3,794
3,353
$ 4,435
13,375
$ 7,147
$ 17,810
The Trusts have six reportable operating segments (Office, which also includes the Trusts’ head office and Finance Trust, Primaris, H&R Retail,
ECHO, Industrial and Residential (operating as Lantower Residential)), in two geographical locations (Canada and the United States). The
operating segments derive their revenue primarily from rental income from leases. The 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”) of the Trusts. The CEO
measures and evaluates the performance of the Trusts based on property operating income on a proportionately consolidated basis for the Trusts’
equity accounted investments. The accounting policies of the segments presented here are consistent with the Trusts’ accounting policies as
described in note 2.
Real estate assets by reportable segment as at December 31, 2017 and December 31, 2016 are as follows:
December 31, 2017
Office*
Primaris
H&R
Retail
ECHO
Industrial
Lantower
Residential
Total
Number of investment properties
36
31
123
227
93
17
527
Real estate assets:
Investment properties
Properties under development
Less: Trusts' proportionate share of real estate
assets relating to equity accounted investments
*
Includes the Trusts’ head office.
$ 6,562,552 $ 2,945,800 $ 1,399,672
-
-
-
$ 789,419 $ 1,035,920 $ 1,187,191 $ 13,920,554
898,604
805,127
10,345
83,132
6,562,552
2,945,800
1,399,672
799,764
1,119,052
1,992,318
14,819,158
-
-
-
(799,764)
(57,012)
(805,127)
(1,661,903)
$ 6,562,552 $ 2,945,800 $ 1,399,672
$ - $ 1,062,040 $ 1,187,191 $ 13,157,255
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, 2017 and 2016
22. Segmented disclosures (continued):
December 31, 2016
Office*
Primaris
H&R
Retail
ECHO
Industrial
Lantower
Residential
Total
Number of investment properties
37
31
126
215
101
12
522
Real estate assets:
Investment properties
Properties under development
$ 6,495,994 $ 3,154,000 $ 1,547,286
$ 767,579 $ 1,102,016
$ 755,358 $ 13,822,233
-
-
-
10,240
118,268
500,287
628,795
6,495,994
3,154,000
1,547,286
777,819
1,220,284
1,255,645
14,451,028
Less: assets classified as held for sale
-
(211,550)
Less: Trusts' proportionate share of real estate
assets relating to equity accounted investments
(62,500)
-
-
-
-
-
-
(211,550)
(777,819)
(216,460)
(500,287)
(1,557,066)
$ 6,433,494 $ 2,942,450 $ 1,547,286
$ - $ 1,003,824
$ 755,358 $ 12,682,412
*
Includes the Trusts’ head office.
Property operating income by reportable segment for the years ended December 31, 2017 and December 31, 2016 is as follows:
Office*
Primaris
H&R
Retail
ECHO
Industrial
Lantower
Residential
Sub-total
Less: Equity
Accounted
Investments
December 31
2017
Property operating income:
Rentals from investment
properties
Property operating costs
Property operating income:
Rentals from investment
properties
Property operating costs
$ 600,792
(210,426)
$ 281,086
(123,822)
$ 125,194 $ 72,548
(15,254)
(29,410)
$ 96,838
$ 80,454
$ 1,256,912
$ (88,458)
$ 1,168,454
(26,003)
(40,511)
(445,426)
18,413
(427,013)
$ 390,366
$ 157,264
$ 95,784 $ 57,294
$ 70,835
$ 39,943
$ 811,486
$ (70,045)
$ 741,441
Office*
Primaris
H&R
Retail
ECHO
Industrial
Lantower
Residential
Sub-total
Less: Equity
Accounted
Investments
December 31
2016
$ 655,856 $ 300,883 $ 142,432
(29,969)
(129,975)
(239,655)
$ 59,999
$ 98,197
$ 52,801
$ 1,310,168
(13,112)
(27,327)
(24,294)
(464,332)
$ (114,157)
33,061
$ 1,196,011
(431,271)
$ 416,201 $ 170,908 $ 112,463
$ 46,887
$ 70,870
$ 28,507
$ 845,836
$ (81,096)
$ 764,740
*
Includes the Trusts’ head office.
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, 2017 and 2016
22. Segmented disclosures (continued):
(ii) Geographical locations:
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
2017
2016
$ 9,344,350
5,475,050
$ 9,335,849
5,115,179
14,819,400
14,451,028
-
(211,550)
(1,662,145)
(1,557,066)
$ 13,157,255
$ 12,682,412
2017
2016
$ 871,955
$ 943,965
384,957
1,256,912
366,203
1,310,168
(88,458)
(114,157)
$ 1,168,454
$ 1,196,011
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, 2017 and 2016
23. Income tax expense (recovery):
Income tax computed at the Canadian statutory rate of nil applicable to the REIT for 2017 and 2016
Current U.S. income taxes
Deferred income taxes applicable to U.S. Holdco:
Impact of U.S. Tax Reform
Other
2017
2016
$ -
$ -
1,538
1,950
(87,970)
48,193
(39,777)
-
199,591
199,591
Income tax expense (recovery) in the determination of net income
$ (38,239)
$ 201,541
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,
such as the REIT.
The REIT has certain subsidiaries in the United States that are subject to tax on their taxable income at a combined federal and state tax rate of
approximately 37.5% in 2017 (2016 - 37.5%). As a result of U.S. legislation enacted on December 22, 2017, commonly referred to as the Tax
Cuts and Jobs Act of 2017 (“U.S. Tax Reform”), deferred income taxes at December 31, 2017 have been measured based upon the newly enacted
federal income tax rate. The income tax recovery for the year ended December 31, 2017 reflects the impact of U.S. Tax Reform resulting from
the reduction in the federal tax rate from 35% to 21% effective in 2018 (24% including state tax) and a reduction in certain deferred tax assets
related to deferred interest deductions.
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
Deferred interest deductions
Accounts payable and accrued liabilities
Other assets
Deferred tax liabilities:
Investment properties
Equity accounted investments
December 31
December 31
2017
2016
$ 6,924
-
1,387
2,257
10,568
256,507
79,192
335,699
$ 17,219
61,940
2,320
1,787
83,266
404,881
65,160
470,041
Deferred tax liability
$ (325,131)
$ (386,775)
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, 2017 and 2016
23.
Income tax expense (recovery) continued:
As at December 31, 2017, U.S. Holdco had accumulated net operating losses available for carryforward for U.S. income tax purposes of $28,879
(December 31, 2016 - $45,903), the benefit of which has been recognized and deferred interest deductions of $194,489 (December 31, 2016 -
$165,125), the benefit of which has not been recognized as a result of U.S. Tax Reform. Certain aspects of U.S. Tax Reform may be subject to
clarifications or varying interpretations including the treatment of deferred interest deductions. The net operating losses will expire between 2031
and 2032. The deductible temporary differences do not generally expire under current tax legislation.
24. Commitments and contingencies:
(a)
(b)
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, 2017, the REIT has outstanding letters of credit totalling $32,924 (December 31, 2016 - $34,305), including $15,120
(December 31, 2016 - nil) which has been pledged as security for certain mortgages payable. The letters of credit are secured in the same manner
as the bank indebtedness (note 7).
The REIT provides guarantees on behalf of third parties, including co-owners. As at December 31, 2017, the REIT issued guarantees amounting
to $369,173 (December 31, 2016 - $171,064), which expire between 2020 and 2029 (December 31, 2016 - expire between 2022 and 2029),
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
guarantees. At December 31, 2017, the estimated amount of debt subject to such guarantees, and therefore the maximum exposure to credit
risk, is $119,279 (December 31, 2016 - $133,040) which expires between 2018 and 2020 (December 31, 2016 - expires between 2017 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)
The REIT is obligated, under certain contract terms, to construct and develop investment properties.
(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 material adverse effect on the combined
financial statements.
25. Subsidiaries:
Significant subsidiaries of the REIT are as follows:
Name of Entity
Bow Centre Street Limited Partnership
H&R Portfolio Limited Partnership
H&R REIT Management Services Limited Partnership
H&R REIT (U.S.) Holdings Inc.
Primaris Management Inc.
PRR Trust
Place of Business
Canada
Canada
Canada
United States
Canada
Canada
Ownership interest
December 31
December 31
2017
100%
100%
100%
100%
100%
100%
2016
100%
100%
100%
100%
100%
100%
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, 2017 and 2016
26. Subsequent events:
(a)
In January 2018, the REIT secured a U.S. $51,400 mortgage for a term of 10 years.
(b)
In January 2018, the REIT issued $250,000 principal amount of Series O senior debentures maturing on January 23, 2023.
(c)
In January 2018, the REIT obtained an additional $200,000 unsecured revolving operating facility due on January 31, 2023.
(d)
In February 2018, the REIT repaid all of its Series E and Series J senior debentures upon maturity for a cash payment of $100,000
and U.S. $125,000, respectively.
(e)
In February 2018, the REIT issued U.S. $125,000 principal amount of Series P senior debentures maturing on February 13, 2020.
46
Unitholder Distribution Reinvestment Plan and Unit Purchase Plan
H&R offers holders of Stapled Units and holders of Exchangeable Units resident in Canada the opportunity
to participate in its Unitholder Distribution Reinvestment Plan (the "DRIP") and Unit Purchase Plan.
The DRIP allows participants to have their monthly cash distributions reinvested in additional Stapled Units
at 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. In addition, participants will be entitled to receive
an additional distribution equal to 3% of each cash distribution reinvested pursuant to the DRIP which will be
reinvested in additional Stapled Units.
The 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 Unit Purchase Plan, please contact us by email through the
"Contact Us" webpage of our website or contact the plan agent: AST Trust Company (Canada), P.O. Box
4229, Station A, Toronto, Ontario M5W 0G1, Tel: 1-800-387-0825 (or for callers outside North America 416-
682-3860), Fax: 1-888-488-1416, Email: inquiries@canstockta.com, Website: www.canstockta.com.
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 (2,3), Strategic financial consultant, marketing communications industry
Edward Gilbert (2), Chief Operating Officer, Firm Capital Mortgage Investment Trust
Laurence A. Lebovic (1), Chief Executive Officer, Runnymede Development Corporation Ltd.
Ronald C. Rutman (1,3), Partner, Zeifman & Company, Chartered Accountants
Stephen Sender (2,3), Financial Consultant
Alex Avery (1), Private Investor
Juli Morrow, Partner, Goodmans LLP
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, Governance and Nominating Committee
Officers
Thomas J. Hofstedter, President and Chief Executive Officer
Larry Froom, Chief Financial Officer
Robyn Kestenberg, Executive Vice-President, Corporate Development
Nathan Uhr, Chief Operating Officer (H&R REIT)
Pat Sullivan, Chief Operating Officer (Primaris)
Philippe Lapointe, Chief Operating Officer (Lantower Residential)
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 2017 distributions by H&R REIT were comprised of capital gains (22.8%), other
taxable income (33.8%), foreign non-business income (12.4%) and tax deferred return of capital (31.0%). The 2017
distributions by H&R Finance Trust were comprised of foreign non-business income (92.2%) and tax deferred return
of capital (7.8%). For a Canadian resident unitholder, only 60.3% of the 2017 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 and HR.DB.D.
Unitholder Distribution Reinvestment Plan and Direct Unit Purchase Plan: H&R REIT offers holders of
Stapled Units and holders of exchangeable 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: AST Trust Company (Canada), P.O. Box 4229, Station A, Toronto, Ontario,
Canada M5W 0G 1, Telephone: 1-800-387-0825 (or for callers outside North America 416-682-3860), Fax: 1 - 8 8 8 -
4 8 8 - 1 4 1 6 , 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
Modera Westshore, Tampa
Dufferin Mall, Toronto
Corus Quay, Toronto
www.HR-REIT.com