H&R Real Estate Investment Trust
2018 Annual Report
The Bow, Calgary
Orchard Park, Kelowna
Airport Road, Brampton – Sleep Country
H&R Profile
H&R REIT is one of Canada’s largest real estate investment trusts with total assets of approximately $14.7
billion at December 31, 2018. H&R REIT has ownership interests in a North American portfolio of high
quality office, retail, industrial and residential properties comprising over 42 million square feet.
Additional information regarding H&R REIT is available at www.hr-reit.com and on www.sedar.com.
Fair Value
by Geographic region
Ontario
33%
United
States
33%
Other Canadian
Provinces
9%
Alberta
25%
Fair Value
by Type of Asset
Multi-family
13%
Industrial
7%
Retail
31%
Office
49%
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, 2019
Fellow Unitholders,
Looking back on 2018, H&R REIT (“H&R”) made significant progress towards the goals set out in our Letter to Unitholders
a year ago. These goals include streamlining and simplifying our portfolio and recycling capital into higher growth
properties, while enhancing the profile of H&R to our unitholders. In 2018 we sold approximately $1 billion of lower
growth assets, including substantially all of our U.S. retail portfolio, and made significant investments into our attractive
and well-advanced development projects and our U.S. residential rental portfolio, structurally enhancing the growth
profile of the portfolio. While this capital reallocation program has had an impact on our financial results, we are pleased
to note that it is essentially behind us. H&R returned to a single trust structure through the wind up of H&R Finance
Trust, thereby simplifying H&R from the previous Stapled Unit structure. In 2018, we also repaid our final series of
convertible debentures, eliminating the related potential future dilution and simplifying our capital structure.
Building on the governance improvements made in recent years, we have implemented a sustainability policy focused
on increasing energy efficiency and reducing waste, consumption and pollution at our properties. We are also proud to
have also updated our diversity policy to include a new target for board composition reflecting a minimum target for
women to comprise at least 25% of our board members by the 2021 annual general meeting.
We believe the steps we have taken to simplify and streamline H&R’s portfolio and increase our internal growth profile
will contribute to positive Funds from Operations (“FFO”) per unit and net asset value (“NAV”) per unit growth. In 2019
and 2020, this enhanced growth profile will be complemented by Sears and Target replacement tenancies commencing
by lease-up of four recently built Lantower Residential properties, and by the contribution of Jackson Park, which is
expected to reach stabilization later this year. We will continue to pursue opportunities to simplify and streamline our
portfolio and enhance the REIT’s growth prospects in 2019, but believe the significant actions taken to date have already
successfully elevated H&R’s growth profile.
Developments
Property development is a key contributor to H&R’s strategy of growing per-unit NAV and FFO. The scale and quality
of our portfolio provides the stability and resilience of cash flow that, when paired with our balance sheet strength, allows
H&R to pursue significant value creating developments. These investments enhance our existing portfolio by delivering
value creation through the development process, increasing NAV per unit, and raising the growth profile of our overall
portfolio. Our development projects all share the following characteristics: gateway city and/or primary market locations;
strong prospects for rental rate growth over time driven by positive demand-growth and supply-constrained market
fundamentals; and high-quality construction and profile, placing these properties at the top of their respective markets.
Last year we added more detail to our disclosure of our development pipeline, including Jackson Park, our flagship
1,871-unit luxury residential rental development in Long Island City, New York (“LIC”). With this project well into lease-
up and achieving rents slightly above our pro forma projections, we have already seen significant value creation delivered
to our unitholders and expect cash flow contribution to increase throughout 2019 and into 2020. The appraised value of
this project stands at U.S. $800 million at our 50% ownership interest, approximately U.S. $260 million more than our
total investment to date.
Amazon’s November 2018 announcement that LIC had been selected as one of its HQ2 locations included plans to
invest $2.5 billion and create 25,000 new high-paying jobs in this market. Despite the excitement created by Amazon’s
announcement, we have conservatively taken the position that it remains too early to forecast how Amazon’s plans might
impact Jackson Park. The assumptions used to support the appraised value, and our future cash flow forecast for the
property do not take into account Amazon’s announcement.
What Amazon’s announcement has done however, is highlight the appealing characteristics of LIC, which are the same
factors that drove our investment in Two Gotham and Jackson Park. These two properties sit at what we believe is the
single best location in LIC, atop the Queens Plaza Subway Station - the gateway to LIC as the nexus of 3 main New
York City subway lines. Our investment in LIC, along with Corus Quay in Toronto and River Landing in Miami, are notable
examples of how H&R has identified and made significant investments in attractive, gentrifying urban areas early in their
development cycle, subsequently benefitting from the emergence of these locations as prime nodes.
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Construction is well advanced on our River Landing development in Miami. This 100% owned mixed-use urban infill
project is located in the Miami Health District, two miles from downtown Miami, with 1,000 feet of waterfront on the Miami
River. With a U.S. $425 million construction budget, this development includes office and retail components aggregating
482,000 sq.ft., and 529 luxury residential rental units. We expect an attractive 5.7% yield on cost, and strong growth in
residential and commercial rents over time, as the local market intensifies and develops. Occupancy is expected to
commence in Q2 2020.
The completion of Jackson Park will contribute to H&R’s overall growth in property operating income and FFO in 2019
and 2020. In addition to Jackson Park and River Landing, H&R has several other developments in the gateway cities of
San Francisco, Seattle, Dallas, Austin, Los Angeles and Toronto in various stages of development.
Significant Intensification Opportunities
With more than 460 properties, H&R’s portfolio includes many properties with the potential for higher and better use, as
their locations have evolved since they were acquired by the REIT, including some owned since the REIT’s IPO over 23
years ago. Our Toronto portfolio in particular holds numerous significant opportunities among its 47 properties
aggregating over 12 million square feet. While we have long considered these properties prime candidates for eventual
intensification, the economics of these intensifications and redevelopments have only recently become attractive, and in
some cases extraordinarily so. We plan to explore options to capitalize on these opportunities in the years ahead,
including redevelopments, intensifications and/or dispositions.
Outlook
We believe that continuing to streamline and simplify our property portfolio into fewer but more significant segments, and
increasing the focus on trophy and flagship properties in primary markets will not only enhance the growth prospects of
our portfolio, but also improve the profile and transparency of H&R to its unitholders.
The market volatility and economic uncertainty we witnessed in the final quarter of 2018 and the beginning of 2019 are
reminders of the need for prudent and conservative strategic principles. For H&R REIT, these prudent and conservative
principles are incorporated into all aspects of our strategy. High-quality and well located assets, a strong and diverse
portfolio of credit tenants, long-term leases, a strong and flexible balance sheet with low leverage, a large pool of
unencumbered properties, and the scale and stability provided by interests in over 460 properties across 42 million
square feet, are all evidence of the steps we have taken to protect and grow your investment.
As we continue to build on H&R’s strengths, we would like to thank our employees who have all contributed to the
progress we have made over our 22-year history. Each member of our team has been crucial to the progress we have
made and are the foundation of H&R’s bright future.
The board, management and their families collectively own more than $400 million of equity in H&R REIT, and firmly
believe that the units are deeply undervalued. We will continue our efforts to improve H&R’s investment profile, enhance
our internal growth prospects, capitalize on opportunities within our portfolio, and narrow the gap between our unit price
and NAV.
Respectfully,
_______________________________
Ronald C. Rutman
Chairman
___________________________
Thomas J. Hofstedter
President & Chief Executive Officer
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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF H&R REAL ESTATE INVESTMENT TRUST
For the Year ended December 31, 2018
Dated: February 14, 2019
TABLE OF CONTENTS
SECTION I .................................................................................................................................................................................................................................................... 1
Basis Of Presentation ................................................................................................................................................................................................................................. 1
Forward-Looking Disclaimer ....................................................................................................................................................................................................................... 1
Non-GAAP Financial Measures ................................................................................................................................................................................................................. 2
Overview .................................................................................................................................................................................................................................................... 4
SECTION II ................................................................................................................................................................................................................................................... 5
Financial Highlights .................................................................................................................................................................................................................................... 5
Key Performance Drivers ........................................................................................................................................................................................................................... 6
Summary Of Significant 2018 Activity ........................................................................................................................................................................................................ 6
SECTION III ................................................................................................................................................................................................................................................ 10
Financial Position ..................................................................................................................................................................................................................................... 10
Assets ....................................................................................................................................................................................................................................................... 11
Liabilities And Unitholders’ Equity ............................................................................................................................................................................................................ 17
Results Of Operations .............................................................................................................................................................................................................................. 22
Property Operating Income ...................................................................................................................................................................................................................... 23
Segmented Information ............................................................................................................................................................................................................................ 23
Net Income, FFO And AFFO From Equity Accounted Investments ......................................................................................................................................................... 27
Income And Expense Items ..................................................................................................................................................................................................................... 28
Funds From Operations And Adjusted Funds From Operations .............................................................................................................................................................. 31
Liquidity And Capital Resources .............................................................................................................................................................................................................. 34
Related Party Transaction ........................................................................................................................................................................................................................ 36
Off-Balance Sheet Items .......................................................................................................................................................................................................................... 36
Derivative Instruments .............................................................................................................................................................................................................................. 36
SECTION IV ............................................................................................................................................................................................................................................... 37
Selected Financial Information ................................................................................................................................................................................................................. 37
Portfolio Overview .................................................................................................................................................................................................................................... 39
SECTION V ................................................................................................................................................................................................................................................ 42
Critical Accounting Estimates And Judgments ......................................................................................................................................................................................... 42
Significant Accounting Policies................................................................................................................................................................................................................. 43
Disclosure Controls And Procedures And Internal Control Over Financial Reporting ............................................................................................................................. 43
SECTION VI ............................................................................................................................................................................................................................................... 44
Risks And Uncertainties ........................................................................................................................................................................................................................... 44
Outstanding Unit Data .............................................................................................................................................................................................................................. 50
Additional Information ............................................................................................................................................................................................................................... 50
Subsequent Events .................................................................................................................................................................................................................................. 50
H&R REIT - MD&A – DECEMBER 31, 2018
SECTION I
BASIS OF PRESENTATION
Management’s Discussion and Analysis (“MD&A”) of the results of operations and financial position of H&R Real Estate Investment Trust (“H&R” or the
“REIT”) for the year ended December 31, 2018 includes material information up to February 14, 2019. This MD&A also includes the results of operations
of H&R Finance Trust ("Finance Trust" and together with H&R, the "Trusts") on a combined basis, up to August 31, 2018, the date of termination of Finance
Trust (see “Overview” on page 4). The comparative periods ended December 31, 2017 and December 31, 2016 continue to reflect the financial position
and results of the REIT and Finance Trust on a combined basis as previously reported, as units of the Trusts were previously stapled ("Stapled Units").
Financial data for the years ended December 31, 2018 and 2017 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 financial statements of
the REIT and appended notes for the year ended December 31, 2018 (“REIT’s Financial Statements”). The REIT’s Financial Statements are defined to
refer to the financial statements for the REIT or the Trusts 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. For the
periods prior to August 31, 2018, references to Units (as defined below) or calculations involving Units should be read as referring to Stapled Units.
FORWARD-LOOKING DISCLAIMER
Certain information in this MD&A contains forward-looking information within the meaning of applicable securities laws (also known as forward-looking
statements) including, among others, statements made or implied under the headings “Results of Operations”, “Liquidity and Capital Resources” and “Risks
and Uncertainties” relating to the H&R’s objectives, strategies to achieve those objectives, H&R’s beliefs, plans, estimates, projections and intentions and
similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts, including the
statements made under the heading “Summary of Significant 2018 Activity” including with respect to the streamlining of H&R’s operations, H&R’s future
plans, including significant development projects, dispositions, acquisitions and the repurchase and cancellation of Units, and management’s expectations
that the reinvestment of sale proceeds and H&R’s enhanced growth profile will result in positive property operating income and FFO growth in 2019 and
beyond, expectations for property operating income or rental growth from Lantower Residential and Primaris, H&R’s expectation with respect to the activities
of its development properties, including redevelopment of existing properties and building of new properties, the expected total cost and lease-up of Jackson
Park, the expected stabilized property operating income from Jackson Park, and the anticipated projected amounts of net income and FFO in 2019-2020
resulting from Jackson Park, the total cost and timing of the Hercules Project, The Pearl, Esterra Park and Shoreline, the expected total cost and stabilized
property operating income from River Landing, expected capital and tenant expenditures, including 160 Elgin St., Ottawa, ON, the expected annual base
rent from former Sears and Target space, management’s expectations regarding future distributions, management’s belief that H&R has sufficient funds
for future commitments and management’s expectation to be able to meet all of its ongoing obligations and to finance short-term development commitments
through its lines of credit 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 H&R’s current beliefs and are based on information currently available to
management.
Forward-looking statements are provided for the purpose of presenting information about management’s current expectations and plans relating to the
future and readers are cautioned that such statements may not be appropriate for other purposes. These statements are not guarantees of future
performance and are based on H&R’s estimates and assumptions that are subject to risks, uncertainties and other factors including those risks and
uncertainties described below under “Risks and Uncertainties” and those discussed in H&R’s materials filed with the Canadian securities regulatory
authorities from time to time, which could cause the actual results, performance or achievements of H&R to differ materially from the forward-looking
statements contained in this 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. H&R cautions 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 H&R believes are reasonable assumptions, there can be no assurance that actual results
will be consistent with these forward-looking statements.
Readers are also urged to examine H&R’s materials filed with the Canadian securities regulatory authorities from time to time as they may contain
discussions on risks and uncertainties which could cause the actual results and performance of H&R to differ materially from the forward-looking statements
contained in this MD&A. None of the former trustees or officers of Finance Trust, assumes any responsibility for the 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
Page 1 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
authorities or for any failure of Finance Trust or its former trustees or officers to disclose events or facts which may have occurred or which may have
affected 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,
2019 and the REIT, except as required by applicable Canadian law, assumes no obligation to update or revise them to reflect new information or the
occurrence of future events or circumstances.
NON-GAAP FINANCIAL MEASURES
The REIT’s Financial Statements are prepared in accordance with IFRS. However, in this MD&A, 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 REIT’s method of calculating these supplemental non-GAAP financial measures may differ from the methods of other real estate
investment trusts or other issuers, and accordingly may not be comparable.
(a) The REIT’s proportionate share
H&R accounts for investments in joint ventures and associates as equity accounted investments in accordance with IFRS. The REIT’s proportionate
share is a non-GAAP measure that adjusts the REIT’s 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 interest of the applicable investment.
Management believes this measure is important for investors as it is consistent with how H&R reviews and assesses operating performance of its
entire portfolio. Throughout this MD&A, the balances at the REIT’s proportionate share have been reconciled back to relevant GAAP measures.
H&R does not independently control its unconsolidated joint ventures, and the presentation of pro-rata assets, liabilities, revenue, and expenses may
not accurately depict the legal and economic implications of the REIT’s interest in its joint ventures and associates.
(b) Same-Asset property operating income (cash basis)
Same-Asset property operating income (cash basis) is a non-GAAP financial measure used by H&R to assess period-over-period performance for
properties owned and operated since January 1, 2017. Same-Asset property operating income (cash basis) adjusts property operating income to
include property operating income from equity accounted investments on a proportionately consolidated basis at H&R’s ownership interest of the
applicable investment and excludes two non-cash items;
Straight-lining of contractual rent; by excluding the impact of straight-lining of contractual rent, rentals from investment properties will consist
primarily of actual rents collected by H&R.
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.
It further excludes:
Acquisitions, business combinations, dispositions and transfers of properties under development to investment properties during the two-year
period ended December 31, 2018 (collectively, “Transactions”).
Management believes that this measure is useful for investors as it adjusts property operating income (including property operating income from equity
accounted investments on a proportionately consolidated basis) for non-cash items which allows investors to better understand period-over-period
changes due to occupancy, rental rates, realty taxes and operating costs, before evaluating the changes attributable to Transactions. Furthermore, 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 Same-Asset property operating income (cash basis).
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H&R REIT - MD&A – DECEMBER 31, 2018
(c) 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. H&R presents its consolidated FFO and AFFO calculations in accordance with
the Real Property Association of Canada (REALpac) February 2018 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 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, H&R has 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. H&R’s 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 REIT’s 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.
(d)
Interest coverage ratio
The interest coverage ratio is a non-GAAP measure that is calculated by dividing the total of: (i) property operating income (excluding straight-lining
of contractual rent and IFRIC 21); (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 be taken into account under IFRS. Management uses this ratio and believes it is useful for
investors as it is an operational measure used to evaluate the REIT’s ability to service the interest requirements of its outstanding debt. Interest
coverage ratio is presented in the “Financial Highlights” and “Liabilities and Unitholders’ Equity” sections of this MD&A.
(e) Debt to total assets at the REIT’s 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 REIT’s Financial Statements. H&R also presents this ratio at the REIT’s proportionate share which is a non-GAAP measure. Debt includes
mortgages payable, debentures payable, unsecured term loans and lines of credit. Management uses this ratio to determine the REIT’s flexibility to
incur additional debt. Management believes this is useful for investors in order to assess the REIT’s 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 REIT’s Financial Statements and
at the REIT’s proportionate share.
(f) Payout ratio per Unit as a % of FFO
Payout Ratio per Unit as a % of FFO is a non-GAAP measure which assesses the REIT’s ability to pay distributions and is calculated by dividing
distributions per Unit (or Stapled Unit, where applicable) by FFO per Unit (or Stapled Unit, where applicable) for the respective period. H&R uses this
ratio amongst other criteria to evaluate the REIT’s 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 REIT’s payout ratio per Unit as a % of FFO.
(g) Net Asset Value (“NAV”) per Unit
NAV per Unit is a non-GAAP measure that management believes is a useful indicator of fair value of the net tangible assets of H&R. NAV per Unit is
calculated by dividing the sum of: (i) Unitholders’ equity, (ii) value of exchangeable units, and (iii) deferred tax liability by the total number of Units and
exchangeable units outstanding. The rationale for including exchangeable units and the deferred tax liability are as follows: (i) under IFRS,
exchangeable units are classified as debt, however, these units are not required to be repaid and each holder of these units has the option to convert
their exchangeable units into Units, and therefore H&R considers this to be equivalent to equity; and (iii) the deferred tax liability is an undiscounted
liability that would be crystalized in the event that U.S. properties are sold. H&R plans to continue to take advantage of U.S. tax legislation in order to
further defer taxes owing on sold properties. H&R’s method of calculating NAV per Unit may differ from other issuers’ calculations.
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H&R REIT - MD&A – DECEMBER 31, 2018
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 units (“Units”) redeemed at any time on demand payable in cash (subject to monthly limits) and/or in specie.
The Units are listed and posted for trading on the Toronto Stock Exchange (“TSX”) under the symbol HR.UN.
On August 31, 2018, the REIT and Finance Trust effected a reorganization (“Reorganization”) by way of plan of arrangement involving the REIT, Finance
Trust and certain of the REIT’s subsidiaries resulting in, among other things, (i) Finance Trust transferring debt owed to it by H&R REIT (U.S.) Holdings
Inc. (“U.S. Holdco”) to the REIT for nil consideration and (ii) unitholders subsequently transferring their Finance Trust units to the REIT for nominal
consideration and retaining their Units. Following these transactions, Finance Trust was terminated, resulting in the Units no longer being stapled to units
of Finance Trust and unitholders holding only REIT Units.
H&R has two primary objectives:
to maximize NAV 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.
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 leased 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 residential rental properties in the United
States. H&R therefore has six operating segments and management assesses the results of these operations separately.
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H&R REIT - MD&A – DECEMBER 31, 2018
SECTION II
FINANCIAL HIGHLIGHTS
(in thousands of Canadian dollars except per Unit amounts)
Total assets
Debt to total assets per the REIT's Financial Statements(1)
Debt to total assets at the REIT's proportionate share(1)(2)
Unitholders' equity
Units outstanding
Unitholders' equity per Unit
NAV per Unit(2)(3)
Unit price
December 31, December 31,
2017
2018
December 31,
2016
$14,691,009
$14,558,863
$14,155,012
44.6%
47.1%
44.6%
46.6%
44.3%
46.0%
7,200,100
7,179,763
6,912,650
285,678
291,320
285,280
$25.20
$26.30
$20.65
$24.65
$25.57
$21.36
$24.23
$25.45
$22.37
Three months ended
Dec. 31,
2018
Dec. 31,
2017 % Change
Dec. 31,
2018
Year ended
Dec. 31,
2017 % Change
Rentals from investment properties
$297,416
$298,042
(0.2%)
$1,176,558
$1,168,454
Property operating income
Same-Asset property operating income (cash basis) - Canada(2)
Same-Asset property operating income (cash basis) - U.S. in U.S. dollars(2)
Same-Asset property operating income (cash basis) total in Canadian dollars(2)
Net income from equity accounted investments
Net income
FFO(2)
Weighted average number of basic Units for FFO(2)
FFO per basic Unit(2)
Distributions paid per Unit
Payout ratio per Unit as a % of FFO(2)
Interest coverage ratio(2)
Net income is reconciled to FFO. See page 31.
192,009
137,493
37,203
186,987
148,165
61,115
130,470
301,200
0.433
0.345
79.7%
3.06
199,414
134,546
36,330
180,646
118,337
325,213
137,447
306,629
0.448
0.345
77.0%
2.99
(3.7%)
2.2%
2.4%
3.5%
25.2%
(81.2%)
(5.1%)
(1.8%)
(3.3%)
-%
2.7%
2.3%
733,932
535,621
150,158
730,826
169,409
337,918
525,696
302,605
1.737
1.380
79.4%
3.03
741,441
528,285
149,106
722,122
167,407
667,870
560,090
304,462
1.840
1.380
75.0%
3.00
0.7%
(1.0%)
1.4%
0.7%
1.2%
1.2%
(49.4%)
(6.1%)
(0.6%)
(5.6%)
-%
4.4%
1.0%
(1) Debt includes mortgages payable, debentures payable, unsecured term loans and lines of credit.
(2) These are non-GAAP measures. See the “Non-GAAP Financial Measures” section of this MD&A.
(3) See page 21 for a detailed calculation of NAV per Unit.
Page 5 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
KEY PERFORMANCE DRIVERS
The following table is presented at the REIT’s proportionate share and includes investment properties classified as assets held for sale:
OPERATIONS
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
H&R
Retail
98.2%
97.4%
98.2%
97.7%
84.9%(4)
92.6%
84.9%(4)
92.6%
$25.44
$23.36
$11.74
$11.75
ECHO
95.5%
94.1%
95.3%
94.6%
N/A
N/A
N/A
N/A
$47.15(5)
$13.11
$15.48
$15.17
4.8
4.9
3.3
4.2
8.4
6.1
3.6
5.0
10.1
10.6
10.7
11.0
Lantower
Industrial Residential(3)
98.5%
98.4%
98.4%
98.7%
$6.86
$6.65
$3.37
$3.54
6.7
7.2
6.5
6.0
88.0%(6)
90.0%
92.7%
93.6%
N/A
N/A
$16.94
$15.99
N/A
N/A
8.3
8.4
Total
94.0%
95.6%
94.9%
96.5%
$18.80
$18.10
$19.04
$16.77
9.0
9.1
5.5
5.6
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
98.5%
97.0%
98.5%
98.3%
$26.41
$25.92
$35.78
$35.75
11.1
11.8
4.1
5.0
(1)
(2)
(3)
(4)
(5)
(6)
Same-Asset refers to those properties owned by H&R for the two-year period ended December 31, 2018.
Excludes properties sold in their respective year.
Jackson Park has been excluded from the Key Performance Drivers above
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 92.6% had these eight Sears store locations been occupied as at December 31, 2018.
In June 2018, H&R sold 63 of its 79 U.S. retail properties owned as at December 31, 2017 which resulted in average contractual rent per sq.ft. in U.S. dollars increasing from $13.11 for
the year ended December 31, 2017 to $47.15 for the year ended December 31, 2018.
Lantower Residential had four properties in lease-up with a weighted average occupancy rate of 67.5% as at December 31, 2018. Excluding these four properties, occupancy would have
been 92.5% as at December 31, 2018.
SUMMARY OF SIGNIFICANT 2018 ACTIVITY
During 2018, H&R actively pursued its capital reallocation program through property dispositions, acquisitions, developments and the repurchase and
cancellation of Units. The objectives of this program include 1) simplifying H&R by focusing on fewer property types and increasing the contributions from
its core portfolio; 2) making H&R easier for investors to understand, analyze and value; and 3) enhancing the REIT’s internal growth profile. The following
2018 transactions highlight H&R’s progress in achieving the strategic objectives identified in its letter to unitholders included in H&R’s 2017 Annual Report:
Sold 63 lower growth U.S. retail assets for U.S. $633.0 million;
Sold H&R’s ownership interest in F1RST Tower in Calgary, AB for $53.5 million;
Sold H&R’s ownership interest in five non-core Canadian industrial assets and two non-core Canadian retail assets for $72.1 million;
Reinvested sales proceeds in higher growth assets by acquiring residential rental assets in the U.S. for U.S. $340.6 million;
Purchased and cancelled 6.6 million Units at an average price of $20.62 per Unit for a total cost of $136.3 million; and
Eliminated Finance Trust and the Stapled Unit structure to return H&R to a single trust in line with industry peers.
Further advanced and expanded the development pipeline to $1.5 billion of properties under development;
Developments
Management believes that H&R’s development pipeline is an important driver of growth in NAV and FFO per Unit over time. H&R’s scale, low leverage and
high quality tenant base serve as a competitive advantage enabling the REIT to pursue large format development opportunities not available to smaller
entities, while managing risk exposures. During 2018, H&R has made significant progress in advancing its value-creating development program, with a
well-staggered pipeline of projects.
Jackson Park, the 1,871 luxury residential rental unit development in Long Island City, NY, in which H&R has a 50% ownership interest, is nearing
completion and expected to be transferred to investment properties in Q1 2019. H&R’s trophy project is on budget and slightly ahead of the development
lease-up schedule. As at December 31, 2018, 1,274 leases had been entered into and 1,231 units were occupied. The remaining lease-up is expected to
occur during the balance of 2019 with stabilized occupancy expected to be achieved during Q3 2019. Upon stabilization, the first full year’s property
operating income at H&R’s ownership interest is projected to be U.S. $35.9 million, equating to a 6.2% yield on budgeted cost of U.S. $580.7 million.
Jackson Park, at the 100% level, has been valued at approximately U.S. $1.6 billion as at December 31, 2018 compared to costs to date of approximately
U.S. $1.1 billion, resulting in a fair value increase of U.S. $522.6 million since the start of the project.
Page 6 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
The following table presents net income and FFO for Jackson Park for the three months and year ended December 31, 2018 as well as projections through
2020:
(H&R's ownership interest)
(in thousands of U.S. dollars)
Property operating income
Finance cost - operations
Fair value adjustment on financial instruments
Fair value adjustment on real estate assets
Net income
Fair value adjustment on financial instruments
Fair value adjustment on real estate assets
Notional interest capitalization
FFO
Q4
2018
(Actual)
YTD
Dec 31, 2018
(Actual)
Annual
2019
(Projected)
Annual
2020
(Projected)
$2,554
$1,988
$27,004
$35,921
(2,999)
(5,475)
(13,191)
(13,600)
(1,699)
1,549
107,718
107,718
-
-
-
-
105,574
105,780
13,813
22,321
1,699
(1,549)
(107,718)
(107,718)
601
$156
5,777
$2,290
-
-
232
$14,045
-
-
-
$22,321
For Q4 2018, net income from Jackson Park exceeded the projection as at September 30, 2018 primarily due to a fair value increase to the property of U.S.
$107.7 million at H&R’s ownership interest which was supported by an independent third party appraisal. FFO for Q4 2018 was lower than projected as at
September 30, 2018 by $0.4 million primarily due to higher initial operating expenses.
In April 2018, H&R acquired a 33.3% non-managing ownership interest in a residential development site zoned for 263 residential rental units for U.S. $8.7
million at the 100% level located in Seattle, WA. This development, known as “Esterra Park”, is part of a larger master planned community and is adjacent
to Microsoft, Inc.’s headquarters, bus transit and future light rail which is expected to be completed in 2021. Construction commenced in November 2018
and the total budget is approximately U.S. $95.7 million at the 100% level. As at December 31, 2018, H&R’s investment was approximately U.S $6.2 million.
In June 2018, H&R converted its mortgage receivable secured against the urban in-fill development site in Miami, FL, known as “River Landing” into a
wholly-owned property under development. River Landing, with approximately 1,000 feet of waterfront on the Miami River, is adjacent to the Health District
and is two miles from downtown Miami. River Landing is a mixed-use development including approximately 346,000 square feet of retail space,
approximately 136,000 square feet of office space and 529 residential rental units. To date, 66.0% of the retail space has been leased, with a further 10.1%
under executed non-binding letters of intent. Construction is underway with occupancy scheduled to commence in Q2 2020. The total cost of the project
is expected to be U.S. $424.8 million and as at December 31, 2018, approximately U.S. $196.0 million had been invested in the development. Upon
stabilized occupancy, the first full year’s property operating income is projected to be U.S. $24.4 million, equating to a 5.7% yield on budgeted cost.
In June 2018, H&R purchased a 100% ownership interest in 20.3 acres of land in Prosper, TX, a suburb of Dallas (“Prosper”) for U.S. $14.6 million. The
location along Dallas North Tollway enables quick access to the acclaimed Legacy West Development, home to major corporate employers including the
regional headquarters of Toyota North America, Federal Express, Inc., Liberty Mutual Regional and JP Morgan Chase. The site is expected to consist of
1,000 residential rental units.
In July 2018, H&R acquired a 30.9% non-managing ownership interest in the development of a 315 luxury residential rental unit tower, with 6,450 square
feet of retail space for a total of U.S. $15.0 million, at the 100% level. Located in Long Beach, CA, “Shoreline Gateway” will become the tallest residential
tower in Long Beach with 35 floors enjoying views overlooking the Pacific Ocean. Construction commenced in November 2018 and the total budget is
approximately U.S. $227.1 million at the 100% level. As at December 31, 2018, H&R’s investment was approximately U.S. $6.4 million.
In December 2018, H&R acquired a 100% interest in approximately 3.3 acres of land in downtown Dallas, TX (“2214 Bryan St.”) for approximately U.S.
$23.5 million. The site was purchased for the future development of luxury residential rental units. The location benefits from great connectivity as the
Pearl/Arts District DART (public rail) station is adjacent to the site.
For a complete list of H&R’s current development projects, see page 14 of this MD&A.
Page 7 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
Retail
In June 2018, H&R sold 63 lower-growth U.S. retail properties, totaling 4,235,943 square feet for U.S. $633.0 million and realized a loss on sale of U.S.
$19.6 million which was primarily due to mortgage prepayment penalties and closing costs. H&R used the proceeds from dispositions to repay 48 mortgages
totaling U.S. $205.3 million, repay bank debt of approximately U.S. $152.4 million and fund Lantower Residential acquisitions of U.S. $255.7 million. The
sale of H&R’s 63 U.S. retail assets reduced net income and FFO during the remainder of 2018.
During 2018, H&R completed lease renewals for 15 single-tenanted properties totaling 1,207,474 square feet with an average lease extension of 13.2 years.
Office
Property operating income and Same-Asset property operating income (cash basis) from the Office segment increased by 0.2% and 1.8%, respectively, for
the year ended December 31, 2018 compared to the respective 2017 period, primarily due to an increase in occupancy, contractual rental escalations and
renewed leases at higher rents from H&R’s Ontario Office properties. The Office portfolio is leased on a long-term basis to creditworthy tenants, with 81.2%
of Office revenue from tenants with investment grade ratings.
In April 2018, H&R sold its 50% ownership interest in F1RST Tower in Calgary, AB for gross proceeds of $53.5 million and repaid the associated mortgage
of $40.0 million at H&R’s ownership interest. As at December 31, 2018, H&R’s Alberta Office portfolio consists of four single tenant properties, all of which
are fully leased to investment grade tenants, with a weighted average remaining lease term to maturity of 17.4 years.
Primaris
Property operating income and Same-Asset property operating income (cash basis) from the Primaris segment grew by 0.9% and 0.8%, respectively, for
the year ended December 31, 2018 compared to the respective 2017 period, despite the decline in occupancy from 92.6% at December 31, 2017 to 84.9%
at December 31, 2018. This reflects the relative low rents Sears had been paying on the vacated space in 2017, the commencement of new leases on the
previous Target space as well as the strength of the remainder of the tenant base.
Redevelopment of the former Sears stores has commenced, however, since each store is part of an existing property, they continue to be classified as
investment properties. During the three months and year ended December 31, 2018, H&R capitalized $0.5 million and $1.1 million, respectively, of property
operating costs and $1.0 million and $2.8 million, respectively, of finance costs attributable to the former Target and Sears space. Management expects
positive rental growth from Primaris as the lease-up of the former Target and Sears space is expected to generate approximately $1.0 million, $5.4 million
and $3.0 million of additional annual base rent in 2019, 2020 and 2021, respectively.
In August 2018, Primaris sold a 44,158 square foot multi-tenant retail property known as Sherwood Park Plaza in Sherwood Park, AB for $13.3 million.
Lantower Residential
Property operating income and Same-Asset property operating income (cash basis) from Lantower Residential, now H&R’s third largest segment, grew by
60.2% and 4.4%, respectively, for the year ended December 31, 2018 compared to the respective 2017 period. The growth in property operating income
was primarily due to 11 property acquisitions during 2017 and 2018. Growth in Same-Asset property operating income (cash basis) was primarily due to
rental growth.
During 2018, Lantower Residential acquired five properties totalling 1,638 residential rental units for an aggregate purchase price of U.S. $340.6 million.
As at December 31, 2018, Lantower Residential has a portfolio of 22 properties comprising 7,271 residential rental units. Eleven properties are in Texas,
seven are in Florida and four are in North Carolina.
In December 2018, Apple Inc. announced it will be building a new 133-acre campus in Austin, TX to accommodate an additional 5,000 jobs with the capacity
to grow to 15,000 jobs. This campus is located within a six-mile radius of Lantower Residential’s four properties in Austin, TX.
As at December 31, 2018, Lantower Residential had four properties in lease-up with a weighted average occupancy rate of 67.5%. During the three months
and year ended December 31, 2018, these properties contributed U.S. $1.2 million and U.S. $2.0 million, respectively, to property operating income. All
four properties are targeted for stabilization by Q4 2019 and are expected to contribute an additional U.S. $7.8 million to property operating income in 2019.
Industrial
During 2018, H&R acquired ownership interests in two Canadian industrial properties for a total purchase price of $17.3 million at H&R’s ownership interest
and H&R sold interests in five Canadian industrial properties for total proceeds of $51.3 million at H&R’s ownership interest.
Page 8 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
Debt Highlights
Debentures:
During 2018, H&R issued the following debentures:
Series O Senior Debentures
Series P Senior Debentures(1)
Maturity
January 23, 2023
February 13, 2020
Contractual
Interest Rate
Principal
Amount
3.42%
3.00%
$250,000
170,000
$420,000
(1) Denominated as U.S. $125.0 million and bearing interest at a rate equal to 3-month London Interbank Offered Rate plus 79 basis points. The average interest rate for the year ended
December 31, 2018 was 3.00%. In December 2018, H&R entered into an interest rate swap on the Series P senior debentures to fix the interest rate at 2.88% per annum.
During 2018, the following debentures matured or were redeemed:
Series E Senior Debentures
Series J Senior Debentures(1)
Series G Senior Debentures
Series C Senior Debentures
2020 Convertible Debentures (HR.DB.D)
(1) Denominated as U.S. $125.0 million.
Maturity/Redemption
February 2, 2018
February 9, 2018
June 20, 2018
December 1, 2018
March 12, 2018
Contractual
Interest Rate
4.90%
2.04%
3.34%
5.00%
5.90%
Principal
Amount
$100,000
157,500
175,000
125,000
99,582
$657,082
Mortgages:
During 2018, H&R secured 14 new mortgages totalling $603.7 million at a weighted average interest rate of 4.1% for an average term of 9.3 years. In
addition to repaying the 48 mortgages totalling $266.9 million (U.S. $205.3 million) on the U.S. retail assets that were sold in June 2018, H&R also repaid
19 other mortgages totalling $138.2 million. Together, these mortgages had a weighted average interest rate of 4.8%.
Unsecured Term Loan:
In December 2018, H&R borrowed $250.0 million by way of an unsecured term loan maturing in January 2026. Through an interest rate swap, H&R fixed
the interest rate at 3.9% for the full seven-year term.
Lines of Credit:
As at December 31, 2018, H&R had $768.2 million of unused borrowing capacity available under its lines of credit.
As at December 31, 2018, debt to total assets was 44.6% unchanged from December 31, 2017. The weighted average interest rate of H&R’s debt as at
December 31, 2018 was 3.8% with an average term to maturity of 4.4 years.
Unwinding of H&R’s Stapled Unit Structure
On August 31, 2018, the REIT and Finance Trust effected a Reorganization by way of plan of arrangement involving the REIT, Finance Trust and certain
of the REIT’s subsidiaries resulting in, among other things, the termination of Finance Trust. Accordingly, H&R’s Units are no longer stapled to units of
Finance Trust with unitholders now only holding H&R Units, thereby returning H&R to a single trust in line with industry peers.
Suspension of DRIP and Unit Purchase Plan
In February 2018, the Trusts announced the suspension of its DRIP and Unit Purchase Plan until further notice. Commencing with the March 2018
distribution, unitholders who elected to participate in the DRIP received the full cash distributions on their Units. If H&R elects to reinstate the DRIP in the
future, unitholders that were enrolled in the DRIP at the time of its suspension and remain enrolled at the time of its reinstatement will automatically resume
participation in the DRIP. Unitholders who elected to participate in the Unit Purchase Plan will no longer have funds withdrawn for purchases of Units. H&R
is well capitalized and has a strong balance sheet with significant financial flexibility. Accordingly, the trustees of H&R and management wish to assert
greater control over when and on what terms H&R raises capital to fund its business. The trustees of H&R and management particularly wish to avoid
issuing equity at a price below NAV per Unit, something that can occur from time to time under the DRIP.
Page 9 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
Normal Course Issuer Bid (“NCIB”)
With an increased focus on recycling capital into investments with higher risk-adjusted returns and the availability of excess capital generated from asset
dispositions, H&R has taken advantage of the opportunity to acquire Units through its NCIB at what management believes to be significantly discounted
trading prices. During the year ended December 31, 2018, the Trusts purchased and cancelled 6,609,420 Units at a weighted average price of $20.62 per
Unit, for a total amount of $136.3 million.
SECTION III
The following foreign exchange rates have been used throughout this MD&A when converting U.S. dollars to Canadian dollars except where otherwise
noted:
For each U.S. $1.00
$1.36 CAD
$1.26 CAD
$1.33 CAD
$1.27 CAD
$1.30 CAD
$1.30 CAD
As at December 31
Three months ended December 31
Year ended December 31
2018
2017
2018
2017
2018
2017
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
Debt
Exchangeable units
Deferred tax liability
Accounts payable and accrued liabilities
Unitholders’ equity
December 31,
December 31,
2018
2017
$12,683,709
$13,074,123
404,814
83,132
13,088,523
13,157,255
1,284,985
1,125,135
110,940
153,488
53,073
-
234,189
42,284
$14,691,009
$14,558,863
$6,546,072
$6,493,617
329,482
392,214
223,141
7,490,909
7,200,100
341,321
325,131
219,031
7,379,100
7,179,763
$14,691,009
$14,558,863
Page 10 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
ASSETS
Real Estate Assets:
Change in Investment Properties
(in thousands of Canadian dollars)
Opening balance, January 1, 2018
Acquisitions, including transaction costs
Dispositions
Transfer of investment properties to assets classified as held for sale
Operating capital:
Capital expenditures
Leasing expenses and tenant inducements
Redevelopment (including capitalized interest)
Amortization of tenant inducements, straight-lining of contractual 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, December 31, 2018
REIT's Financial
Statements
Plus: equity accounted
investments
REIT's proportionate
share(1)
$13,074,123
$846,431
$13,920,554
463,299
(933,403)
(110,940)
57,825
32,441
60,892
3,088
-
(246,967)
283,351
6,240
(2,111)
-
2,754
2,730
1,030
(733)
13,932
(8,474)
68,500
469,539
(935,514)
(110,940)
60,579
35,171
61,922
2,355
13,932
(255,441)
351,851
$12,683,709
$930,299
$13,614,008
(1) The REIT’s proportionate share is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.
2018 Acquisitions:
Property
504 East Pettigrew St., Durham, NC
190 Goodrich Dr., Kitchener, ON(2)
15175 Integra Junction, Odessa, FL
14201 N. Interstate, 35 Frontage Rd., Austin, TX
3300-70th Ave., Leduc, AB(3)
6000 Elevate Circle, Cary, NC
6101 Ardrey Kell Rd., Charlotte, NC
Total
Year
Built
2018
1980
2017
2018
2018
2018
2016
Segment
Date
Acquired
Number of
Residential
Rental Units
Purchase Price
($ Millions)(1)
Ownership
Interest
Acquired
Residential
Jun 1, 2018
Industrial
Jun 1, 2018
Residential
Jun 11, 2018
Residential
Sep 17, 2018
Industrial
Oct 1, 2018
Residential
Oct 16, 2018
Residential
Dec 3, 2018
305
-
322
328
-
308
375
1,638
98.9
4.0
74.9
62.9
13.3
95.4
111.4
$460.8
100%
50%
100%
100%
33.3%
100%
100%
(1) U.S. acquisitions have been translated to Canadian dollars at the exchange rate as at the date acquired.
(2) Purchase price is stated at H&R’s ownership interest. The square footage at H&R’s ownership interest is 36,562.
(3) Purchase price is stated at H&R’s ownership interest. The square footage at H&R’s ownership interest is 134,883.
Page 11 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
2017 Acquisitions:
Property
14233 The Lakes Blvd., Austin, TX
14301 N. Interstate Hwy. 35, Austin, TX
1810 Sweetbroom Circle, Lutz, FL
11660 Westwood Blvd., Orlando, FL
10440 Sanderling Shores Dr., Tampa, FL
2600 Lake Ridge Rd., Lewisville, TX
Total
Year
Built
2016
2017
2010
2017
2016
2016
Segment
Date
Acquired
Number of
Residential
Rental Units
Purchase Price
($ Millions)(1)
Ownership
Interest
Acquired
Residential
Apr 7, 2017
Residential
May 26, 2017
Residential
Oct 10, 2017
Residential
Nov 15, 2017
Residential
Dec 11, 2017
Residential
Dec 12, 2017
375
370
451
282
450
301
2,229
$69.5
71.3
98.6
76.2
121.3
64.1
$501.0
100%
100%
100%
100%
100%
100%
(1) U.S. acquisitions have been translated to Canadian dollars at the exchange rate as at the date acquired.
2018 Dispositions:
Property
7350 Catherine St., Windsor, ON
1880 Matheson Blvd. E., Mississauga, ON(2)
1377 The Queensway, Toronto, ON(2)
411 1st Street, Calgary, AB(2)
10300 Rue Henri Bourassa, St. Laurent, QC(2)
U.S. Retail portfolio - 63 properties
380 Spinnaker Way, Vaughan, ON(2)
650 Cataraqui Woods Dr., Kingston, ON(2)
101 Granada Blvd., Sherwood Park, AB
Total
Segment
Date
Sold
Square
Feet
Selling Price
($ Millions)(1)
Ownership
Interest Sold
H&R Retail
Jan 31, 2018
Industrial
Feb 20, 2018
Industrial
Feb 23, 2018
Office
Apr 10, 2018
Industrial
Apr 19, 2018
102,997
194,657
92,449
353,140
40,750
H&R Retail
June 2018
4,235,943
Industrial
Industrial
Jul 11, 2018
Jul 31, 2018
Primaris
Aug 1, 2018
24,763
88,328
44,158
$7.5
31.3
7.0
53.5
3.6
823.3
4.6
4.8
13.3
5,177,185
$948.9
100%
50%
50%
50%
50%
100%
75%
50%
100%
(1) U.S. dispositions have been translated to Canadian dollars at the exchange rate as at the date sold.
(2) Square feet and selling price are based on the ownership interest disposed.
2017 Dispositions:
Property
Place du Royaume, Chicoutimi, QC(2)(3)
Cataraqui Town Centre, Kingston, ON(2)(3)
914 E. North Ave., Belton, MO
2940 N. Broadway, Anderson, IN
8766 E. 96th St., Fishers, IN
2800 Skymark Ave., Mississauga, ON(4)
189/203 Queen St. N., Tilbury, ON(2)
12510 South Green Dr., Houston, TX(5)
Total
Selling Price
($ Millions)(1)
Ownership
Interest Sold
Segment
Primaris
Primaris
Date
Sold
Jan 16, 2017
Jan 16, 2017
H&R Retail
Jan 27, 2017
Square
Feet
301,859
310,311
88,248
$109.0
102.6
13.9
H&R Retail
Mar 31, 2017
39,877
2.7
H&R Retail
Mar 31, 2017
80,960
5.3
Office
Q2-Q3 2017
12,202
1.6
Industrial
Aug 21, 2017
85,068
3.8
Residential
Sep 27, 2017
323,568
39.9
1,242,093
$278.8
50%
50%
100%
100%
100%
100%
50%
100%
(1) U.S. dispositions have been translated to Canadian dollars at the exchange rate as at the date sold.
(2) Square feet and selling price are based on the ownership interest disposed.
(3) H&R retained an ownership interest of 50% in these properties.
(4) As at December 31, 2017, all condominium units have been sold.
(5) Property consisted of 428 units.
Page 12 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
Investment Properties and Properties under Development by Segment and Region:
The following tables disclose the fair values of the investment properties and properties under development by operating segment and geographic
location, excluding assets held for sale:
December 31, 2018
REIT's Financial Statements
Equity Accounted Investments
Operating Segment
(in millions of Canadian dollars)
Investment
Properties
Office
Primaris
H&R Retail
ECHO
Industrial
Lantower Residential
Total
$6,659
2,733
570
-
966
1,756
$12,684
Properties
Under
Development
$ -
-
-
-
86
319
$405
Sub
Total
$6,659
2,733
570
-
1,052
2,075
$13,089
Investment
Properties
Properties
Under
Development
$ -
$ -
-
-
870
60
-
$930
-
-
12
-
1,133
$1,145
Sub
Total
$ -
-
-
882
60
1,133
$2,075
REIT's
proportionate
share(1)
$6,659
2,733
570
882
1,112
3,208
$15,164
(1)
The REIT’s proportionate share is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.
December 31, 2018
REIT's Financial Statements
Equity Accounted Investments
Geographic Location
(in millions of Canadian dollars)
Investment
Properties
Ontario
Alberta
Other
Canada
United States
Total
$4,421
3,404
1,259
9,084
3,600
$12,684
Properties
Under
Development
Sub
Total
Investment
Properties
Properties
Under
Development
$86
$4,507
$ -
$ -
-
-
86
319
$405
3,404
1,259
9,170
3,919
$13,089
-
-
-
930
$930
-
-
-
1,145
$1,145
Sub
Total
$ -
-
-
-
2,075
$2,075
REIT's
proportionate
share(1)
$4,507
3,404
1,259
9,170
5,994
$15,164
(1)
The REIT’s 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 excluding assets classified as held for sale. The
capitalization rates disclosed below are reported by segment and geographic location at the REIT’s proportionate share which differs from the REIT’s
Financial Statements.
Weighted Average Overall Capitalization Rates:
December 31, 2018
Canada
United States
December 31, 2017
Canada
United States
Office
Primaris
5.54%
5.27%
6.00%
H&R
Retail
6.44%
ECHO
Industrial
Lantower
Residential
-
5.68%
8.55%
-
5.09%
-
11.25%
6.69%
Office
Primaris
5.58%
5.36%
5.54%
-
H&R
Retail
6.38%
7.36%
ECHO
Industrial
Lantower
Residential
-
6.78%
5.85%
8.06%
-
5.12%
Page 13 of 50
Total
5.73%
5.68%
Total
5.63%
5.98%
H&R REIT - MD&A – DECEMBER 31, 2018
At H&R Ownership Interest
Ownership
Interest
Number
of Acres
Total
Development
Budget
Properties
Under
Development
Costs
Remaining
to Complete
Expected
Yield
on Cost
Expected
Completion
Date
Properties Under Development:
As at December 31, 2018
Development Name
(in thousands of Canadian dollars)
U.S. projects
River Landing, Miami, FL(1)
Prosper, Dallas, TX (Phase 1)(2)(3)
2214 Bryan St., Dallas, TX(2)
Total in U.S. Dollars
Total U.S. projects in Canadian Dollars
Canadian projects
100.0%
100.0%
100.0%
8.1
20.3
3.3
31.7
144.0
175.7
2.7
-
0.9
2.2
36.2
5.0
1.1
$424,815
$196,022
$228,793
5.7%
Q2 2020
424,815
577,748
15,103
23,616
234,741
319,247
85,567
228,793
311,158
$577,748
$404,814
$311,158
$580,654
$529,872
$27,760
6.2%
Q1 2019
70,096
26,041
23,201
31,859
261,293
9,704
7,312
11,721
6,519
6,354
9,150
-
6.2%
6.5%
6.2%
6.0%
-
Q1 2021
Q2 2020
Q2 2020
Q3 2020
60,392
18,729
16,682
25,505
149,068
202,732
48.1
731,851
841,925
995,317
1,145,018
223.8
$1,573,065
$1,549,832
$513,890
Industrial Lands, Caledon, ON(2)(4)
100.0%
Total per the REIT's Financial Statements
Equity accounted investments:
U.S. projects
Jackson Park, Long Island City, NY(5)
Jackson Park, Long Island City, NY (Fair Value Increase)
Shoreline, Long Beach, CA(6)
Hercules Project (Block N - Phase 1), Hercules, CA(7)
Hercules Project (Remaining Phases), Hercules, CA(2)(7)
The Pearl, Austin, TX(8)
Esterra Park, Seattle, WA(9)
ECHO: 11 properties under development(2)
Total in U.S. Dollars
Total U.S. projects in Canadian Dollars
Total per the REIT's proportionate share
50.0%
50.0%
30.9%
31.7%
31.7%
33.3%
33.3%
33.6%
(1) Mixed use development consisting of 529 residential rental units, approximately 346,000 square of retail space and 136,000 square feet of office space.
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Development budget metrics have not been determined as at December 31, 2018.
Total development to be approximately 1,000 residential rental units over several phases in a master planned community, along the Dallas North Tollway in north Dallas.
2.7 million square feet of industrial property is expected to be built. Costs spent to date relate to land only.
1,871 luxury residential rental units. Stabilized occupancy is expected to be achieved in Q3 2019. The fair value of this property under development is U.S. $800.0 million at H&R’s
ownership interest as at December 31, 2018, which includes amounts grouped in other assets. The total development budget less properties under development as at December 31, 2018
differs from costs remaining to complete as certain amounts spent have been accounted for as other assets or through net income.
35-storey residential tower consisting of 315 luxury residential rental units and 6,450 square feet of retail.
Total project spans 38.4 acres and 1,081 residential rental units are expected to be built. Construction commenced on Phase 1 of this project which will consist of 172 residential rental
units.
383 residential rental units. Close to major technology employers including Apple, IBM, Oracle & Samsung as well as the University of Texas at Austin and downtown Austin.
7-storey residential tower consisting of 263 residential rental units. Part of a larger master planned community and is adjacent to transit, Microsoft, Inc.’s headquarters, and future light rail
which is expected to be completed in 2021.
Page 14 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
Equity Accounted Investments:
December 31, 2018
December 31,
2017
(in thousands of Canadian
dollars)
ECHO
Jackson
Park
Six U.S.
Industrial
Properties
Hercules
Project
The
Pearl
Esterra
Park
Shoreline
Scotia
Plaza(1)
Total(2)
Total(2)
Investment properties
$870,032
$ -
$60,267
$ -
$ -
$ -
$ -
$ -
$930,299
$846,431
Properties under development
12,445 1,075,984
-
25,884
8,866
8,642
13,197
-
1,145,018
815,472
Other assets
Cash and cash equivalents
13,970
11,075
17,160
26,563
174
3,734
Debt
Other liabilities
(376,293)
(379,108)
(19,122)
(47,234)
(31,174)
(659)
-
490
(6,029)
(1,832)
-
111
-
34
335
-
-
190
-
38
99
31,376
42,597
-
(780,552)
(245)
(597)
(726)
(1,286)
(83,753)
83,416
64,820
(613,585)
(71,419)
Equity accounted investments
$483,995
$709,425
$44,394
$18,513
$8,732
$8,414
$12,661
($1,149)
$1,284,985
$1,125,135
(1) On June 30, 2016, H&R sold its 33.3% freehold and leasehold interests in Scotia Plaza and 100 Yonge.
(2)
Each of these line items represent the REIT’s proportionate share of equity accounted investments which are reconciled to the total equity accounted investments per the REIT’s 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, primarily in Pennsylvania and Ohio. ECHO reports its financial results to H&R one month in arrears. ECHO’s financial
information has been disclosed as at November 30, 2018 and November 30, 2017, respectively.
During the twelve months ended November 30, 2018, ECHO acquired three investment properties totalling 28,616 square feet and eight properties under
development for an aggregate purchase price of U.S. $10.5 million, at H&R’s ownership interest. During this period, Echo sold two investment properties
totalling 23,722 square feet for gross proceeds of U.S. $1.0 million and transferred two properties under development to investment properties totalling
35,199 square feet for a total value of U.S. $10.1 million, at H&R’s ownership interest.
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.
Long Island City Project-Jackson Park
Jackson Park, the 1,871 luxury residential rental unit development in Long Island City, NY, in which H&R has a 50% ownership interest, is nearing
completion and expected to be transferred to investment properties in Q1 2019. H&R’s trophy project is on budget and slightly ahead of the development
lease-up schedule. During Q4 2018, 162 leases were entered into and 194 tenants began occupancy. As at December 31, 2018, 1,274 leases had been
entered into and 1,231 units were occupied. The remaining lease-up is expected to occur during the balance of 2019 with stabilized occupancy expected
to be achieved during Q3 2019. The five-storey 45,000 square foot amenity building known as “The Club at Jackson Park” is complete and open to
residents. Upon stabilized occupancy, the first full year’s property operating income at H&R’s ownership interest is projected to be U.S. $35.9 million,
equating to a 6.2% yield on budgeted cost of U.S. $580.7 million. Jackson Park, at the 100% level, has been valued at approximately U.S. $1.6 billion as
at December 31, 2018 compared to costs to date of approximately U.S. $1.1 billion, resulting in a fair value increase of U.S. $522.6 million since the start
of the project. Please refer to page 7 for an update on expected net income and FFO during the lease-up period.
Page 15 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
Six U.S. Industrial Properties
As at December 31, 2018, H&R owns a 50.5% interest in six industrial properties through a joint venture with its partners, all of which are located in the
United States (December 31, 2017 - 6 properties). During 2017, this joint venture sold the following nine properties:
Property
11 Cermak Blvd., Saint Peters, MO
827 Graham Dr., Fremont, OH
15573 Oakwood Dr., Romulus, MI
12090 Sage Point Ct., Reno, NV
930 Sherwin Pkwy., Buford, GA
One Nestle Crt., McDonough, GA
1915-B Fairview Dr., Dekalb, IL
13600 Independence Pkwy., Fort Worth, TX
950 Stelzer Rd., Columbus, OH
Total
Segment
Industrial
Industrial
Industrial
Industrial
Industrial
Industrial
Industrial
Industrial
Industrial
Date Sold
Aug 21, 2017
Aug 21, 2017
Aug 21, 2017
Nov 30, 2017
Dec 14, 2017
Dec 14, 2017
Dec 14, 2017
Dec 14, 2017
Dec 14, 2017
Square
Feet(1)
Selling Price
($ Millions)(1)(2)
Ownership
Interest Sold
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%
(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 was 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.
Hercules Project
H&R has a 31.7% non-managing ownership interest in 38.4 acres of land located in Hercules, CA, adjacent to San Pablo Bay, northeast of San Francisco,
for the future development of residential rental 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, 2018, H&R’s investment was
approximately U.S. $13.6 million. Phase 1 of the Hercules Project, known as “Block N – Creekside Apartments” will consist of 172 residential rental units,
including lofts and townhomes and 13,979 square feet of ground level retail. The four-storey podium project sits on 2.2 acres over a one-level subterranean
parking garage. Construction commenced in June 2018. The total budget for this phase is expected to be approximately U.S. $82.1 million and construction
financing of U.S. $57.5 million was secured in July 2018, both at the 100% level. In addition, in July 2018, the Hercules Project obtained a U.S. $14.0
million land loan, at the 100% level, secured against the remaining land parcels.
The Pearl
H&R has a 33.3% non-managing ownership interest in approximately 5.0 acres of land in Austin, TX for the future development of 383 residential rental
units which will be known as “The Pearl”. This residential development site is close to major technology employers including Apple, IBM, Oracle, and
Samsung, as well as the University of Texas at Austin and downtown Austin. Construction commenced in October 2018. The total budget for this project
is approximately U.S. $69.7 million and construction financing of U.S. $47.9 million was secured in October 2018, both at the 100% level. As at December
31, 2018, H&R’s investment was approximately U.S. $6.4 million.
Esterra Park
In April 2018, H&R acquired a 33.3% non-managing ownership interest in a residential development site zoned for 263 residential rental units for U.S. $8.7
million, at the 100% level, located in Seattle, WA. This development, known as “Esterra Park”, is part of a larger master planned community and is adjacent
to Microsoft, Inc.’s headquarters, bus transit and future light rail which is expected to be completed in 2021. Construction commenced in November 2018.
The total budget for this project is approximately U.S. $95.7 million and construction financing of U.S. $66.5 million was secured in October 2018, both at
the 100% level. As at December 31, 2018, H&R’s investment was approximately U.S $6.2 million.
Shoreline
In July 2018, H&R acquired a 30.9% non-managing ownership interest in the development of a 315 luxury residential rental unit tower with 6,450 square
feet of retail space for a total of U.S. $15.0 million, at the 100% level. Located in Long Beach, CA, “Shoreline Gateway” will become the tallest residential
tower in Long Beach with 35 floors enjoying views overlooking the Pacific Ocean. Construction commenced in November 2018. The total budget for this
Page 16 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
project is approximately U.S. $227.1 million and construction financing of U.S. $132.0 million was secured in December 2018, both at the 100% level. As
at December 31, 2018, H&R’s investment was approximately U.S. $6.4 million.
Assets Classified as Held for Sale
As at December 31, 2018, H&R had a 50% ownership interest in one industrial property and a 100% ownership interest in one U.S. office property totalling
$110.9 million (December 31, 2017 - no properties) classified as held for sale.
Other Assets
(in thousands of Canadian dollars)
Mortgages receivable
Prepaid expenses and sundry assets
Restricted cash
Accounts receivable
Derivative instruments
December 31, 2018
December 31, 2017
$96,909
25,861
12,872
12,401
5,445
$153,211
33,554
25,311
15,739
6,374
$153,488
$234,189
Mortgages receivable decreased by $56.3 million to $96.9 million as at December 31, 2018 primarily due to the River Landing and 2214 Bryan St.
mortgages, which had a total balance of $100.6 million as at December 31, 2017, being converted into 100% wholly-owned properties under development
during 2018. This was partially offset by a new mortgage receivable of $34.1 million issued as part of the sale of F1RST Tower in Calgary, AB and an
increase of $6.9 million relating to 2217 Bryan St., which had a balance outstanding of $44.7 million as at December 31, 2018 (U.S. $32.9 million).
Prepaid expenses and sundry assets decreased by $7.7 million to $25.9 million as at December 31, 2018 primarily due to the release of acquisition and
new mortgage deposits in 2018.
Restricted cash decreased by $12.4 million to $12.9 million as at December 31, 2018 primarily due to $13.3 million of funds held in escrow from the sale
of a U.S. residential property in Q3 2017 being released in Q1 2018 due to a Section 1031 property exchange.
LIABILITIES AND UNITHOLDERS’ EQUITY
Debt to total assets per the REIT's Financial Statements(1)
Debt to total assets at the REIT's proportionate share(1)(2)
Unencumbered assets(3) (in thousands of Canadian dollars)
Unsecured debt(3) (in thousands of Canadian dollars)
Unencumbered asset to unsecured debt coverage ratio(3)
Interest coverage ratio(2)
Weighted average interest rate of debt(1)
Weighted average term to maturity of debt (in years)(1)
December 31, 2018
December 31, 2017
44.6%
47.1%
$3,438,151
$2,069,419
1.66
3.03
3.8%
4.4
44.6%
46.6%
$3,614,735
$2,144,992
1.69
3.00
3.9%
4.2
(1) Debt includes mortgages payable, debentures payable, unsecured term loans and lines of credit.
(2) These are non-GAAP measures. See the “Non-GAAP Financial Measures” section of this MD&A.
(3) Unencumbered assets are investment properties and properties under development without encumbrances for mortgages or lines of credit. Unsecured debt includes senior debentures,
unsecured term loans and unsecured lines of credit.
Page 17 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
Debt
H&R’s debt consists of the following items:
(in thousands of Canadian dollars)
December 31, 2018
December 31, 2017
Mortgages payable
Debentures payable
Unsecured term loans
Lines of credit
Mortgages Payable
(in thousands of Canadian dollars)
Opening balance, January 1, 2018
Principal repayments:
Scheduled amortization on mortgages
Mortgage repayments
New mortgages
Effective interest rate accretion on mortgages
Change in foreign exchange rates
Closing balance, December 31, 2018
$4,150,459
1,613,040
450,629
331,944
$3,958,631
1,852,790
186,629
495,567
$6,546,072
$6,493,617
REIT's Financial
Statements
Plus: Equity accounted
investments
REIT's proportionate
share(1)
$3,958,631
$198,550
$4,157,181
(129,145)
(407,763)
619,788
382
108,566
$4,150,459
(17,056)
(4,760)
-
(467)
15,843
$192,110
(146,201)
(412,523)
619,788
(85)
124,409
$4,342,569
(1)
The REIT’s proportionate share is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.
Future Mortgage Principal Payments
2019
2020
2021
2022
2023
Thereafter
Financing costs and mark-to-market adjustments arising on acquisitions(1)
Total balance outstanding as at December 31, 2018
Periodic
Amortized
Principal
($000’s)
$126,503
124,829
109,366
71,103
61,436
Principal on
Maturity
($000’s)
$50,679
366,368
839,231
539,953
391,746
% of Total
Principal
Weighted
Average Interest
Rate on Maturity
3.8%
4.5%
3.9%
3.9%
3.9%
4.3
11.8
22.8
14.7
10.9
35.5
100%
Total Principal
($000’s)
$177,182
491,197
948,597
611,056
453,182
1,483,616
4,164,830
(14,371)
$4,150,459
(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 REIT’s mortgages payable balances and
are recognized in finance costs over the life of the applicable mortgage.
The mortgages outstanding as at December 31, 2018 bear interest at a weighted average rate of 4.2% (December 31, 2017 - 4.3%) and mature between
2019 and 2032 (December 31, 2018 – maturing between 2018 and 2033). The weighted average term to maturity of the REIT’s mortgages is 5.2 years
(December 31, 2017 - 5.4 years). For a further discussion of liquidity please see “Funding of Future Commitments”. For a further discussion of interest
rate risk, please see “Risks and Uncertainties”.
Page 18 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
Debentures Payable
Opening balance, January 1, 2018
Series O and P Senior Debenture issuances
Senior Debenture redemptions
2020 Convertible Debenture redemption (HR.DB.D)
Conversion - 2020 Convertible Debentures (HR.DB.D)
Gain on change in fair value
Change due to foreign exchange rates
Accretion adjustment
Closing balance, December 31, 2018
Unsecured Term Loans
(in thousands of Canadian Dollars)
H&R unsecured term loan #1(1)
H&R unsecured term loan #2(2)
(in thousands of
Canadian dollars)
$1,852,790
409,205
(557,500)
(99,582)
(70)
(3,488)
8,737
2,948
$1,613,040
Maturity
December 31,
Date
March 17, 2021
January 6, 2026
2018
$200,629
250,000
$450,629
(1)
(2)
The total facility as at December 31, 2018 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 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,
maturing March 17, 2021.
The REIT entered into an interest rate swap to fix the interest rate at 3.91% per annum, maturing January 6, 2026.
Lines of Credit
(in thousands of Canadian Dollars)
Revolving unsecured operating lines of credit:
Maturity
Date
Total
Facility
Amount
Outstanding
Drawn
Letters of Credit
Available
Balance
H&R revolving unsecured line of credit #1
September 30, 2022
$150,000
H&R revolving unsecured line of credit #2
H&R revolving unsecured line of credit #3
H&R revolving unsecured letter of credit facility
January 31, 2023
September 20, 2023
Sub-total
Revolving secured operating lines of credit(1)
H&R co-ownership revolving secured line of credit
September 30, 2019
H&R and CrestPSP revolving secured line of credit
Primaris revolving secured line of credit
April 30, 2020
July 1, 2020
Sub-total
200,000
350,000
60,000
760,000
3,514
62,500
300,000
366,014
$ -
-
(5,750)
-
(5,750)
(3,514)
(49,000)
(273,680)
(326,194)
$ -
$150,000
-
(2,330)
(23,439)
(25,769)
-
(105)
-
(105)
200,000
341,920
36,561
728,481
-
13,395
26,320
39,715
December 31, 2018
$1,126,014
($331,944)
($25,874)
$768,196
(1)
Secured by certain investment properties.
The lines of credit can be drawn in either Canadian or U.S. dollars and bear interest at a rate approximating the prime rate of a Canadian chartered bank.
Page 19 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
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 Units
to participating vendors upon redemption. These puttable instruments are classified as a liability under IFRS and are measured at fair value through profit
or loss.
At the end of each period the fair value is determined by using the quoted prices of Units on the TSX as the exchangeable units are exchangeable into
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 Unit amount provided to holders of Units.
During the year ended December 31, 2018, there were 23,889 exchangeable units exchanged for Units (year ended December 31, 2017 - 584,386
exchanged for Units).
The following number of exchangeable units are issued and outstanding:
As at December 31, 2018
As at December 31, 2017
Number of
Exchangeable
Units
15,955,541
15,979,430
Quoted Price
of Units
$20.65
$21.36
Amounts per the
REIT's Financial
Statements
($000’s)
$329,482
$341,321
A subsidiary of H&R also holds 0.4 million Units to mirror certain of these exchangeable units. Therefore, when the approximately 0.4 million exchangeable
units are exchanged for Units, the number of outstanding Units will not increase. 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 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
24.3% in 2018 (2017 - 37.5%). As a result of U.S. Tax Reform (further discussed on page 49), deferred income taxes have been measured based upon a
21.0% federal income tax rate.
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
Accounts payable and accrued liabilities
Other assets
Deferred liabilities:
Investment properties
Equity accounted investments
Deferred tax liability
December 31,
2018
December 31,
2017
$22.6
0.6
1.4
24.6
284.0
132.8
416.8
$6.9
1.4
2.3
10.6
256.5
79.2
335.7
($392.2)
($325.1)
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 increased by $67.1 million from $325.1 million as at December
31, 2017 to $392.2 million as at December 31, 2018 primarily due to a fair value increase to Jackson Park and the weakening of the Canadian dollar. The
exchange rate as at December 31, 2018 was $1.36 for each U.S. $1.00 (December 31, 2017 - $1.26).
Page 20 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
Unitholders’ Equity
Unitholders’ equity increased by $20.3 million from $7,179.8 million as at December 31, 2017 to $7,200.1 million as at December 31, 2018. The increase
is primarily due to net income, other comprehensive income and proceeds from the issuance of Units under the Distribution Reinvestment and Unit Purchase
Plan (“DRIP”) and Unit Option Plan, partially offset by distributions paid to unitholders and Units repurchased and cancelled under the NCIB.
Units issued under the DRIP and Unit Purchase Plan previously resulted in an increase in the number of Units. In February 2018, the Trusts announced
the suspension of the DRIP and Unit Purchase Plan until further notice, commencing with the March 2018 distribution.
Other comprehensive income (loss) consists of the unrealized gain (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 income (loss) is primarily due to changes in foreign exchange rates.
NCIB
On December 14, 2018, the REIT received approval from the TSX for the renewal of its NCIB, allowing the REIT to purchase for cancellation up to a
maximum of 15.0 million Units on the open market until the earlier of December 16, 2019 or the date on which the REIT purchased the maximum number
of Units permitted under the NCIB.
With an increased focus on recycling capital into investments with higher risk-adjusted returns and the availability of excess capital generated from asset
dispositions, H&R has taken advantage of the opportunity to acquire Units through its NCIB at what management believes to be significantly discounted
prices. During the year ended December 31, 2018, under a previous NCIB, the Trusts purchased and cancelled 6,609,420 Units at a weighted average
price of $20.62 per Unit, for a total amount of $136.3 million. During the year ended December 31, 2017, under a previous NCIB, the Trusts purchased and
cancelled 755,420 Units at a weighted average price of $21.10 per Unit, for a total cost of $15.9 million.
Unitholders' Equity per Unit and NAV per Unit
Unitholders' equity
Exchangeable units
Deferred tax liability
Total
Units outstanding
Exchangeable units outstanding
Total
Unitholders' equity per Unit(1)
NAV per Unit(2)
Unit Price
(1)
(2)
Unitholders’ equity per Unit is calculated by dividing Unitholders’ equity by Units outstanding.
This is a Non-GAAP measure. See the “Non-GAAP Financial Measures” section of this MD&A.
December 31,
2018
December 31,
2017
$7,200,100
$7,179,763
329,482
341,321
392,214
325,131
$7,921,796
$7,846,215
285,678
15,522
291,320
15,546
301,200
306,866
$25.20
$26.30
$20.65
$24.65
$25.57
$21.36
Page 21 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
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 adjustment on real estate assets
Loss on sale of real estate assets
Gain (loss) on foreign exchange
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
Total comprehensive income attributable to unitholders
Three months ended December 31
Year ended December 31
2018
2017
2018
2017
$297,416
(105,407)
192,009
148,165
-
(65,834)
2,254
(8,648)
(17,332)
(151,884)
(267)
-
98,463
(37,348)
61,115
139,335
$200,450
$298,042
$1,176,558
$1,168,454
(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
(442,626)
(427,013)
733,932
169,409
-
741,441
167,407
1,040
(267,087)
(270,358)
8,638
(18,271)
11,197
(246,967)
(19,602)
6,886
378,135
(40,217)
337,918
4,999
(18,111)
27,049
1,796
(7,729)
(17,903)
629,631
38,239
667,870
10,253
194,876
(131,272)
$335,466
$532,794
$536,598
Net income before income taxes decreased by $164.1 million and $251.5 million for the three months and year ended December 31, 2018 compared to
the respective 2017 periods, primarily due to non-cash items including fair value adjustments, gain (loss) on sale of real estate assets and foreign exchange.
Excluding these items, net income before income taxes increased by $21.1 million from $246.8 million in Q4 2017 to $267.9 million in Q4 2018 and by $0.2
million from $626.4 million for the year ended December 31, 2017 to $626.6 million for the year ended December 31, 2018. The increase of $21.1 million
was primarily due to net income from equity accounted investments increasing by $29.8 million for Q4 2018 compared to the respective 2017 period.
Page 22 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
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. Same-Asset property operating income (cash basis) adjusts property
operating income (including property operating income from equity accounted investments on a proportionately consolidated basis) to exclude straight-
lining of contractual rent and realty taxes accounted for under IFRIC 21. “Same-Asset” refers to those properties owned by H&R for the entire two-year
period ended December 31, 2018. It excludes acquisitions, business combinations, dispositions and transfers of properties under development to
investment properties during the two-year period ended December 31, 2018 (collectively, “Transactions”). Management believes that this measure is useful
for investors as it adjusts property operating income (including property operating income from equity accounted investments on a proportionately
consolidated basis) for non-cash items which allows investors to better understand period-over-period changes due to occupancy, rental rates, realty taxes
and operating costs, before evaluating the changes attributable to Transactions. Furthermore, it is also used as a key input in determining the value of
investment properties.
Three months ended December 31
Year ended December 31
(in thousands of Canadian dollars)
2018
2017
Change
2018
2017
Rentals
Property operating costs
Property operating income
Adjusted for:
Proportionate share of property operating income from
equity accounted investments(1)
Straight-lining of contractual rent at the REIT's
proportionate share(1)
Realty taxes in accordance with IFRIC 21
at the REIT's proportionate share(1)
Property operating income (cash basis) from
Transactions at the REIT's proportionate share(1)
Change
$8,104
$297,416
$298,042
($626)
$1,176,558
$1,168,454
(105,407)
(98,628)
(6,779)
(442,626)
(427,013)
(15,613)
192,009
199,414
(7,405)
733,932
741,441
(7,509)
20,165
16,066
4,099
60,939
70,045
(9,106)
1,175
605
570
3,683
5,373
(1,690)
(11,166)
(12,003)
837
-
-
-
Same-Asset property operating income (cash basis)(2)
$186,987
$180,646
$6,341
$730,826
$722,122
(1)
(2)
The REIT’s 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) is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.
(15,196)
(23,436)
8,240
(67,728)
(94,737)
27,009
$8,704
Property operating income per the REIT’s Financial Statements decreased by $7.4 million and $7.5 million, respectively, for the three months and year
ended December 31, 2018 compared to the respective 2017 periods primarily due to the sale of 63 U.S. retail properties in June 2018, partially offset by
an increase in property operating income from Lantower Residential as a result of properties acquired throughout 2017 and 2018.
SEGMENTED INFORMATION
Operating Segments and Geographic Locations:
H&R has six reportable operating segments (Office, which also includes the REIT’s head office, 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 REIT. The CEO measures and evaluates the performance of H&R based on property
operating income on a proportionately consolidated basis for the REIT’s equity accounted investments.
H&R's Office portfolio is comprised of 35 properties throughout Canada and in select markets in the United States, aggregating 11.9 million square feet, at
H&R’s ownership interest, with an average lease term to maturity of 11.1 years as at December 31, 2018. The office portfolio is leased on a long-term
basis to creditworthy tenants, with 81.2% of office revenue from tenants with investment grade ratings. With a very long average lease term and high credit
tenants, this segment tends to generate very stable, gradual growth in property operating income driven by contractual rental rate increases, and to a lesser
extent, lease renewals.
The Primaris segment consists of 30 properties throughout Canada aggregating 8.0 million square feet, at H&R’s ownership interest, of enclosed shopping
centres and multi-tenant retail plazas with an average lease term to maturity of 4.8 years as at December 31, 2018. Primaris continues to receive strong
Page 23 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
tenant demand having completed 419 new lease and renewal transactions for the twelve months ended December 31, 2018. Occupancy was 84.9% as at
December 31, 2018, rising to 87.5% including tenants committed, but not yet open.
H&R’s Retail segment consists of 43 retail properties in Canada and 16 properties in the United States aggregating 2.8 million square feet, at H&R’s
ownership interest, with an average lease term to maturity of 8.4 years as at December 31, 2018.
As at December 31, 2018, ECHO segment is a portfolio of 230 grocery anchored shopping centres in select markets in the United States aggregating 3.2
million square feet, at H&R’s ownership interest. The ECHO segment’s average lease term to maturity was 10.1 years.
The Industrial segment consists of 84 industrial properties throughout Canada and six properties in the United States comprising 9.7 million square feet, at
H&R’s ownership interest, with an average lease term to maturity of 6.7 years as at December 31, 2018.
As at December 31, 2018, Lantower Residential segment consists of 22 residential properties in select markets in the United States comprising 7,271
residential rental units, at H&R’s ownership interest. The investment policy of the Lantower Residential segment is to acquire properties in strong
employment markets and where rents are increasing annually.
Further disclosure of segmented information for property operating income can be found in the REIT’s Financial Statements.
(in thousands of Canadian dollars)
2018
2017 % Change
2018
2017 % Change
2018
2017
Property operating income
Occupancy
Three months ended December 31
Year ended December 31
As at December 31
Operating Segment:
Office(1)
Primaris
H&R Retail
ECHO
Industrial
Lantower Residential
$101,721
$101,060
42,674
10,792
15,275
16,111
25,601
41,814
27,488
13,623
17,615
13,880
0.7%
2.1%
(60.7%)
12.1%
(8.5%)
84.4%
$389,856
$389,147
158,650
157,264
66,104
53,388
62,884
63,989
96,584
57,294
71,254
39,943
The REIT's proportionate share
212,174
215,480
(1.5%)
794,871
811,486
0.2%
0.9%
(31.6%)
(6.8%)
(11.7%)
60.2%
(2.0%)
Less: equity accounted investments
(20,165)
(16,066)
25.5%
(60,939)
(70,045)
(13.0%)
The REIT's Financial Statements
$192,009
$199,414
(3.7%)
$733,932
$741,441
(1.0%)
Geographic Location:
Canada(2)
United States(2)
$138,238
$137,152
0.8%
$538,141
$535,968
0.4%
73,936
78,328
(5.6%)
256,730
275,518
(6.8%)
(2.0%)
The REIT's proportionate share
212,174
215,480
(1.5%)
794,871
811,486
Less: equity accounted investments
(20,165)
(16,066)
25.5%
(60,939)
(70,045)
(13.0%)
The REIT's Financial Statements
$192,009
$199,414
(3.7%)
$733,932
$741,441
(1.0%)
Includes the REIT’s head office.
(1)
(2) Property operating income relating to corporate entities has been included in Canada for Canadian properties and the United States for U.S. properties.
98.5%
84.9%
98.2%
95.5%
98.5%
88.0%
94.0%
96.6%
93.7%
94.6%
92.8%
94.0%
96.6%
93.7%
97.0%
92.6%
97.4%
94.1%
98.4%
90.0%
95.6%
95.6%
95.6%
95.7%
97.4%
95.6%
95.6%
95.6%
Property operating income at the REIT’s proportionate share for the three months and year-ended December 31, 2018 decreased by 1.5% and 2.0%,
respectively, due to the following: (i) the H&R Retail segment selling 63 U.S. retail properties in June 2018; (ii) the Industrial segment selling nine U.S
properties and six Canadian properties throughout 2017 and 2018; and (iii) the ECHO segment (United States) receiving lease termination fees in Q3 2017
of $5.5 million at H&R’s ownership interest from tenants who terminated their leases which negatively impacted H&R’s year-over-year results. This was
partially offset by an increase in property operating income from the Lantower Residential segment (United States) which was due to properties acquired
throughout 2017 and 2018.
Page 24 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
The following segmented information has been presented at the REIT’s proportionate share which is a non-GAAP measure defined in the “Non-GAAP
Financial Measures” section of this MD&A.
(in thousands of Canadian dollars)
2018
2017 % Change
2018
2017 % Change
2018
2017
Same-Asset property operating
income (cash basis)(1)
Occupancy (same asset)
Three months ended December 31
Year ended December 31
As at December 31
Operating Segment:
Office(2)
Primaris
H&R Retail
ECHO
Industrial
Lantower Residential
$98,545
$95,125
41,326
10,951
12,657
15,292
8,216
41,222
10,555
11,426
14,560
7,758
3.6%
0.3%
3.8%
10.8%
5.0%
5.9%
$388,639
$381,594
156,085
154,831
42,905
48,527
59,557
35,113
42,238
50,517
59,315
33,627
The REIT's proportionate share (page 23)
$186,987
$180,646
3.5%
$730,826
$722,122
Geographic Location:
Ontario(3)
Alberta
Other Canada
Total – Canada
United States(3)
$64,136
$62,264
51,932
21,425
51,390
20,892
137,493
134,546
49,494
46,100
3.0%
1.1%
2.6%
2.2%
7.4%
$250,569
$244,329
203,823
203,190
81,229
80,766
535,621
528,285
195,205
193,837
The REIT's proportionate share (page 23)
$186,987
$180,646
3.5%
$730,826
$722,122
United States in U.S. dollars:
Office(2)
H&R Retail
ECHO
Industrial
Lantower Residential
U.S. total in U.S. dollars
$17,948
$17,758
2,562
9,522
1,012
6,159
2,522
9,019
911
6,120
1.1%
1.6%
5.6%
11.1%
0.6%
$71,817
$70,729
10,277
37,328
3,726
27,010
9,950
38,859
3,701
25,867
$37,203
$36,330
2.4%
$150,158
$149,106
1.8%
0.8%
1.6%
(3.9%)
0.4%
4.4%
1.2%
2.6%
0.3%
0.6%
1.4%
0.7%
1.2%
1.5%
3.3%
(3.9%)
0.7%
4.4%
0.7%
98.5%
84.9%
98.2%
95.3%
98.4%
92.7%
94.9%
95.5%
93.8%
93.1%
94.5%
96.1%
94.9%
98.3%
92.6%
97.7%
94.6%
98.7%
93.6%
96.5%
96.0%
97.5%
96.6%
96.6%
96.2%
96.5%
100.0%
100.0%
95.3%
100.0%
100.0%
94.6%
100.0%
100.0%
92.7%
96.1%
93.6%
96.2%
(1)
(2)
(3)
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 REIT’s head office.
Property operating income relating to corporate entities has been included in Ontario for Canadian properties and the United States for U.S. properties.
Same-Asset property operating income (cash basis) from the Office segment increased by 3.6% and 1.8%, respectively, for the three months and year
ended December 31, 2018 compared to the respective 2017 periods, primarily due to an increase in occupancy, contractual rental escalations and renewed
leases at higher rents from H&R’s Ontario Office properties.
Same-Asset property operating income (cash basis) from the ECHO segment in U.S. dollars, increased by 5.6% for the three months ended December 31,
2018 compared to the respective 2017 period primarily due to an increase in occupancy and contractual rental escalations. Same-Asset property operating
income (cash basis) from the ECHO segment in U.S. dollars, decreased by 3.9% for the year ended December 31, 2018 compared to the respective 2017
period, primarily due to ECHO receiving lease termination fees in Q3 2017 of U.S. $2.4 million at H&R’s ownership interest from two tenants who terminated
their leases, partially offset by an increase in occupancy and contractual rental escalations.
Same-Asset property operating income (cash basis) from the Industrial segment increased by 5.0% for the three months ended December 31, 2018
compared to the respective 2017 period primarily due to a new tenant paying higher rent, as well as lease termination payments received for two U.S.
properties in 2018.
Same-Asset property operating income (cash basis) from the Lantower Residential segment in U.S. dollars increased 0.6% and 4.4%, respectively, for the
three months and year ended December 31, 2018 compared to the respective 2017 periods primarily due to rental growth, partially offset by an increase
in property taxes to five properties which are currently under appeal. Subsequent to December 31, 2018, Lantower Residential has successfully appealed
two of the five properties and is expecting a refund of U.S. $0.2 million in Q1 2019.
Page 25 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
Same-Asset property operating income (cash basis) from the Primaris segment increased by 0.3% and 0.8%, respectively, for the three months and year
ended December 31, 2018 compared to the respective 2017 periods, primarily due to new lease commencements for former Target space, offset by the
impact of Sears Canada's 2017 bankruptcy filing.
Redevelopment of the former Sears stores has commenced, however, since each store is part of an existing property, they have not been transferred to
properties under development. During the three months and year ended December 31, 2018, H&R capitalized $0.5 million and $1.1 million, respectively,
of property operating costs and $1.0 million and $2.8 million, respectively, of finance costs attributable to the former Target and Sears space. Management
expects positive rental growth from Primaris as the lease-up of the former Target and Sears space is expected to generate approximately $1.0 million, $5.4
million and $3.0 million of additional annual base rent in 2019, 2020 and 2021, respectively.
The Primaris portfolio all store and same store sales were relatively stable for the rolling 12 months ended December 31, 2018 compared to the respective
2017 period. Management monitors tenant sales and actively pursues the replacement of tenants experiencing declining sales trends. Remerchandising
at many of the properties continues to impact sales as the replacement of tenants may have a negative impact in the short term but a positive impact in the
long term.
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
2017
% Change
Primaris Enclosed Shopping Centres
Location
Cataraqui Town Centre(1)(2)
Dufferin Mall
Grant Park(1)
Kildonan Place(1)(2)
McAllister Place(1)(2)
Medicine Hat Mall(2)
Orchard Park Shopping Centre(2)
Park Place Shopping Centre(2)
Peter Pond Mall
Place d’Orleans(1)
Place du Royaume(1)
Regent Mall(1)(2)
Sherwood Park Mall
St. Albert Centre
Stone Road Mall(2)
Sunridge Mall
Total(3)(4)
Kingston, ON
Toronto, ON
Winnipeg, MB
Winnipeg, MB
Saint John, NB
Medicine Hat, AB
Kelowna, BC
Lethbridge, AB
Fort McMurray, AB
Orleans, ON
Chicoutimi, QC
Fredericton, NB
Sherwood Park, AB
St. Albert, AB
Guelph, ON
Calgary, AB
2018
$88,315
116,551
26,367
80,923
55,427
49,036
$86,340
121,296
26,662
80,876
53,280
50,572
171,110
167,793
81,669
71,551
90,472
87,426
80,841
42,751
34,025
84,789
71,857
94,301
89,298
81,109
46,079
31,365
111,664
93,839
112,683
96,237
2.3%
(3.9)
(1.1)
0.1
4.0
(3.0)
2.0
(3.7)
(0.4)
(4.1)
(2.1)
(0.3)
(7.2)
8.5
(0.9)
(2.5)
2018
$526
2017
$527
% Change
(0.2%)
682
458
538
467
408
702
599
713
509
433
585
479
495
678
525
699
463
539
461
433
688
609
725
515
437
587
505
479
685
518
(2.4)
(1.1)
(0.2)
1.3
(5.8)
2.0
(1.6)
(1.7)
(1.2)
(0.9)
(0.3)
(5.1)
3.3
(1.0)
1.4
$1,281,967
$1,294,537
(1.0%)
$565
$568
(0.5%)
(1) All store sales and same-store sales have been reported as if Primaris owned 100% of these enclosed shopping centres.
(2) Location previously had a Sears store.
(3) The total same-store sales figures have been presented on a weighted average basis.
(4) Excludes Northland Village which is slated for redevelopment.
Page 26 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
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
Property operating income
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
2018
$26,937
(6,772)
20,165
130
(9,104)
681
(904)
(2,037)
139,726
271
-
(763)
148,165
(1,252)
2017
$20,642
(4,576)
16,066
81
2018
$86,533
(25,594)
60,939
406
(4,332)
(25,511)
109
(565)
3,402
1,311
(2,894)
3,236
103,834
133,520
(20)
(46)
(1,532)
89
(61)
(286)
118,337
(1,306)
2017
$88,458
(18,413)
70,045
587
(18,807)
403
(2,291)
4,222
114,996
(677)
(185)
(886)
169,409
167,407
-
-
Fair value adjustments on real estate assets and financial instruments
(137,689)
(107,236)
(136,756)
(119,218)
Gain (loss) on sale of real estate assets
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
(271)
48
1,051
10,052
(181)
(694)
(1,122)
(48)
$8,007
(89)
63
3,342
13,111
(289)
(3,016)
(1,787)
(63)
20
231
7,827
40,731
(430)
(2,754)
(2,730)
(231)
677
203
13,799
62,868
(1,445)
(11,120)
(2,079)
(203)
$7,956
$34,586
$48,021
(1)
(2)
Each of these line items represent the REIT’s proportionate share of equity accounted investments which are reconciled to net income from equity accounted investments per the REIT’s
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.
Property operating income from equity accounted investments for the three months ended December 31, 2018 compared to the respective 2017 period
increased by $4.1 million primarily due to occupancy commencing in Jackson Park. Property operating income from equity accounted investments for the
year ended December 31, 2018 compared to the respective 2017 period decreased by $9.1 million primarily due to the sale of nine U.S. industrial properties
throughout 2017 and ECHO receiving lease termination fees of $5.5 million at H&R’s ownership interest from four tenants who terminated their leases in
Q3 2017. This decrease was partially offset by an increase in property operating income from Jackson Park.
Net income from equity accounted investments for the three months and year ended December 31, 2018 compared to the respective 2017 periods increased
by $29.8 million and $2.0 million, respectively, primarily due to the fair value of Jackson Park increasing by U.S. $107.7 million at H&R’s ownership interest
which was supported by an independent third party appraisal. This increase for the year ended December 31, 2018 compared to the respective 2017 period
was offset by a decrease in property operating income from equity accounted investments and higher finance costs from Jackson Park.
FFO from equity accounted investments for the three months and year ended December 31, 2018 compared to the respective 2017 periods decreased by
$3.1 million and $22.1 million, respectively, primarily due to Jackson Park which is in lease-up and the sale of nine U.S. industrial properties in 2017. FFO
from equity accounted investments for the year ended December 31, 2018 compared to the respective 2017 period further decreased due to 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.
Page 27 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
INCOME AND EXPENSE ITEMS
The income and expense items section of this MD&A provides management’s commentary on the Results of Operations per the REIT’s Financial
Statements.
Finance Costs
(in thousands of Canadian dollars)
Finance costs – operations:
Three months ended December 31
Year ended December 31
2018
2017
Change
2018
2017
Change
Contractual interest on mortgages payable
($42,271)
($43,083)
$812
($165,855)
($174,492)
Contractual interest on debentures payable
(14,355)
(16,095)
Effective interest rate accretion
Bank interest and charges
Exchangeable unit distributions
Capitalized interest
Finance income
Fair value adjustments on financial instruments
(1,073)
(5,639)
(5,511)
(920)
(3,588)
(5,464)
(68,849)
(69,150)
3,015
147
(65,834)
(69,003)
2,254
(17,332)
1,407
9,553
1,740
(153)
(2,051)
(47)
301
2,868
3,169
847
(26,885)
(61,213)
(3,666)
(20,709)
(22,050)
(62,565)
(1,808)
(11,877)
(22,254)
(273,493)
(272,996)
6,406
2,638
(267,087)
(270,358)
8,638
11,197
4,999
27,049
(15,852)
$8,637
1,352
(1,858)
(8,832)
204
(497)
3,768
3,271
3,639
($80,912)
($58,043)
($22,869)
($247,252)
($238,310)
($8,942)
The decrease in contractual interest on mortgages payable of $0.8 million and $8.6 million, respectively, for the three months and year ended December
31, 2018 compared to the respective 2017 periods is primarily due to the repayment of mortgages upon maturity and sale of investment properties.
The decrease in contractual interest on debentures payable of $1.7 million and $1.4 million, respectively, for the three months and year ended December
31, 2018 compared to the respective 2017 periods is primarily due to the repayment of an aggregate of $657.1 million of senior and convertible debentures
since January 2018 as well as a decrease in contractual interest rates. This was offset by the issuance of an aggregate of $420.0 million of senior
debentures since January 2018.
The increase in bank interest and charges of $2.1 million and $8.8 million, respectively, for the three months and year ended December 31, 2018 compared
to the respective 2017 periods is primarily due to unsecured term loans and lines of credit increasing to $782.6 million as at December 31, 2018 compared
to $682.2 million as at December 31, 2017, as well as an increase in interest rates.
The increase in capitalized interest of $2.9 million and $3.8 million, respectively, for the three months and year ended December 31, 2018 compared to the
respective 2017 periods is primarily due to the increase in funding for the River Landing development.
The change in fair value adjustments on financial instruments of ($26.9 million) and ($15.9 million), respectively, for the three months and year ended
December 31, 2018 compared to the respective 2017 periods is primarily due to the following non-cash items: (i) gain (loss) on fair value of exchangeable
units and convertible debentures, which are fair valued at the end of each reporting period based on quoted prices of Units on the TSX and (ii) gain (loss)
on derivative instruments which are marked-to-market at the end of each reporting period, both of which result in an unrealized gain or loss recorded in net
income. In addition, during the year ended December 31, 2017, H&R realized a one-time gain of $8.9 million on the sale of an investment previously
classified as held for trading.
Trust Expenses
Three months ended December 31
Year ended December 31
(in thousands of Canadian dollars)
2018
2017
Change
2018
2017
Change
Other expenses
($4,369)
($3,700)
($669)
($15,858)
($13,242)
($2,616)
Unit-based compensation recovery (expense)
(4,279)
(683)
(3,596)
(2,413)
(4,869)
Trust expenses
($8,648)
($4,383)
($4,265)
($18,271)
($18,111)
2,456
($160)
Other expenses are primarily comprised of salaries, professional fees, trustee fees and corporate overhead expenses. Other expenses increased by $0.7
million and $2.6 million, respectively, for the three months and year ended December 31, 2018 compared the respective 2017 periods primarily due to
higher salaries and corporate expenses from Primaris and Lantower Residential.
Page 28 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
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 Units on the TSX. The fair value adjustment to unit-based compensation was ($3.2 million) and $0.3
million, respectively, for the three months ended December 31, 2018 and 2017 and $1.5 million and ($1.3 million), respectively, for the year ended December
31, 2018 and 2017.
Fair Value Adjustment on Real Estate Assets
Three months ended December 31
Year ended December 31
(in thousands of Canadian dollars)
2018
2017
Change
2018
2017
Change
Fair value adjustment on real estate assets
($151,884)
$3,984
($155,868)
($246,967)
$1,796
($248,763)
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. The fair value adjustment on real estate assets for the three
months and year ended December 31, 2018 of ($151.9 million) and ($247.0 million), respectively, is primarily due to fair value decreases to the Primaris
segment in Q1 and Q4 2018 as a result of a changing retail landscape and increased competition in the retail industry. The weighted overall average
capitalization rate for the Primaris segment was 6.00% as at December 31, 2018 compared to 5.54% as at December 31, 2017. 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 and these factors also contributed to the negative fair value adjustment on real estate assets for both the three months
and year ended December 31, 2018.
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
2018
($267)
2017
($70)
Change
2018
2017
Change
($197)
($19,602)
($7,729)
($11,873)
During the year ended December 31, 2018, H&R sold 64 retail properties, one Primaris property, a 50% ownership interest in four industrial properties, a
75% ownership interest in one industrial property and a 50% ownership interest in one office property and recognized a loss on sale of real estate assets
of $19.6 million (Q4 2018 - loss on sale of $0.3 million). The loss on sale of real estate assets for the year ended December 31, 2018 of $19.6 million is
primarily due to mortgage prepayment penalties and closing costs relating to the 63 U.S. retail properties sold in June 2018.
During the year ended December 31, 2017, H&R sold three retail properties, a 50% ownership interest in two Primaris properties, a 50% interest in one
industrial property, one residential property and an office property and recognized a loss on sale of real estate assets of $7.7 million (Q4 2017 - $0.1
million). The loss on sale of real estate assets includes mark-to-market adjustments of $3.5 million on the purchaser’s assumption of a mortgage.
For a list of property dispositions, please refer to page 12 in this MD&A.
Gain (loss) on Foreign Exchange
(in thousands of Canadian dollars)
Gain (loss) on foreign exchange
Three months ended December 31
Year ended December 31
2018
2017
Change
2018
2017
Change
$ -
$2,263
($2,263)
$6,886
($17,903)
$24,789
The amounts in the table above were recorded by Finance Trust due to the translation of the U.S. Holdco Notes (a note payable previously owing by U.S.
Holdco to Finance Trust) into Canadian dollars prior to the termination of Finance Trust on August 31, 2018. The U.S. Holdco Notes were previously
eliminated in the Trusts’ Financial Statements. However, the related foreign exchange difference was not eliminated on combination as it flowed through
net income of Finance Trust and other comprehensive income of the REIT as U.S. Holdco is a subsidiary of the REIT and formed part of its net investment
in the United States. U.S. Holdco was not a subsidiary of Finance Trust. The exchange rate as at September 30, 2018 was $1.29 for each U.S. $1.00
(December 31, 2017 - $1.26). 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).
Page 29 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
Income Tax Recovery (Expense)
Three months ended December 31
Year ended December 31
(in thousands of Canadian dollars)
2018
2017
Change
2018
2017
Change
Income tax computed at the Canadian statutory rate of nil applicable
to H&R for 2018 and 2017
Current U.S. income taxes
Deferred income taxes recovery (expense) applicable
to U.S. Holdco
$ -
$ -
$ -
$ -
(142)
(376)
234
(760)
$ -
(1,538)
$ -
778
Impact of U.S. Tax Reform
Other
-
87,970
(37,206)
(24,923)
(87,970)
(12,283)
-
87,970
(87,970)
(39,457)
(48,193)
8,736
Income tax recovery (expense) in the determination of net income
($37,348)
$62,671
($100,019)
($40,217)
$38,239
($78,456)
H&R is generally subject to tax in Canada under the Income Tax Act (Canada) (“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 recovery (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 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 and losses can be realized. Deferred income tax expense increased by $100.3 million and $79.2
million for the three months and year ended December 31, 2018 compared to the respective 2017 periods primarily due to the enactment of U.S. Tax
Reform in Q4 2017 and a fair value increase to Jackson Park in Q4 2018.
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 are also recognized in equity.
As at December 31, 2018, H&R had net deferred tax liabilities of $392.2 million (December 31, 2017 - $325.1 million) primarily related to taxable temporary
differences between the tax and accounting bases of U.S. real estate assets.
Page 30 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
FUNDS FROM OPERATIONS AND ADJUSTED FUNDS FROM OPERATIONS
The REIT presents its FFO and AFFO calculations in accordance with REALpac’s February 2018 White Paper on Funds From Operations and Adjusted
Funds From Operations for IFRS. FFO, AFFO and payout ratio per Unit as a % of FFO 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 REIT's Financial Statements
Realty taxes in accordance with IFRIC 21
FFO adjustments from equity accounted investments (page 27)
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
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 27)
AFFO
Weighted average number of Units (in thousands of basic Units
adjusted for conversion of exchangeable Units)(2)
Diluted weighted average number of Units (in thousands of Units) for
the calculation of FFO(2)(3)(4)(5)(6)
Diluted weighted average number of Units (in thousands of Units) for
the calculation of AFFO(2)(3)(4)(6)
FFO per basic Unit (adjusted for conversion of exchangeable units)
FFO per diluted Unit
AFFO per basic Unit (adjusted for conversion of exchangeable units)
AFFO per diluted Unit
Distributions per Unit
Payout ratio per Unit as a % of FFO
2018
$61,115
(9,914)
(138,113)
5,511
169,216
3,291
267
-
37,206
1,891
2017
$325,213
(10,697)
(105,226)
5,464
(13,537)
(317)
70
(2,263)
(63,047)
1,787
2018
$337,918
-
(128,678)
22,050
235,770
(1,493)
19,602
(6,886)
39,457
7,956
2017
$667,870
-
(104,539)
22,254
(19,910)
1,307
7,729
17,903
(39,777)
7,253
$130,470
$137,447
$525,696
$560,090
1,356
(23,330)
(9,575)
(1,891)
(2,045)
894
(14,874)
(9,394)
(1,787)
(5,155)
4,113
(57,825)
(32,441)
(7,956)
(6,145)
6,818
(51,845)
(28,722)
(7,253)
(14,847)
$94,985
$107,131
$425,442
$464,241
301,200
306,629
302,605
304,462
301,881
311,836
304,131
312,433
301,881
$0.433
$0.432
$0.315
$0.315
$0.345
79.7%
307,595
$0.448
$0.445
$0.349
$0.348
$0.345
77.0%
304,131
$1.737
$1.732
$1.406
$1.403
$1.380
79.4%
312,433
$1.840
$1.821
$1.525
$1.514
$1.380
75.0%
(1) During the year ended December 31, 2017, H&R realized a one-time gain of $8.9 million on the sale of an investment classified as held for trading which has not been added back above.
(2) For the three months and year ended December 31, 2018, included in the weighted average and diluted weighted average number of Units are exchangeable units of 15,540,024 and
15,544,685, respectively. For the three months and year ended December 31, 2017, included in the weighted average and diluted weighted average number of Units are exchangeable
units of 15,546,256 and 15,674,341, respectively.
(3) For the three months and year ended December 31, 2018, included in the determination of diluted FFO and AFFO with respect to H&R’s Unit Option Plan and Incentive Unit Plan are 681,054
Units and 701,032 Units, respectively. For the three months and year ended December 31, 2017, included in the determination of diluted FFO and AFFO with respect to H&R’s Unit Option
Plan and Incentive Unit Plan are 966,301 Units and 1,555,465 Units, respectively.
(4) The 2020 convertible debentures are dilutive for the year ended December 31, 2018. Therefore, debenture interest of $1.1 million is added to FFO and AFFO and 824,855 Units are included
in the diluted weighted average number of Units outstanding for this period.
(5) 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.
(6) 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 Units
are included in the diluted weighted average number of Units outstanding for this period.
Page 31 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
FFO for the three months and year ended December 31, 2018 compared to the respective 2017 periods decreased by $7.0 million and $34.4 million,
respectively, primarily due to lower property operating income as a result of property dispositions and lower notional interest capitalization due to occupancy
commencing at Jackson Park. FFO further decreased for the year ended December 31, 2018 compared to the respective 2017 period due to a one-time
gain of $8.9 million on the sale of an investment classified as held for trading recorded in 2017.
AFFO for the three months and year ended December 31, 2018 compared to the respective 2017 periods decreased by $12.1 million and $38.8 million,
respectively, primarily due to the following: (i) a decrease in FFO explained above; (ii) higher capital expenditures in Q4 2018 compared to Q4 2017; and
(iii) higher leasing expenses and tenant inducements for the year ended December 2018 compared to the respective 2017 period.
Included in FFO at the REIT’s proportionate share are the following items which can be a source of variances between periods:
(in thousands of Canadian dollars)
Lease termination fees
Mortgage prepayment penalties
Jackson Park FFO loss during lease-up
Notional interest capitalization (Jackson Park)
Adjustment to straight-lining of contractual rent
Other income
One-time gain realized on sale of investment
Three months ended December 31
Year ended December 31
2018
$705
(153)
(608)
835
-
-
-
2017
Change
2018
2017
Change
$4
(404)
(708)
3,342
(252)
1,040
-
$701
$2,631
$5,989
($3,358)
251
100
(153)
(4,533)
(2,507)
7,511
252
(1,040)
-
-
-
-
(952)
(708)
13,799
(5,892)
1,040
8,935
799
(3,825)
(6,288)
5,892
(1,040)
(8,935)
$779
$3,022
($2,243)
$5,456
$22,211
($16,755)
Excluding the above items, FFO would have been $129.7 million for the three months ended December 31, 2018 (Q4 2017 - $134.4 million) and $0.43 per
basic Unit (Q4 2017 - $0.44 per basic Unit). For the year ended December 31, 2018, FFO would have been $520.2 million (Q4 2017 - $537.9 million) and
$1.72 per basic Unit (Q4 2017 - $1.77 per basic Unit).
Included in AFFO at the REIT’s proportionate share are the following items which can be a source of variances between periods:
(in thousands of Canadian dollars)
2018
2017
Change
2018
2017
Change
Three months ended December 31
Year ended December 31
Additional current year capital expenditure recoveries net of
capital expenditures
Lease termination fees
Mortgage prepayment penalties
Jackson Park AFFO loss during lease-up
Notional interest capitalization (Jackson Park)
Other income
One-time gain realized on sale of investment
Capital expenditures
$2,297
($1,445)
5,989
(3,358)
$1,003
705
(153)
(608)
835
-
-
$632
4
(404)
(708)
3,342
1,040
-
$371
701
251
100
(2,507)
(1,040)
-
$852
2,631
(153)
(4,533)
(952)
(708)
7,511
13,799
-
-
1,040
8,935
799
(3,825)
(6,288)
(1,040)
(8,935)
(24,024)
(17,890)
(6,134)
(60,579)
(62,965)
2,386
Leasing expenses and tenant inducements
(10,697)
(11,181)
484
(35,171)
(30,801)
(4,370)
($32,939)
($25,165)
($7,774)
($89,442)
($63,366)
($26,076)
Excluding the above items, AFFO would have been $127.9 million for the three months ended December 31, 2018 (Q4 2017 - $132.3 million) and $0.42
per basic Unit (Q4 2017 - $0.43 per basic Unit). For the year ended December 31, 2018, AFFO would have been $514.9 million (Q4 2017 - $527.6 million)
and $1.70 per basic Unit (Q4 2017 - $1.73 per basic Unit).
Page 32 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
Capital and Tenant Expenditures
The following is a breakdown of H&R’s capital expenditures and tenant expenditures (leasing expenditures and tenant inducements) by operating segment:
(in thousands of Canadian dollars)
2018
2017
Change
2018
2017
Change
Three months ended December 31
Year ended December 31
Office:
Capital expenditures
Leasing expenditures and tenant inducements
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
Leasing expenditures and tenant inducements
Total at the REIT's proportionate share
Less: equity accounted investments
$10,207
$10,307
4,016
5,400
($100)
(1,384)
$24,855
$33,675
($8,820)
12,439
17,179
(4,740)
9,476
3,292
98
1,781
694
858
167
750
2,924
2,777
-
705
752
914
6,552
515
98
1,076
(58)
(56)
2,343
1,385
(2,176)
(635)
22,965
8,564
10,264
8,822
12,701
(258)
1,037
3,658
2,754
2,175
1,619
8,335
1,065
1,170
2,366
1,206
9,694
2,424
(28)
2,488
388
969
(8,075)
5,911
3,382
1,564
1,818
7,349
5,901
1,448
-
-
34,721
29,071
(1,816)
(4,803)
-
5,650
2,987
-
-
95,750
93,766
(5,484)
(13,199)
-
1,984
7,715
Total per the REIT's Financial Statements(1)
$32,905
$24,268
$8,637
$90,266
$80,567
$9,699
(1)
Equal to the sum of capital expenditures and leasing expenses and tenant inducements per the REIT’s Financial Statements.
During 2017 and 2018, H&R’s largest office project was at 160 Elgin St., in Ottawa, ON at which a complete renovation of the lobby and retail space was
substantially completed. H&R expects to spend an additional $4.9 million to complete this project. Total capital and tenant expenditures at 160 Elgin St.,
in Ottawa, ON during the three months and year ended December 31, 2018 were $2.0 million and $8.7 million, respectively, compared to the three months
and year ended December 31, 2017 of $6.7 million and $27.3 million, respectively. Capital expenditures from the Office segment for the three months and
year ended December 31, 2018 also included $4.7 million and $4.9 million, respectively, relating to an entrance and lobby renovation, washroom upgrades
and electrical upgrades at Atrium in Toronto, ON.
The largest capital expenditures from the Primaris segment for the three months and year ended December 31, 2018 included: (i) a food court re-location
at Place d’Orleans in Orleans, ON; (ii) backfilling a former Sobey’s location with a new Marshalls/Home Sense store at McAllister Place in Saint John, NB;
and (iii) backfilling a former Safeway location with a new Marshalls store at Garden City Square in Winnipeg, MB.
Tenant expenditures from the H&R Retail segment for the three months and year ended December 31, 2018 included a $1.8 million tenant allowance paid
as part of a 15-year lease renewal to a single tenant at an Ontario retail property occupying 118,526 square feet.
Capital expenditures from the Industrial segment for the three months and year ended December 31, 2017 included $2.6 million and $9.1 million,
respectively, which related to re-paving work being completed at two U.S. industrial properties which were subsequently sold in December 2017. Tenant
expenditures from the Industrial segment for the year ended December 31, 2018 included a $4.6 million tenant allowance paid as part of a 5-year lease
renewal to a single tenant at an Ontario industrial property occupying 369,051 square feet, at H&R’s ownership interest.
Page 33 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
LIQUIDITY AND CAPITAL RESOURCES
Cash Distributions
In accordance with National Policy 41-201 - Income Trusts and Other Indirect Offerings, the REIT is 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,
2018
Year ended
December 31,
2018
Year ended
December 31,
2017
Year ended
December 31,
2016
$122,239
$462,123
$479,239
$424,196
61,115
98,404
23,835
(37,289)
337,918
395,568
66,555
(57,650)
667,870
397,908
81,331
269,962
388,745
381,106
43,090
7,639
(1) Total distributions include cash distributions to unitholders and Unit distributions issued under the DRIP. In February 2018, the Trusts announced the suspension of the DRIP until further
notice, commencing with the March 2018 distribution. Following the Reorganization, the DRIP remains suspended until further notice.
Unit distributions issued under the DRIP were nil and $16.6 million, respectively, for the three months and year ended December 31, 2018 (December 31,
2017 - $107.4 million, December 31, 2016 - $106.8 million), which are non-cash distributions. Unit distributions issued under the DRIP previously resulted
in an increase in the number of Units outstanding, however, the suspension of the DRIP commencing with the March 2018 distribution, has resulted in
increased total cash distributions. Distributions exceeded net income for the three months and year ended December 31, 2018 primarily due to non-cash
items. Non-cash items relating to the fair value adjustments on financial instruments and real estate assets, gain (loss) on sale of real estate assets, 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 operations
Cash flows from (used) investing
Cash flows from (used) financing
Cash and cash equivalents, end of year
Three months ended December 31
Year ended December 31
2018
2017
Change
2018
2017
Change
$93,492
$51,727
$41,765
$42,284
$48,021
($5,737)
122,239
128,512
(6,273)
462,123
479,239
(17,116)
(232,622)
(425,489)
192,867
175,186
(625,635)
800,821
69,964
287,534
(217,570)
(626,520)
140,659
(767,179)
$53,073
$42,284
$10,789
$53,073
$42,284
$10,789
Cash flows from operations decreased by $6.3 million and $17.1 million, respectively, for the three months and year ended December 31, 2018 compared
to the respective 2017 periods primarily due to a decrease in property operating income and an increase in interest paid. The decrease for the three
months ended December 31, 2018 compared to the respective 2017 period was partially offset by an increase in non-cash operating working capital.
Cash flows from (used) investing increased by $192.9 million for the three months ended December 31, 2018 compared to the respective 2017 period
primarily due to restricted cash released from escrow as a result of H&R completing Section 1031 property exchanges in Q4 2018 and a greater amount
spent on acquisitions in Q4 2017 compared to Q4 2018. Cash flows from (used) investing increased by $800.8 million for the year ended December 31,
2018 compared to the respective 2017 period, primarily due to net proceeds on dispositions of real estate assets including the sale of nine U.S. industrial
joint venture properties sold in 2017 with proceeds being disbursed in Q1 2018. The increase for both the three months and year ended December 31,
2018 compared to the respective 2017 periods was partially offset by additions to properties under development. For a list of property acquisitions and
dispositions, see pages 11, 12 and 16 of this MD&A.
Cash flows from (used) financing decreased by $217.6 million and $767.2 million, respectively, for the three months and year ended December 31, 2018
compared to the respective 2017 periods primarily due to the repayment of debt. Cash flows from (used) financing further decreased for the year ended
December 31, 2018 compared to the respective 2017 period due to the Trusts’ purchase and cancellation of Units under their NCIB during 2018 and higher
cash distributions to unitholders due to the suspension of the DRIP in March 2018.
Page 34 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
Capital Resources
Subject to market conditions, management expects to be able to meet all of the REIT’s ongoing contractual obligations through cash on hand of $53.1
million and amounts available under its lines of credit of $768.2 million as at December 31, 2018. In addition, the REIT has $172.8 million available under
its secured construction facilities held through equity accounted investments as at December 31, 2018. As at December 31, 2018, the REIT is not in default
or arrears on any of its obligations including interest or principal payments on debt and any debt covenant.
As at December 31, 2018, H&R had 91 unencumbered properties, with a fair value of approximately $3.4 billion. Also, due to H&R’s 22-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, 2018, H&R had 36 properties valued at approximately $1.3 billion which are encumbered with mortgages totalling $248.8
million. In this pool of assets, the average loan to value is 18.9%, the minimum loan to value is 0.3% and the maximum loan to value is 27.1%. The
weighted average remaining term to maturity of this pool of mortgages is 3.3 years.
The following is a summary of material contractual obligations including payments due as at December 31, 2018 for the next five years and thereafter:
Contractual Obligations(1)
(in thousands of Canadian dollars)
Mortgages payable
Senior debentures
Lines of credit
Unsecured term loans
2019
$177,182
350,000
3,514
-
Payments Due by Period
2020-
2021
2022-
2023
2024 and
thereafter
Total
$1,439,794
$1,064,238
$1,483,616
$4,164,830
345,000
322,680
200,629
575,000
5,750
350,000
1,620,000
-
250,000
-
331,944
450,629
Total contractual obligations
$530,696
$2,308,103
$1,644,988
$2,083,616
$6,567,403
(1) The amounts in the above table are the principal amounts due under the contractual agreements.
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, 2018. This is a rating achieved by only three
Canadian REITs (including H&R) and one real estate company as at December 31, 2018. 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, 2018, through cash on hand of $53.1 million and the total amount available under its lines of credit of $768.2
million and its unencumbered property pool of approximately $3.4 billion, H&R has sufficient funds for future commitments.
Page 35 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
The following summarizes the estimated loan to value ratios on properties for which mortgages mature over the next five years:
Year
2019
2020
2021
2022
2023
Number of
Properties
Mortgage Debt due
on Maturity ($000’s)
Weighted Average
Interest Rate on Maturity
Fair Value of Investment
Properties ($000’s)(1)
Loan to
Value
6
15
11
39
10
81
$50,679
366,368
839,231
539,953
391,746
$2,187,977
3.8%
4.5%
3.9%
3.9%
3.9%
4.0%
$145,298
992,225
3,567,636
3,053,530
1,862,380
$9,621,069
35%
37%
24%
18%
21%
23%
(1)
Converting U.S. dollars to Canadian dollars at an exchange rate of $1.36 as at December 31, 2018.
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.
RELATED PARTY TRANSACTION
In 2018, H&R paid approximately U.S. $14.6 million for 20.3 acres of land in Dallas, TX, to be developed into approximately 1,000 residential rental units,
from an entity in which the CEO held a 50% ownership interest.
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, 2018, H&R has outstanding letters of credit totalling $25.9 million (December 31, 2017 - $32.9 million), including $17.3 million (December
31, 2017 - $15.1 million) which has been pledged as security for certain mortgages payable. The letters of credit are secured by certain investment
properties.
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, 2018, such guarantees amounted
to $263.9 million expiring between 2019 and 2029 (December 31, 2017 - $497.5 million, expiring between 2020 and 2029), and no amount has been
provided for in the REIT’s 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.
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, 2018, the estimated amount of debt subject to such guarantees, and
therefore the maximum exposure to credit risk is approximately $44.0 million, which expires in 2020 (December 31, 2017 - $119.3 million, expiring between
2018 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 REIT’s Financial Statements.
DERIVATIVE 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.
Page 36 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
H&R had the following interest rate swaps outstanding:
Fair value asset (liability)*
Net gain (loss) on derivative contracts
(in thousands of Canadian dollars)
Debenture interest rate swap
Debenture interest rate swap
Debenture interest rate swap
Term loan interest rate swap
Term loan interest rate swap
December 31
December 31
December 31
December 31
(1)
(2)
(3)
(4)
(5)
2018
$592
(331)
-
4,853
(2,370)
$2,744
2017
$2,231
-
177
3,966
-
$6,374
2018
($1,639)
(331)
(177)
887
(2,370)
($3,630)
2017
$1,455
-
584
7,350
-
$9,389
(1)
(2)
(3)
(4)
(5)
*
To fix the interest rate at 2.36% per annum for the Series K senior debentures, maturing on March 1, 2019.
To fix the interest rate at 2.88% per annum for the Series P senior debentures, maturing on February 13, 2020.
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 (settled when these debentures matured on February 9, 2018).
To fix the interest rate at 2.56% per annum on U.S. $130.0 million of term loan, maturing on March 17, 2021.
To fix the interest rate at 3.91% per annum on $250.0 million term loan, maturing on January 6, 2026.
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
SELECTED FINANCIAL INFORMATION
Selected Annual information
The following table summarizes certain financial information 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
Year Ended
December 31,
2018
$1,176,558
169,409
8,638
337,918
532,794
14,691,009
7,490,909
$1.38
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
Page 37 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
Summary of Quarterly Results
The following tables summarize certain financial information 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
Rentals from investment properties
Net income from equity accounted investments
Net income
Total comprehensive income (loss)
Q4
2018
$297,416
148,165
61,115
200,450
Q4
2017
$298,042
118,337
325,213
335,466
Q3
2018
$286,223
8,143
105,509
71,065
Q3
2017
$289,568
3,072
78,784
(1,511)
Q2
2018
$294,302
6,864
108,194
144,329
Q2
2017
$286,987
26,280
153,070
104,181
Q1
2018
$298,617
6,237
63,100
116,950
Q1
2017
$293,857
19,718
110,803
98,462
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.
Rentals from investment properties increased by $11.2 million in Q4 2018 compared to Q3 2018, primarily due to the following: (i) an increase in rentals
from Primaris due to seasonality; (ii) contractual rental escalations from H&R’s office properties; and (iii) the lease-up and acquisition of Lantower Residential
properties.
Net income from equity accounted investments increased by $140.0 million in Q4 2018 compared to Q3 2018 primarily due to the fair value adjustment on
real estate assets increasing by $141.6 million mainly due to the fair value of Jackson Park increasing by U.S. $107.7 million at H&R’s ownership interest.
An independent third party appraisal was obtained for this property in Q4 2018.
Net income decreased by $44.4 million in Q4 2018 compared to Q3 2018 primarily due to the following: (i) a decrease in the fair value adjustments on real
estate assets and financial instruments and (ii) an increase in deferred income taxes. This was partially offset by an increase in net income from equity
accounted investments.
Total comprehensive income (loss) increased by $129.4 million in Q4 2018 compared to Q3 2018 primarily due to an unrealized gain on translation of U.S.
denominated foreign operations of $139.3 million in Q4 2018 compared to an unrealized loss of $34.5 million in Q3 2018, partially offset by a decrease in
net income explained above.
Page 38 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
PORTFOLIO OVERVIEW
The geographic diversification of the portfolio of properties in which the REIT has an interest and the related square footage is disclosed at the REIT’s
proportionate share as at December 31, 2018 in the tables below:
Number of Properties(1)
Canada
Office
Primaris
H&R Retail
ECHO(2)
Industrial
Lantower Residential(3)
Total
Square Feet (in thousands)(1)
Office
Primaris
H&R Retail
ECHO(2)
Industrial
Lantower Residential(3)
Total
Ontario
20
6
34
-
36
-
96
Ontario
6,426
2,076
1,675
-
4,577
-
14,754
Alberta
4
17
2
-
19
-
42
Canada
Alberta
2,607
3,821
240
-
2,030
-
8,698
Other
4
7
7
-
29
-
47
Other
893
2,090
707
-
2,012
-
5,702
Subtotal
28
30
43
-
84
-
185
Subtotal
9,926
7,987
2,622
-
8,619
-
29,154
United States
7
-
16
230
6
22
281
United States
2,023
-
219
3,178
1,068
6,811
13,299
Total
35
30
59
230
90
22
466
Total
11,949
7,987
2,841
3,178
9,687
6,811
42,453
(1) H&R has nine properties under development which are not included in the tables above.
(2) ECHO has 11 properties under development which are not included in the tables above.
(3) Lantower Residential’s properties contain 7,271 residential rental units.
Page 39 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
LEASE MATURITY PROFILE
The following tables disclose H&R’s leases expiring in Canada and the United States at the REIT’s proportionate share, excluding Lantower Residential.
Canadian Portfolio:
LEASE EXPIRIES
2019
2020
2021
2022
2023
Office
Primaris
H&R Retail
Industrial
Total
Rent per
sq.ft. ($)
on expiry
25.03
Sq.ft.
972,308
22.36
1,046,416
18.34
24.58
21.86
720,805
722,270
462,898
Sq.ft.
215,720
234,603
483,976
623,173
506,186
2,063,658
22.24
3,924,697
Rent per
sq.ft. ($)
on expiry
24.91
21.68
27.23
24.73
35.50
25.69
Rent per
sq.ft. ($)
on expiry
9.15
15.23
11.48
Sq.ft.
764,485
708,995
276,949
11.33
1,147,156
12.68
386,899
Rent per
sq.ft. ($)
on expiry
5.65
8.55
5.83
6.83
6.61
Sq.ft.
2,100,036
2,087,298
1,690,677
2,546,478
1,405,761
Sq.ft.
147,523
97,284
208,947
53,879
49,778
557,411
11.61
3,284,484
6.82
9,830,250
Rent per
sq.ft. ($)
on expiry
16.80
17.00
19.23
16.35
21.83
17.86
Total % of each segment
20.8%
49.1%
21.3%
38.1%
33.7%
U.S. Portfolio(1):
LEASE EXPIRIES
2019
2020
2021
2022
2023
Total % of each segment
(1)
U.S. dollars.
Office
H&R Retail
ECHO
Industrial
Total
Rent per
sq.ft. ($)
on expiry
-
-
-
71.76
5.86
6.29
Rent per
sq.ft. ($)
on expiry
46.44
52.38
47.64
46.21
37.97
46.88
Rent per
sq.ft. ($)
on expiry
11.82
8.00
16.16
16.86
21.86
13.71
Rent per
sq.ft. ($)
on expiry
3.94
-
-
4.94
3.00
Sq.ft.
208,751
388,738
176,084
274,994
677,708
3.33
1,726,275
26.6%
Rent per
sq.ft. ($)
on expiry
10.91
14.59
19.10
20.64
9.12
13.42
Sq.ft.
82,896
-
-
54,654
412,585
550,135
51.5%
Sq.ft.
112,487
331,047
159,619
163,240
147,272
913,665
28.7%
Sq.ft.
13,368
57,691
16,465
56,537
32,126
176,187
80.5%
Sq.ft.
-
-
-
563
85,725
86,288
4.3%
Page 40 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
TOP TWENTY SOURCES OF REVENUE BY TENANT
The following table discloses H&R’s top twenty tenants at the REIT’s 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.
Canadian Tire Corporation(4)
TransCanada Pipelines Limited
Lowe's Companies, Inc.(5)
Canadian Imperial Bank of Commerce
1.
2.
3.
4.
5.
6.
7.
8.
9.
10. Corus Entertainment Inc.
11. Government of Ontario
12.
Telus Communications
13. Shell Oil Products
14. Public Works and Government Services, Canada
15.
16.
17. Empire Company Limited(7)
18. Royal Bank of Canada
19.
20. Hudson's Bay Company
Toronto-Dominion Bank
Loblaw Companies Limited(6)
The TJX Companies Inc(8)
Total
11.4%
8.2%
5.1%
3.6%
3.2%
2.6%
1.8%
1.8%
1.7%
1.6%
1.3%
1.2%
1.2%
1.0%
0.9%
0.9%
0.9%
0.9%
0.7%
0.6%
50.6%
1
23
1
1
192
19
1
15
9
1
4
17
17
5
7
20
15
5
14
7
374
1,997
2,541
845
660
1,680
2,627
466
1,750
555
472
359
356
223
338
277
287
569
247
548
958
BBB- Positive
19.4
BBB+ Stable
6.6
(9)
BBB- Stable
11.9
AA Stable
12.2 Not Rated
7.0
12.3
11.6
5.5
14.2
3.9
6.3
3.5
4.1
8.0
7.8
10.8
6.4
6.2
6.6
BBB+ Stable
BBB+ Stable
BBB+ Stable
A+ Stable
BB Negative
A+ Stable
BBB+ Stable
AA- Stable
AAA Stable
AA- Stable
BBB Stable
BB+ Stable
AA- Stable
A+ Stable
B Stable
17,755
10.9
(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) Canadian Tire Corporation includes Canadian Tire, Mark’s, Sport Chek, Atmosphere and Sports Experts.
(5) Lowe’s Companies, Inc. includes Rona.
(6) Loblaw Companies Limited includes Loblaw, No Frills and Shoppers Drug Mart.
(7) Empire Company Limited includes Sobeys, Sobey’s Liquor, Safeway and Lawtons Drugs.
(8) The TJX Companies Inc. includes Winners, T.J. Maxx, Marshalls and Home Sense.
(9) Due to the confidentiality under the tenant’s lease, the term is not disclosed.
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SECTION V
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
Preparation of the REIT’s 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 REIT’s 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 REIT’s 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.
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 consolidated 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 REIT’s Financial Statements and this MD&A.
Refer to note 3 of the REIT’s 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(r)(i) of the December 31, 2018 REIT’s 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, 2018 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,
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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.
SIGNIFICANT ACCOUNTING POLICIES
Accounting Standards adopted in 2018:
On January 1, 2018, the REIT adopted IFRS 15, Revenue from Contracts with Customers (“IFRS 15”) and IFRS 9, Financial Instruments (“IFRS 9”), in
accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. The policies were adopted retrospectively without restatement
of the prior period. For the comparative year ended December 31, 2017, the policies applied were consistent with the 2017 disclosed policies. The adoption
of IFRS 15 and 9 did not have a significant impact.
New standards and interpretations not yet adopted:
The REIT intends to adopt these standards when they become effective.
(i) 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 REIT is evaluating the impact of IFRS 16. In particular, the REIT is 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.
Management does not expect the adoption of IFRS 16 to have a material impact on the REIT’s Financial Statements.
(ii)
IFRIC Interpretation 23, Uncertainty over Income Tax Treatments (“The Interpretation”)
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 REIT 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; and b) determine if it is probable that the tax authorities will accept the uncertain
tax treatment or 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 REIT will adopt the Interpretation in its
consolidated financial statements for the annual period beginning on January 1, 2019.
Management does not expect the adoption of IFRIC 23 to have a material impact on the REIT’s Financial Statements.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING
H&R’s CEO and Chief Financial Officer (“CFO”) has designed, or caused to be designed under their direct supervision, the applicable 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 REIT, 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. H&R’s CEO and CFO have evaluated, or caused to be evaluated under
their supervision, the effectiveness of the REIT’s disclosure controls and procedures as at December 31, 2018, 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, 2018. The REIT’s
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.
H&R’s management has reviewed its respective internal control over financial reporting on an annual basis. The REIT’s management, under the supervision
of the CEO and the CFO, has evaluated the effectiveness of internal control over financial reporting as at December 31, 2018 using the framework and
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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, 2018. No changes were made to H&R’s internal control over financial reporting during the three-month period ended December 31,
2018 that have materially affected, or are reasonably likely to materially affect, the REIT’s internal controls over financial reporting.
H&R’s management, including the CEO and CFO, does not expect that the REIT’s 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 REIT have been detected. H&R is continually evolving and enhancing its systems of controls
and procedures.
SECTION VI
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, 2018, approximately 26.0% of property operating income at the REIT’s proportionate share 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.
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.
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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 32.4% 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 REIT’s 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 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
H&R is 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 U.S. mortgages, Series P senior debentures, U.S. unsecured term loans and U.S. lines of
credit each being denominated in U.S. dollars.
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
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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, Units
may trade at a premium or a discount to the underlying value of the assets of H&R. See also “Forward-Looking Disclaimer”.
One of the factors that may influence the quoted price of the Units is the annual yield on the Units. Accordingly, an increase in market interest rates may
lead investors in Units to demand a higher annual yield, which could adversely affect the quoted price of Units. In addition, the quoted price for 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.
Availability of Cash for Distributions
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 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 Units may decline significantly
if H&R 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.
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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 H&R is authorized to issue is unlimited. The trustees have the discretion to issue additional Units in certain circumstances, including
under H&R’s Unit Option Plan and Incentive Unit Plan. In addition, H&R may issue Units pursuant to the DRIP and Unit Purchase Plan. Any issuance of
Units may have a dilutive effect on the investors of Units.
Unitholder Liability
H&R’s Declaration of Trust provides that unitholders will have no personal liability for actions of the REIT 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. H&R’s Declaration of Trust further
provides that this lack of unitholder liability, where possible, must be provided for in certain written instruments signed by the REIT. 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 H&R considers 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 REIT’s assets. It is intended that the REIT’s 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 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 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 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 Units; and (iii) the normal trading of the Units is not
suspended or halted on any stock exchange on which the Units are listed (or, if not so listed, on any market on which the 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.
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 Series F, 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 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. 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.
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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 2018.
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.
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 Units. If H&R 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), Units 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 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 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. During 2017 and 2018, H&R made
loans to U.S. Holdco (“U.S. Holdco Loans”) to refinance existing loans, including U.S. Holdco Notes, or 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 Loans or H&R’s ability to make distributions on its Units.
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 was
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) 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.
Page 48 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
U.S. Tax Reform
Overview
U.S. Tax Reform was signed into law by the president on December 22, 2017, and Management has considered the material effects of tax reform on H&R’s
Financial Statements (if any).
U.S. corporate rate reduction
The U.S. federal corporate income tax rate was 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).
Section 163(j) carryover
Under the tax reform bill, Prior Section 163(j) was repealed and replaced with a new section 163(j) effective January 1, 2018. H&R has U.S. $147.3 million
of Prior Section 163(j) interest carryover that was recorded as a deferred tax asset under the old regime. Given the initial lack of specific guidance regarding
the appropriate treatment of a deferred interest carryover under the old regime, H&R reversed the deferred tax benefit of its Prior Section 163(j) carryover,
which resulted in a one-time expense of $48.1 million in 2017 (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”) to depreciate certain assets for U.S. federal income tax purposes.
Risks relating to tax reforms
As the new U.S. Tax Reform continues to move 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 Units, any distributions in respect of Units which are treated as “excess distribution” under the applicable rules and any gain on a
sale or other disposition of 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 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). Units are treated as a
specified foreign financial asset for this purpose.
In addition, with respect to years during which unitholders held interests in Finance Trust, 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 on behalf of 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 49 of 50
H&R REIT - MD&A – DECEMBER 31, 2018
A holder of 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 H&R paid or credited (whether in cash or in specie) in respect of such Units, subject to reduction under
the U.S. Treaty if applicable. In the case of income paid or credited on Units, the withholding rate applicable to a U.S. unitholder entitled to the benefits of
the U.S. Treaty in respect of such income generally would be reduced to 15%. U.S. unitholders may be entitled to a refund of a portion of such withholding
tax if the rate applied by H&R 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 the REIT are represented by two classes of Units: Units which are unlimited in number; and special voting Units of which a
maximum of 9,500,000 may be issued. Each Unit carries a single vote at any meeting of unitholders of the REIT. Each special voting Unit carries a single
vote at any meeting of unitholders of the REIT. As at February 6, 2019, there were 285,677,811 Units issued and outstanding and 9,500,000 special voting
Units outstanding.
As at December 31, 2018, 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, 477,764 have expired and 7,075,468 remain to be granted. Of the amount originally granted, 10,138,717 had been
exercised or expired and 11,263,579 options to purchase Units remained outstanding. As at February 6, 2019, there were 11,263,579 options to purchase
Units outstanding of which 8,867,636 have fully vested.
As at December 31, 2018, the maximum number of incentive units authorized to be granted under H&R’s Incentive Unit Plan was 5,000,000. As at
December 31, 2018, 935,049 incentive units had been granted, of which 46,308 had expired, 320,864 have been settled for cash and 6,635 had been
settled for Units. Accordingly, 4,432,123 may still be granted under the plan and 561,242 incentive units remain outstanding. As at February 6, 2019, there
were 564,145 incentive units outstanding.
As at December 31, 2018, there were 15,955,541 exchangeable units outstanding of which 9,500,000 exchangeable units are accompanied by special
voting units. As at February 6, 2019, there were 15,955,541 exchangeable units outstanding of which 9,500,000 exchangeable units are accompanied by
special voting units.
ADDITIONAL INFORMATION
Additional information relating to H&R, including H&R’s Annual Information Form, is available on SEDAR at www.sedar.com
SUBSEQUENT EVENTS
(a)
In January 2019, the REIT sold one U.S. office property which was classified as held for sale as at December 31, 2018, for gross proceeds of U.S.
$69.8 million.
(b)
In February 2019, the REIT secured two new mortgages totalling $36.6 million, bearing interest at 3.36% per annum for a term of 10 years.
Page 50 of 50
Consolidated Financial Statements of
H&R REAL ESTATE INVESTMENT TRUST
Years ended December 31, 2018 and 2017
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
Opinion
We have audited the consolidated financial statements of H&R Real Estate Investment
Trust (the Entity), which comprise:
the consolidated statement of financial position as at December 31, 2018
the consolidated statement of comprehensive income for the year then ended
the consolidated statement of changes in unitholders' equity for the year then ended
the consolidated statement of cash flows for the year then ended
and notes to the consolidated financial statements, including a summary of
significant accounting policies.
(Hereinafter referred to as the "financial statements").
In our opinion, the accompanying financial statements present fairly, in all material
respects, the consolidated financial position of the Entity as at December 31, 2018 and
its consolidated financial performance and its consolidated cash flows for the year then
ended in accordance with International Financial Reporting Standards (IFRS).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Our responsibilities under those standards are further described in
the "Auditors' Responsibilities for the Audit of the Financial Statements" section
of our auditors' report.
We are independent of the Entity in accordance with the ethical requirements that are
relevant to our audit of the financial statements in Canada and we have fulfilled our
other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our 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
Other Information
Management is responsible for the other information. Other information comprises:
the information included in Management's Discussion and Analysis filed with the
relevant Canadian Securities Commissions.
the information other than the financial statements and the auditors' report thereon,
included in a document entitled "Annual Report".
Our opinion on the financial statements does not cover the other information and we do
not and will not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the
other information identified above and, in doing so, consider whether the other
information is materially inconsistent with the financial statements or our knowledge
obtained in the audit and remain alert for indications that the other information appears
to be materially misstated.
We obtained the information included in Management's Discussion and Analysis filed
with the relevant Canadian Securities Commissions and the information other than the
financial statements and the auditors' report thereon, included in a document entitled
"Annual Report" as at the date of this auditors' report.
If, based on the work we have performed on this other information, we conclude that
there is a material misstatement of this other information, we are required to report that
fact in the auditors' report.
We have nothing to report in this regard.
Responsibilities of Management and Those Charged with
Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial
statements in accordance with International Financial Reporting Standards (IFRS), and
for such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether
due to fraud or error.
In preparing the financial statements, management is responsible for assessing the
Entity's ability to continue as a going concern, disclosing as applicable, matters related
to going concern and using the going concern basis of accounting unless management
either intends to liquidate the Entity or to cease operations, or has no realistic alternative
but to do so.
Those charged with governance are responsible for overseeing the Entity's financial
reporting process.
Page 3
Auditors' Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud or
error, and to issue an auditors' report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with Canadian generally accepted auditing standards will
always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually
or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards,
we exercise professional judgment and maintain professional skepticism throughout the
audit.
We also:
Identify and assess the risks of material misstatement of the financial statements,
whether due to fraud or error, design and perform audit procedures responsive to
those risks, and obtain audit evidence that is sufficient and appropriate to provide a
basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than
for one resulting from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit 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 Entity's internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness
of accounting estimates and related disclosures made by management.
Conclude on the appropriateness of management's use of the going concern basis
of accounting and, based on the audit evidence obtained, whether a material
uncertainty exists related to events or conditions that may cast significant doubt on
the Entity's ability to continue as a going concern. If we conclude that a material
uncertainty exists, we are required to draw attention in our auditors' report to the
related disclosures in the financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit evidence
obtained up to the date of our auditors' report. However, future events or conditions
may cause the Entity to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the financial statements,
including the disclosures, and whether the financial statements represent the
underlying transactions and events in a manner that achieves fair presentation.
Page 4
Communicate with those charged with governance regarding, among other matters,
the planned scope and timing of the audit and significant audit findings, including
any significant deficiencies in internal control that we identify during our audit.
Provide those charged with governance with a statement that we have complied
with relevant ethical requirements regarding independence, and communicate with
them all relationships and other matters that may reasonably be thought to bear on
our independence, and where applicable, related safeguards.
Obtain sufficient appropriate audit evidence regarding the financial information of
the entities or business activities within the Group Entity to express an opinion on
the financial statements. We are responsible for the direction, supervision and
performance of the group audit. We remain solely responsible for our audit opinion.
Chartered Professional Accountants, Licensed Public Accountants
The engagement partner on the audit resulting in this auditors' report is Tony Marino.
Toronto, Canada
February 14, 2019
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 statement of financial position as at December 31, 2017, the combined
statements of comprehensive income, changes in unitholders' equity and cash flows for
the year 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 audit. We conducted our audit 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 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 their
combined financial performance and their combined cash flows for the year then ended
in accordance with International Financial Reporting Standards.
Chartered Professional Accountants, Licensed Public Accountants
February 14, 2018
Toronto, Canada
Note
December 31
2018
December 31
2017
3
3
4
5
6
7
8
9
21
10
23
25
$ 12,683,709
404,814
13,088,523
$ 13,074,123
83,132
13,157,255
1,284,985
110,940
153,488
53,073
1,125,135
-
234,189
42,284
$ 14,691,009
$ 14,558,863
$ 6,546,072
329,482
392,214
223,141
$ 6,493,617
341,321
325,131
219,031
7,490,909
7,379,100
7,200,100
7,179,763
$ 14,691,009
$ 14,558,863
H&R REAL ESTATE INVESTMENT TRUST
Consolidated Statements of 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:
Debt
Exchangeable units
Deferred tax liability
Accounts payable and accrued liabilities
Unitholders' equity
Commitments and contingencies
Subsequent events
See accompanying notes to the consolidated financial statements.
Approved on behalf of the Board of Trustees:
“Stephen Sender”
“Thomas J. Hofstedter”
Trustee
Trustee
1
H&R REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Comprehensive Income
(In thousands of Canadian dollars)
Years ended December 31, 2018 and 2017
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
Gain (loss) on foreign exchange
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
Total comprehensive income attributable to unitholders
See accompanying notes to the consolidated financial statements.
Note
2018
2017
14
4
15
15
15
3
3
21
$ 1,176,558
(442,626)
733,932
$ 1,168,454
(427,013)
741,441
169,409
-
(267,087)
8,638
(18,271)
11,197
(246,967)
(19,602)
6,886
378,135
(40,217)
337,918
167,407
1,040
(270,358)
4,999
(18,111)
27,049
1,796
(7,729)
(17,903)
629,631
38,239
667,870
13
194,876
(131,272)
$ 532,794
$ 536,598
2
H&R REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Changes in Unitholders' Equity
(In thousands of Canadian dollars)
Years ended December 31, 2018 and 2017
UNITHOLDERS' EQUITY
Note
Value of
Units
Accumulated
net income
Accumulated
distributions
Accumulated
other
comprehensive
income
(note 13)
Unitholders' equity, January 1, 2017
Proceeds from issuance of Units
Net income
Distributions to unitholders
Conversion of convertible debentures, net
Units repurchased and cancelled
Other comprehensive loss
Unitholders' equity, December 31, 2017
Proceeds from issuance of Units
Net income
Distributions to unitholders
Conversion of convertible debentures
Units repurchased and cancelled
Other comprehensive income
$ 5,354,930
144,360
-
-
2
(15,939)
-
5,483,353
19,313
-
-
70
(136,272)
-
$ 4,552,274
-
667,870
-
-
$ (3,302,774)
-
-
(397,908)
-
$ 308,220
-
-
-
-
-
5,220,144
-
(3,700,682)
(131,272)
176,948
-
337,918
-
-
-
-
-
-
(395,568)
-
-
-
-
-
-
-
-
194,876
12(c)
8(b)(iii)
12(d)
12(c)
8(b)(iii)
12(d)
Total
$ 6,912,650
144,360
667,870
(397,908)
2
(15,939)
(131,272)
7,179,763
19,313
337,918
(395,568)
70
(136,272)
194,876
Unitholders' equity, December 31, 2018
$ 5,366,464
$ 5,558,062
$ (4,096,250)
$ 371,824
$ 7,200,100
See accompanying notes to the consolidated financial statements.
3
H&R REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Cash Flows
(In thousands of Canadian dollars)
Years ended December 31, 2018 and 2017
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
(Gain) loss on foreign exchange
Fair value adjustment on real estate assets
Loss on sale of real estate assets, net of related costs
Fair value adjustments on financial instruments
Unit-based compensation
Deferred income taxes (recovery)
Change in other non-cash operating items
Investing:
Properties under development:
Acquisition
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 investments
Restricted cash
Financing:
Unsecured term loans
Lines of credit
Mortgages payable:
New mortgages payable
Principal repayments
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 16).
See accompanying notes to the consolidated financial statements.
4
Note
2018
2017
15
4
14
3
3
15
12(b)
21
16
3, 16
3, 16
3
3, 16
3
3
6
8(c)
8(d)
8(a)
8(a)
8(b)(iii)
8(b)(iii)
12(d)
12(c)
7
7
$ 337,918
267,087
(268,156)
$ 667,870
270,358
(258,328)
(169,409)
1,988
(6,886)
246,967
19,602
(11,197)
2,413
39,457
2,339
462,123
(31,876)
(115,491)
879,347
(463,299)
(58,121)
(57,825)
(32,441)
110,603
(68,150)
-
12,439
175,186
250,000
(196,323)
619,788
(536,908)
(657,082)
409,205
8
(136,272)
(378,936)
(626,520)
10,789
42,284
$ 53,073
(167,407)
2,354
17,903
(1,796)
7,729
(27,049)
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)
-
69,704
588,094
(585,659)
(249,394)
619,299
5,051
(15,939)
(290,497)
140,659
(5,737)
48,021
$ 42,284
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
H&R Real Estate Investment Trust (the “REIT”) is an unincorporated open-ended trust domiciled in Canada and H&R Finance Trust (“Finance Trust”)
was an unincorporated investment trust domiciled in Canada. The REIT owns, operates and develops commercial and residential properties across
Canada and in the United States. The REIT’s units (“Units”) are listed and posted for trading on the Toronto Stock Exchange (“TSX”) under the symbol
HR.UN. The principal office and centre of administration of the REIT is located at 3625 Dufferin Street, Suite 500, Toronto, Ontario M3K 1N4. Unitholders
of the REIT participate pro rata in distributions of income and, in the event of termination of the REIT, participate pro rata in the net assets remaining
after satisfaction of all liabilities.
On August 31, 2018, the REIT and Finance Trust effected a reorganization (“Reorganization”) by way of plan of arrangement involving the REIT, Finance
Trust and certain of the REIT’s subsidiaries resulting in, among other things, (i) Finance Trust transferring debt owed to it by H&R REIT (U.S.) Holdings
Inc. (“U.S. Holdco”) to the REIT for nil consideration and (ii) unitholders subsequently transferring their Finance Trust units to the REIT for nominal
consideration and retaining their Units. Following these transactions, Finance Trust was terminated, resulting in the Units no longer being stapled to
units of Finance Trust and unitholders holding only REIT Units.
These consolidated financial statements include the accounts of the REIT and Finance Trust, (together with the REIT, the “Trusts”) up to August 31,
2018, the date of termination of Finance Trust. The comparative period ended December 31, 2017 continues to reflect the financial position and results
of the REIT and Finance Trust as previously reported on a combined basis, as units of the Trusts were previously stapled (“Stapled Units”). For the
periods prior to August 31, 2018, references to Units should be read as referring to Stapled Units.
1. Basis of preparation:
(a) Statement of compliance
These consolidated financial statements have been prepared in accordance with IFRS as published by International Accounting Standards
Board (“IASB”) and using accounting policies described herein.
The consolidated financial statements were approved by the Board of Trustees of the REIT on February 14, 2019.
(b) Functional currency and presentation
These consolidated financial statements are presented in Canadian dollars, except where otherwise stated, which is the REIT’s functional
currency. All financial information has been rounded to the nearest thousand.
The REIT presents its consolidated statements of financial position based on the liquidity method, where all assets and liabilities are presented
in ascending order of liquidity.
(c) Basis of measurement
The consolidated financial statements have been prepared on the historical cost basis except for the following items in the consolidated
statements of financial position which have been measured at fair value:
(i) Real estate assets;
(ii) Assets classified as held for sale;
(iii) Derivative instruments;
(iv) Liabilities for cash-settled unit-based compensation; and
(v) Exchangeable units.
5
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
1. Basis of preparation (continued):
(d) Use of estimates and judgements
The preparation of these consolidated 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 21).
(ii) Use of judgements
The critical judgements made in applying accounting policies that have the most significant effect on the amounts recognized in these
consolidated financial statements are as follows:
Business combinations
Accounting for business combinations under IFRS 3, Business Combinations (“IFRS 3”) is only applicable if it is determined that a
business has been acquired. Under IFRS 3, a business is defined as an integrated set of activities and assets conducted and
managed for the purpose of providing a return to investors or lower costs or other economic benefits directly and proportionately to
the REIT. A business generally consists of inputs, processes applied to those inputs, and resulting outputs that are, or will be, used
to generate revenues. In the absence of such criteria, a group of assets is deemed to have been acquired. If goodwill is present in
a transferred set of activities and assets, the transferred set is presumed to be a business. Judgement is used by management in
determining whether the acquisition of an individual property, or group of properties, qualifies as a business combination in accordance
with IFRS 3 or as an asset acquisition.
Valuations of real estate assets
Real estate assets, which consist of investment properties and properties under development, are carried on the consolidated
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 consolidated 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.
6
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
1. Basis of preparation (continued):
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 consolidated financial statements.
(a) Basis of consolidation:
These consolidated 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.
(b) Basis of combination:
The principles used to prepare the 2017 comparative combined financial statements are similar to those used to prepare consolidated financial
statements. The 2017 comparative combined financial statements include the assets, liabilities, unitholders' equity, other comprehensive 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.
The gain (loss) on foreign exchange recorded in net income as a result of translating Finance Trust's U.S. dollar note receivable from U.S.
Holdco was not eliminated on combination as it flows through net income on Finance Trust’s books and other comprehensive income (loss)
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
was 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.
(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”).
7
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
2. Significant accounting policies (continued):
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.
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:
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.
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 consolidated statement of financial
position. These amounts are not offset or presented as a single amount.
8
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
2. Significant accounting policies (continued):
(f)
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.
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 2018 and the 2017 comparative year.
For financial statement reporting purposes, the tax deductibility of the REIT’s distributions is treated as an exemption from taxation as the
REIT has distributed and is committed to continue distributing all of its taxable income to its unitholders.
(g) 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
12(b). These plans are considered to be a cash-settled liability under IFRS 2, Share-based Payment (“IFRS 2”) and as a result are measured
at each reporting period and at settlement date at their 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.
The REIT adopted amendments to IFRS 2 beginning on January 1, 2018, the mandatory effective date. There was no material impact from
the adoption of the amendments to IFRS 2.
(h) 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.
(i) Restricted cash:
Restricted cash includes amounts relating to Internal Revenue Code Section 1031 U.S. property exchanges, amounts held in reserve by
lenders to fund mortgage payments, repairs and capital expenditures or property tax payments.
9
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
2. Significant accounting policies (continued):
(j) 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 consolidated 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 until there is
a reduction in the REIT’s net investment in the foreign operations. The U.S. dollar denominated senior debenture, unsecured term loan and
line of credit 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.
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 consolidated 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.
(k) Units:
Under IAS 32, Financial Instruments: Presentation (“IAS 32”), puttable instruments, such as the 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.
Nevertheless, the Units are not considered ordinary units under IAS 33, Earnings Per Share, and therefore an income per unit calculation is
not presented.
(l) 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.
(m) Investment in associates and joint ventures:
An associate is an entity over which the REIT 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 REIT accounts
for investments in associates using the equity method.
The REIT considers investments in joint arrangements to be joint ventures when the REIT jointly controls one or more investment properties
with another party and has 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 REIT’s interests in its associates and joint ventures are accounted for using the equity method and are carried on the consolidated
statements of financial position at cost, adjusted for the REIT’s proportionate share of post-acquisition changes in the net assets, less any
identified impairment loss. The REIT’s share of profits and losses is recognized in the share of net income from the associate or joint venture
investments in the consolidated statements of comprehensive income and the REIT’s other comprehensive income includes its share of the
associate or joint ventures’ other comprehensive income.
10
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
2. Significant accounting policies (continued):
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 associate or joint venture and that event has a negative impact on the future cash flows of the
associate or joint venture that can be reliably estimated.
(n) Joint Operations:
The REIT considers investments in joint arrangements to be joint operations when the REIT makes 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 REIT will include its share of the underlying assets,
liabilities, revenue and expenses in its financial results.
(o) 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 consolidated 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.
(p) 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.
(q) Subsidiaries
Subsidiaries are entities controlled by the REIT. The REIT controls an entity when it is exposed to, or has rights to, variable returns from its
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 consolidated financial statements from the date on which control commences until the date on which control ceases.
(r) Accounting standards adopted in 2018:
On January 1, 2018, the REIT adopted IFRS 15, Revenue from Contracts with Customers (“IFRS 15”) and IFRS 9, Financial Instruments
(“IFRS 9”), in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. These policies were adopted
retrospectively without restatement of the prior period. For the comparative year ended December 31, 2017, the policies applied were
consistent with the 2017 disclosed policies. The adoption of IFRS 15 and 9 did not have a significant impact.
The new accounting policies and the impact from the adoption of IFRS 15 and IFRS 9 are described below:
(i) Revenue from contracts with customers:
IFRS 15 replaces all existing guidance in IFRS related to revenue, including (but not limited to) IAS 11 Construction Contracts, IAS 18
Revenue and IFRIC 15 Agreements for the Construction of Real Estate.
IFRS 15 contains a single, control-based model that applies to contracts with customers and provides 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.
11
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
2. Significant accounting policies (continued):
The REIT adopted IFRS 15 on January 1, 2018, using the cumulative effect method, which means that the REIT did not apply the
requirements of IFRS 15 to the 2017 comparative period presented. The effect of initially applying this standard would have been
recognized at January 1, 2018, however, the adoption of IFRS 15 did not have an impact on the timing of recognition or measurement of
revenue.
The REIT earns revenue from its tenants from various sources consisting of base rent for the use of space leased, recoveries of property
tax and property insurance, and service revenue from utilities, cleaning and property maintenance costs.
Revenue from lease components is recognized on a straight-line basis over the lease term and includes the recovery of property taxes
and insurance. Revenue recognition commences when a tenant has the right to use the premises and is recognized pursuant to the terms
of the lease agreement.
Revenue related to the services component of the REIT’s leases is accounted for in accordance with IFRS 15. These services consist
primarily of utilities, cleaning and property maintenance costs for which the revenue is recognized over time, typically as the costs are
incurred, which is when the services are provided.
(ii) Financial instruments:
IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement (“IAS 39”). The adoption of IFRS 9 was generally applied
retrospectively, without restatement of comparative information. There was no material impact from the adoption of IFRS 9.
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 managed 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.
A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated at fair value through profit
or loss (“FVTPL”):
‐
‐
It is held within a business model whose objective is to hold assets to collect contractual cash flows; and
Its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal
amount outstanding.
All financial assets not classified as measured at amortized cost as described above are measured at FVTPL.
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.
12
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
2. Significant accounting policies (continued):
The following table summarizes the classification impacts upon adoption of IFRS 9.
Asset/Liability
Mortgages receivable
Accounts receivable
Cash and cash equivalents
Restricted cash
Mortgages payable
Senior debentures payable
Classification under IAS 39
Classification under IFRS 9
Loans and receivables
Loans and receivables
Loans and receivables
Loans and receivables
Other liabilities at amortized cost
Other liabilities at amortized cost
Amortized cost or fair value through profit or loss
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Convertible debentures payable
Fair value through profit or loss
Fair value through profit or loss
Exchangeable units
Lines of credit
Accounts payable and accrued liabilities
Other liabilities at amortized cost
Other liabilities at amortized cost
Amortized cost
Amortized cost
Fair value through profit or loss
Fair value through profit or loss
Derivative instruments
Fair value through profit and loss
Fair value through profit and loss
For impairment of financial assets, IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ (“ECL”)
model. The new impairment model applies to financial assets except for investments in equity instruments, and to contract assets, lease
receivables, loan commitments and financial guarantee contracts.
The REIT adopted the practical expedient to determine ECL on accounts receivable using a provision matrix based on historical credit
loss experiences adjusted for current and forecasted future economic conditions to estimate lifetime ECL. The other ECL models applied
to other financial assets also require judgment, assumptions and estimations on changes in credit risks, forecasts of future economic
conditions and historical information on the credit quality of the financial asset.
Impairment losses are recorded in finance cost - operations in the consolidated statement of comprehensive income with the carrying
amount of the financial asset or group of financial assets reduced through the use of impairment allowance accounts.
IFRS 9 also includes a new general hedge accounting standard which aligns hedge accounting more closely with risk management. The
U.S. dollar denominated senior debenture, unsecured term loan and line of credit are designated as a hedge of the REIT’s investment in
self-sustaining operations.
(s) New standards and interpretations not yet adopted:
(i) 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 REIT is evaluating the impact of IFRS 16. In particular, the REIT is 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.
Management does not expect the adoption of IFRS 16 to have a material impact on the consolidated financial statements.
13
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
2. Significant accounting policies (continued):
(ii)
IFRIC Interpretation 23, Uncertainty over Income Tax Treatments (“The Interpretation”)
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 REIT 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; and b) determine if it is probable
that the tax authorities will accept the uncertain tax treatment or 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 REIT will adopt the Interpretation in its consolidated financial statements for the annual period beginning
on January 1, 2019.
Management does not expect the adoption of IFRIC 23 to have a material impact on the consolidated financial statements.
3. Real estate assets:
Opening balance, beginning of year
Acquisitions, including transaction costs
Dispositions
Transfer from equity accounted investment
December 31, 2018
December 31, 2017
Note
Investment
Properties
Properties
Under
Development
Investment
Properties
Properties
Under
Development
$ 13,074,123
$ 83,132
$ 12,564,144
$ 118,268
463,299
(933,403)
-
196,754
-
-
-
-
-
-
430,537
(70,062)
62,500
-
51,845
28,722
113,212
71,260
-
-
-
-
-
-
Transfer of investment properties to assets classified as held for sale
5
(110,940)
Operating capital:
Capital expenditures
Leasing expenses and tenant inducements
Development capital:
Redevelopment (including capitalized interest)
57,825
32,441
60,892
Additions to properties under development (including capitalized interest)
Amortization of tenant inducements, straight-lining of contractual 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
-
119,117
-
15,555
3,088
-
(246,967)
283,351
-
-
-
5,811
(1,478)
-
116,525
3,038
(224,860)
(116,525)
(1,242)
(4,184)
$ 12,683,709
$ 404,814
$ 13,074,123
$ 83,132
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.
Asset acquisitions:
During the year ended December 31, 2018, the REIT acquired five residential properties, partial ownership in two industrial properties and three
residential properties under development (year ended December 31, 2017 - five residential properties and one residential property under
development which was transferred to investment properties upon substantial completion). The results of operations for these acquisitions are
included in these consolidated financial statements from the date of acquisition.
14
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
3. Real estate assets (continued):
The following table summarizes the purchase price plus transaction costs of the assets as at the respective dates of acquisition:
Assets
Investment properties
Properties under development
December 31
2018
December 31
2017
$ 462,961
196,754
$ 659,715
$ 430,516
71,260
$ 501,776
During the year ended December 31, 2018, the REIT incurred additional costs of $338 (year ended December 31, 2017 - $21) in respect of prior
year acquisitions which are not included in the above table.
Asset dispositions:
During the year ended December 31, 2018, the REIT sold 64 retail properties, one Primaris property, a 50% ownership interest in four industrial
properties, a 75% ownership interest in one industrial property and a 50% ownership interest in one office property and recognized a loss on sale
of real estate assets of $19,602.
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 of $3,544 on the purchaser’s assumption of a mortgage.
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 stabilized net operating income; and
(iv) External independent appraisals. During the year ended December 31, 2018, certain properties were valued by professional external
independent appraisers. These properties represent 25.4% of the fair value of investment properties as at December 31, 2018 (year ended
December 31, 2017 - 32.3%). 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 overall capitalization, discount and terminal capitalization rates. To the extent
that the ranges of these externally provided rates change from one reporting period to the next, the fair value of the investment properties is
increased or decreased accordingly.
15
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
3. Real estate assets (continued):
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
5.73%
5.63%
United
States
5.39%
5.78%
Total Canada
5.64%
5.67%
6.48%
6.46%
United
States
6.29%
6.60%
Total Canada
6.43%
6.50%
5.92%
5.88%
United
States
5.72%
6.08%
Total
5.86%
5.94%
December 31, 2018
December 31, 2017
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 overall
capitalization rate applied as at December 31, 2018:
Capitalization Rate
Sensitivity
Increase (Decrease)
(0.75%)
(0.50%)
(0.25%)
December 31, 2018
0.25%
0.50%
0.75%
Overall
Capitalization Rate
Fair Value of
Investment Properties
4.89%
5.14%
5.39%
5.64%
5.89%
6.14%
6.39%
$ 14,629,063
$ 13,917,533
$ 13,272,007
$ 12,683,709
$ 12,145,351
$ 11,650,834
$ 11,195,011
Fair Value
Variance
$ 1,945,354
$ 1,233,824
$ 588,298
$ -
$ (538,358)
$ (1,032,875)
$ (1,488,698)
% Change
15.34%
9.73%
4.64%
0.00%
(4.24%)
(8.14%)
(11.74%)
4. Equity accounted investments:
The REIT has entered into a number of arrangements with other parties for the purpose of jointly developing, 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 joint control over the operations of such properties. The REIT’s arrangements fall into three categories: a) joint operations,
where the REIT has joint control over the operations and the REIT has rights to the assets and obligations for the liabilities of the properties; b)
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 (c) investments in associates, where the REIT has significant influence over the investment but does
not have joint control over the operations. Joint operations are accounted for on a proportionately consolidated basis. Joint ventures and
investments in associates are accounted for using the equity method.
16
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
4. Equity accounted investments (continued):
During the year ended December 31, 2018, the REIT: (i) acquired a 33.3% interest in Esterra Park Development Partners LP (“Esterra Park”), a
joint venture, for $3,799; and (ii) acquired a 30.9% interest in Shoreline Developments Partners LP (“Shoreline”), a joint venture, for $5,973.
During the year ended December 31, 2017, the REIT: (i) acquired a 33.3% net interest in the Koenig Lane Development LP (“The Pearl”), a joint
venture, for $6,413; and (ii) disposed of nine industrial properties.
Investments in joint ventures:(1)
6 industrial properties
Hercules Project
The Pearl
Esterra Park
Shoreline
Investments in associates:(2)
ECHO Realty LP ("ECHO")
Location
Principal activity
United States
United States
United States
United States
United States
Own and operate investment property
Develop, own and operate investment property
Develop, own and operate investment property
Develop, own and operate investment property
Develop, own and operate investment property
United States
Own and operate investment properties
LIC Operator Co., L.P. ("Jackson Park")
United States
Develop, own and operate investment property
Ownership interest
December 31
2018
December 31
2017
50.5%
31.7%
33.3%
33.3%
30.9%
33.6%
50.0%
50.5%
31.7%
33.3%
-
-
33.6%
50.0%
(1) 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.
(2) Where the REIT has significant influence over the investment but does not have joint control over the operations.
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
Cash and cash equivalents
Debt
Deferred tax liability
Accounts payable and accrued liabilities
Non-controlling interest
Net assets
December 31, 2018
December 31, 2017
Investments in
joint ventures
Investments in
associates
Total
Investments in
joint ventures
Investments in
associates
Total
$ 119,340
$ 2,565,646
$ 2,684,986
$ 112,896
$ 2,328,749
$ 2,441,645
176,493
2,188,350
2,364,843
538
11,192
75,905
86,096
76,443
97,288
68,222
103,056
107,205
1,596,490
1,664,712
76,940
30,383
179,996
137,588
(56,907)
(1,878,428)
(1,935,335)
(36,232)
(1,530,339)
(1,566,571)
(335)
(14,679)
-
-
(123,477)
(78,640)
(335)
(138,156)
(78,640)
(310)
(4,393)
-
-
(99,794)
(74,428)
(310)
(104,187)
(74,428)
235,642
2,835,452
3,071,094
350,444
2,328,001
2,678,445
REIT's share of net assets
$ 91,565
$ 1,193,420
$ 1,284,985
$ 163,907
$ 961,228
$ 1,125,135
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, 2018 and November 30, 2017, respectively.
17
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
4. Equity accounted investments (continued):
Net income (loss) from equity accounted
investments:
Investments in
joint ventures
Investments in
associates
Total
Investments in
joint ventures
Investment in
associates
Total
Rentals from investment properties
$ 11,137
$ 228,522
$ 239,659
$ 31,506
$ 216,095 $ 247,601
Property operating costs
(1,235)
(64,421)
(65,656)
(4,855)
(46,852)
(51,707)
Year ended December 31, 2018
Year ended December 31, 2017
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 unitholders
-
254
(2,033)
(277)
-
(3,599)
(628)
(54)
3,565
-
3,565
1,208
2,638
(65,043)
(8,200)
7,664
266,086
868
(56)
369,266
(4,559)
364,707
1,208
2,892
(67,076)
(8,477)
7,664
262,487
240
(110)
372,831
(4,559)
368,272
-
87
(5,431)
(293)
-
(30,517)
(1,993)
(236)
(11,732)
1,750
1,071
1,750
1,158
(47,874)
(53,305)
(6,387)
(6,680)
9,213
262,840
802
9,213
232,323
(1,191)
(197)
(433)
390,461
378,729
-
(2,640)
(2,640)
(11,732)
387,821
376,089
$ 1,771
$ 167,638
$ 169,409
$ (5,854)
$ 173,261 $ 167,407
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, 2017 to November 30, 2018 and December 1, 2016 to November 30, 2017, respectively.
5. Assets classified as held for sale:
As at December 31, 2018, the REIT had a 50% interest in one industrial property and a 100% interest in one U.S. office property (December 31, 2017
- no properties) classified as held for sale.
The following table sets forth the consolidated statement of financial position items associated with investment properties classified as held for sale:
Assets
Investment properties
December 31
December 31
2018
2017
$ 110,940
$ 110,940
$ -
$ -
18
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
6. Other assets:
Mortgages receivable(1)
Prepaid expenses and sundry assets
Restricted cash
Accounts receivable
Derivative instruments
December 31
December 31
Note
2018
2017
$ 96,909
$ 153,211
25,861
12,872
12,401
5,445
33,554
25,311
15,739
6,374
$ 153,488
$ 234,189
11
(1) As at December 31, 2018, mortgages receivable bear interest at effective rates between 3.25% and 9.00% per annum (December 31, 2017 - between 3.25% and 9.00%
per annum) with a weighted average effective rate of 6.49% per annum (December 31, 2017 - 7.42%), and mature between 2019 and 2026 (December 31, 2017 - mature
between 2018 and 2026).
Future repayments are as follows:
Years ending December 31:
2019
2020
2021
2022
2023
Thereafter
7. Cash and cash equivalents:
December 31
2018
$ 4,533
-
44,731
34,100
2,297
11,248
$ 96,909
Cash and cash equivalents at December 31, 2018 includes cash on hand of $52,807 (December 31, 2017 - $42,022) and bank term deposits of
$266 (December 31, 2017 - $262) at a rate of interest of 1.58% (December 31, 2017 - 0.85%).
8. Debt:
The REIT’s debt consists of the following items:
Mortgages payable
Debentures payable
Unsecured term loans
Lines of credit
Note
8(a)
8(b)
8(c)
8(d)
December 31
December 31
2018
2017
$ 4,150,459
1,613,040
450,629
331,944
$ 3,958,631
1,852,790
186,629
495,567
$ 6,546,072
$ 6,493,617
19
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
8. Debt (continued):
(a) 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 4.17% (December 31, 2017 - 4.26%) per annum and mature between 2019 and 2032 (December 31, 2017 -
maturing between 2018 and 2033). Included in mortgages payable at December 31, 2018 are U.S. dollar denominated mortgages of U.S.
$1,368,241 (December 31, 2017 - U.S. $1,189,793). The Canadian equivalent of these amounts is $1,860,808 (December 31, 2017 - $1,499,139).
Mortgages payable related to certain properties are 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:
2019
2020
2021
2022
2023
Thereafter
Financing costs and mark-to-market adjustment arising on acquisitions
The following table provides a continuity of mortgages payable for the year ended December 31, 2018:
Opening balance, beginning of year
Principal repayments:
Scheduled amortization on mortgages
Mortgage repayments
New mortgages
Effective interest rate accretion on mortgages
Change in foreign exchange
Closing balance, end of year
December 31
2018
$ 177,182
491,197
948,597
611,056
453,182
1,483,616
4,164,830
(14,371)
$ 4,150,459
December 31
2018
$ 3,958,631
(129,145)
(407,763)
619,788
382
108,566
$ 4,150,459
20
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
8. Debt (continued):
(b) 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
2018
December 31
2017
Convertible Debentures (i)
2020 Convertible Debentures (HR.DB.D)
5.90%
5.90%
$ 23.50
$ -
$ -
$ 103,140
Senior Debentures (ii)
Series E Senior Debentures
Series J Senior Debentures
Series G Senior Debentures
Series C Senior Debentures
Series K Senior Debentures
Series M Senior Debentures
Series P Senior Debentures
Series F Senior Debentures
Series L Senior Debentures
Series O Senior Debentures
Series N Senior Debentures
March 1, 2019
July 23, 2019
February 13, 2020
March 2, 2020
May 6, 2022
January 23, 2023
January 30, 2024
4.90%
2.04%
3.34%
5.00%
2.36%
3.06%
3.00%
4.45%
2.92%
3.42%
3.37%
3.21%
5.22%
(1)
3.54%
5.30%
(2)
(3)
(4)
4.58%
3.11%
3.44%
3.45%
3.29%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
200,000
150,000
170,000
175,000
325,000
250,000
350,000
-
-
-
-
199,943
149,902
169,667
174,731
321,996
248,782
348,019
99,971
157,480
174,847
124,690
199,633
149,683
-
174,519
321,158
-
347,669
1,620,000
1,613,040
1,749,650
3.21%
3.29%
$ 1,620,000
$ 1,613,040
$ 1,852,790
(1) Denominated as $125,000 U.S. dollars and bore 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 11). In February 2018, the REIT repaid all of its Series J senior debentures
upon maturity for a cash payment of $125,000 U.S. dollars.
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 11).
Bears interest at a rate equal to 3-month Canadian Dealer Offered Rate plus 123 basis points. The average interest rate for the year ended December 31, 2018 was
3.06%.
(2)
(3)
(4) Denominated as $125,000 U.S. dollar and bears interest at a rate equal to 3-month London Interbank Offered Rate plus 79 basis points. The average interest rate for
the year ended December 31, 2018 was 3.00%. In December 2018, the REIT entered into an interest rate swap on the Series P senior debentures to fix the interest rate
at 2.88% per annum (note 11).
(i)
Convertible Debentures:
The Convertible Debentures were measured at fair value, with fair value determined using the quoted price on the TSX on December 31, 2017.
In March 2018, the REIT redeemed all of the outstanding 2020 Convertible Debentures for a cash payment of $99,582.
21
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
8.
Debt (continued):
(ii)
Senior Debentures:
In January 2018, the REIT issued $250,000 Series O unsecured senior debentures (the “Series O Senior Debentures”). On issuance, the REIT
recorded a liability of $248,525, net of issue costs of $1,475.
In February 2018, the REIT issued U.S. $125,000 Series P floating rate unsecured senior debentures (the “Series P Senior Debentures”). On
issuance, the REIT recorded a liability of U.S. $124,553, net of issue costs of U.S. $447.
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.
The Series F, K, L, M, N, O and P unsecured senior debentures (collectively, the “Senior Debentures”) pay interest semi-annually or quarterly as
noted below:
Senior Debentures
Series F
Series K
Series L
Series M
Series N
Series O
Series P
Interest Payment Dates
March 2 and September 2
March 1, June 1, September 1 and December 1
May 6 and November 6
January 23, April 23, July 23 and October 23
January 30 and July 30
January 23 and July 23
February 13, May 13, August 13 and November 13
22
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
8.
Debt (continued):
(iii)
A summary of the changes in the carrying value of debentures payable is as follows:
Convertible Debentures
Carrying value, beginning of year
Conversion - 2020 Convertible Debentures (HR.DB.D)
Redemption - 2020 Convertible Debentures (HR.DB.D)
Redemption - 2018 Convertible Debentures (HR.DB.H)
Gain on change in fair value
Carrying value, end of year
Senior Debentures
Carrying value, beginning of year
Redemption - Series E Senior Debentures
Redemption - Series J Senior Debentures
Redemption - Series G Senior Debentures
Redemption - Series C Senior Debentures
Redemption - Series I Senior Debentures
Redemption - Series B Senior Debentures
Issuance - Series M Senior Debentures
Issuance - Series N Senior Debentures
Issuance - Series L Senior Debentures
Issuance - Series O Senior Debentures
Issuance - Series P Senior Debentures
Change in foreign exchange
Accretion adjustment
Carrying value, end of year
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(2)
(2)
(2)
(2)
(2)
December 31
December 31
2018
2017
$ 103,140
$ 178,898
(70)
(99,582)
-
(3,488)
-
1,749,650
(100,000)
(157,500)
(175,000)
(125,000)
-
-
-
-
-
248,525
160,680
8,737
2,948
1,613,040
(2)
-
(74,394)
(1,362)
103,140
1,312,693
-
-
-
-
(60,000)
(115,000)
149,461
347,393
122,445
-
-
(10,000)
2,658
1,749,650
$ 1,613,040
$ 1,852,790
(1) During the year ended December 31, 2018, the REIT redeemed debentures payable of $657,082 (2017 - $249,394).
(2) During the year ended December 31, 2018, the REIT issued debentures payable of $409,205 (2017 - $619,299).
23
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
8. Debt (continued):
(c) Unsecured term loans:
The REIT has the following unsecured term loans:
H&R REIT unsecured term loan #1(1)
H&R REIT unsecured term loan #2(2)
Maturity Date
December 31
2018
December 31
2017
March 17, 2021
$ 200,629
$ 186,629
January 6, 2026
250,000
-
$ 450,629
$ 186,629
(1) The total facility as at December 31, 2018 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 rate swap 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, maturing on March 17, 2021 (note 11).
(2) The REIT entered into an interest rate swap to fix the interest rate at 3.91% per annum, maturing on January 6, 2026 (note 11).
Included in unsecured term loans at December 31, 2018, are U.S. denominated amounts of $140,000 (December 31, 2017 - U.S. $140,000). The
Canadian equivalent of these amounts is $190,400 (December 31, 2017 - $176,400).
(d) Lines of credit:
The REIT has the following lines of credit:
Maturity Date
Total
Facility
Amount
Drawn
Outstanding
Letters of
Credit
Available
Balance
Revolving unsecured operating lines of credit:
H&R REIT revolving unsecured line of credit #1
September 20, 2022
$ 150,000
$ -
$ -
$ 150,000
H&R REIT revolving unsecured line of credit #2
H&R REIT revolving unsecured line of credit #3
H&R REIT revolving unsecured letter of credit facility
January 31, 2023
September 20, 2023
Sub-total
Revolving secured operating lines of credit(1):
H&R REIT co-ownership revolving secured line of credit
H&R REIT and CrestPSP revolving secured line of credit
Primaris revolving secured line of credit
September 30, 2019
April 30, 2020
July 1, 2020
Sub-total
200,000
350,000
60,000
760,000
3,514
62,500
300,000
366,014
-
(5,750)
-
(5,750)
-
(2,330)
(23,439)
(25,769)
(3,514)
(49,000)
(273,680)
(326,194)
-
(105)
-
(105)
200,000
341,920
36,561
728,481
-
13,395
26,320
39,715
December 31, 2018
$ 1,126,014
$ (331,944)
$ (25,874)
$ 768,196
(1)
Secured by certain investment properties.
As at December 31, 2017, the total facility was $828,514 less the amount drawn and outstanding letters of credit of $495,567 and $32,924,
respectively, resulting in an available balance of $300,023.
The lines of credit and can be drawn in either Canadian or U.S. dollars and bear interest at a rate approximating the prime rate of a Canadian
chartered bank.
Included in lines of credit at December 31, 2018 are U.S. dollar denominated amounts of $13,000 (December 31, 2017 - U.S. $327,000). The
Canadian equivalent of these amounts is $17,680 (December 31, 2017 - $412,020).
24
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
8. Debt (continued):
The following table provides a continuity of unsecured term loans and lines of credit for the year ended December 31, 2018:
Opening balance, beginning of year
Net advances (repayments)
Change in foreign exchange
Closing balance, end of year
9. Exchangeable units:
Unsecured Term
Loans
Lines of
Credit
$ 186,629
$ 495,567
250,000
14,000
(196,323)
32,700
$ 450,629
$ 331,944
Certain of the REIT’s subsidiaries have in aggregate 15,955,541 (December 31, 2017 - 15,979,430) exchangeable units outstanding which are
puttable instruments where, upon redemption, the REIT has a contractual obligation to issue Units. A subsidiary of the REIT also holds 433,174
(December 31, 2017 - 433,174) Units to mirror these exchangeable units. Therefore, when such exchangeable units are exchanged for Units, the
number of outstanding 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 Unit amount provided to holders of Units. These puttable instruments are classified as a liability under IFRS
and are measured at fair value through profit or loss. Fair value is determined by using the quoted prices for the Units as the exchangeable units
are exchangeable into Units at the option of the holder. The quoted price as at December 31, 2018 was $20.65 (December 31, 2017 - $21.36) per
Unit.
A summary of the carrying value of exchangeable units is as follows:
Carrying value, beginning of year
Exchanged for Units
Gain on fair value of exchangeable units
Carrying value, end of year
December 31
December 31
2018
2017
$ 341,321
(500)
(11,339)
$ 370,533
(13,324)
(15,888)
$ 329,482
$ 341,321
The REIT has entered into various exchange agreements that provide, among other things, the mechanics whereby exchangeable units may be
exchanged for Units.
25
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
10. 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
11. Derivative instruments:
Debenture interest rate swap
Debenture interest rate swap
Debenture interest rate swap
Term loan interest rate swap
Term loan interest rate swap
(1)
(2)
(3)
(4)
(5)
The REIT entered into interest rate swaps as follows:
December 31
December 31
Note
2018
2017
$ 148,106
$ 149,282
9,885
24,030
14,869
2,701
1,834
1,688
9,376
23,059
13,295
-
2,249
3,156
6,051
5,752
9,045
4,932
10,297
2,565
$ 223,141
$ 219,031
11
12(b)
12(b)
12(b)
12(b)
Fair value asset (liability)*
Net gain (loss) on derivative contracts
December 31
December 31
December 31
December 31
2018
$ 592
(331)
-
4,853
(2,370)
$ 2,744
2017
2018
2017
$ 2,231
$ (1,639)
$ 1,455
-
177
3,966
-
$ 6,374
(331)
(177)
887
(2,370)
$ (3,630)
-
584
7,350
-
$ 9,389
(1)
(2)
(3)
(4)
(5)
*
To fix the interest rate at 2.36% per annum for the Series K senior debentures, maturing on March 1, 2019.
To fix the interest rate at 2.88% per annum for the Series P senior debentures, maturing on February 13, 2020.
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 (settled when these debentures matured on February 9, 2018).
To fix the interest rate at 2.56% per annum on U.S. $130,000 term loan, maturing on March 17, 2021.
To fix the interest rate at 3.91% per annum on $250,000 term loan, maturing on January 6, 2026.
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 (note 6)
and derivative instruments in a liability position are recorded in accounts payable and accrued liabilities (note 10).
26
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
12. 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 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. The aggregate number of Units which the REIT may issue is unlimited and the aggregate number of
special voting units which the REIT may issue is 9,500,000. Units carry the right to participate pro rata in any distributions. As at December
31, 2018, 9,500,000 (December 31, 2017- 9,500,000) special voting units are issued and outstanding.
Units are listed and posted for trading on the TSX under the symbol HR.UN.
Units are freely transferable and the trustees shall not impose any restriction on the transfer of Units.
Unitholders have the right to require the REIT to redeem their Units on demand. 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
Declaration of Trust.
Upon valid tender for redemption of each Unit, the unitholder is entitled to receive a price per Unit as determined by a formula based on the
market price of a Unit. 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) and in specie distribution of notes of H&R Portfolio LP Trust (a subsidiary of
the REIT).
Changes in the issued and outstanding number of Units during the years ended December 31, 2018 and 2017 are as follows:
As at January 1, 2017
Issuance of Units:
Issued under the Dividend Reinvestment Plan and Unit Purchase Plan ("DRIP")
Options exercised
Incentive Units settled in Units
Exchangeable units exchanged into Units
Conversion of convertible debentures
Units repurchased and cancelled
As at December 31, 2017
Issuance of Units:
Issued under the DRIP(1)
Options exercised
Incentive Units settled in Units
Exchangeable units exchanged into Units
Conversion of convertible debentures
Units repurchased and cancelled
As at December 31, 2018
Note
12(d)
12(d)
285,279,707
5,557,815
652,291
1,354
584,386
85
(755,420)
291,320,218
933,594
1,271
5,281
23,889
2,978
(6,609,420)
285,677,811
(1)
In February 2018, the Trusts announced the suspension of their DRIP and Unit Purchase Plan until further notice. Commencing with the March 2018 distribution,
unitholders who elected to participate in the DRIP received the full cash distributions on their Units. Following the Reorganization, the REIT’s DRIP and Unit Purchase
Plan remain suspended until further notice and unitholders who elected to participate in the DRIP will receive the full cash distributions on their Units.
27
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
12. Unitholders’ equity (continued):
The weighted average number of basic Units for the year ended December 31, 2018 is 287,060,425 (December 31, 2017 - 288,787,282).
(b) 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, 2018, a maximum of 28,000,000 (December 31, 2017 - 28,000,000) options to purchase Units were authorized
to be issued, of which 21,402,296 (December 31, 2017 - 21,402,296) options have been granted, 477,764 (December 31, 2017 -
452,170) options have expired and 7,075,468 (December 31, 2017 - 7,049,874) options remain to be granted. The exercise price of
each option approximates the quoted price of the Units on the date of grant. 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.
A summary of the status of the unit option plan and the changes during the respective years are as follows:
December 31, 2018
December 31, 2017
Units
Weighted average
exercise price
Units
Weighted average
exercise price
Outstanding, beginning of year
11,310,383
$ 20.51
13,820,539
Granted
Exercised
Expired
-
(21,210)
(25,594)
-
(18.98)
(20.71)
-
(2,401,408)
(108,748)
Outstanding, end of year
11,263,579
$ 20.51
11,310,383
$ 20.26
-
(19.15)
(19.65)
$ 20.51
Options exercisable, end of year
8,867,636
$ 20.93
6,008,045
$ 21.62
The options outstanding at December 31, 2018 are exercisable at varying prices ranging from $15.42 to $23.18 (December 31, 2017
- $15.42 to $23.18) with a weighted average remaining life of 5.8 years (December 31, 2017 - 6.8 years). The vested options are
exercisable at varying prices ranging from $15.42 to $23.18 (December 31, 2017 - $15.42 to $23.18) with a weighted average
remaining life of 5.4 years (December 31, 2017 - 5.7 years).
(ii)
Incentive unit plan:
As at December 31, 2018, a maximum of 5,000,000 (December 31, 2017 - 5,000,000) incentive units exchangeable into Units were
authorized to be issued under the incentive unit plan. Of this amount, 935,049 (December 31, 2017 - 651,026) incentive units have
been granted, of which 46,308 (December 31, 2017 - 39,731) incentive units have expired, 320,864 incentive units have been settled
for cash (December 31, 2017 - 178,408) and 6,635 (December 31, 2017 - 1,354) incentive units have been settled for Units. 4,432,123
(December 31, 2017 - 4,567,113) incentive units may still be granted under the plan and 561,242 (December 31, 2017 - 431,533)
incentive units remain outstanding.
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 Units issued from treasury, with the result that the awards are classified as
cash-settled unit-based payments and presented as liabilities. 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.
28
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
12. Unitholders’ equity (continued):
The REIT grants restricted units under the incentive unit plan. 100% of the restricted 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 restricted units are, subject to the holder’s election, cash settled upon vesting.
The REIT grants performance units under the incentive unit plan with a three-year performance period for certain senior executives.
The performance units are and will be subject to both internal and external measures consisting of both absolute and relative
performance over a three-year period and, subject to the holder’s election, cash settled upon vesting.
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
2018
Units
431,533
284,023
(147,737)
(6,577)
561,242
2017
Units
407,360
232,001
(179,762)
(28,066)
431,533
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 (recovery) included in trust expenses is as follows:
Options
Incentive units
December 31
December 31
2018
$ 10,879
6,620
$ 17,499
2017
$ 12,546
5,721
$ 18,267
2018
$ (1,642)
4,055
$ 2,413
2017
$ 2,127
2,742
$ 4,869
29
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
12. Unitholders’ equity (continued):
(c) Distributions:
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.
For the year ended December 31, 2018, the REIT declared distributions per Unit of $1.38 (December 31, 2017 - $1.38).
The details of the distributions are as follows:
Cash distributions to unitholders
Unit distributions (issued under the DRIP)(1)
2018
2017
$ 378,936
16,632
$ 290,497
107,411
$ 395,568
$ 397,908
(1)
In February 2018, the Trusts announced the suspension of their DRIP and Unit Purchase Plan until further notice. Commencing with the March 2018 distribution,
unitholders who elected to participate in the DRIP received the full cash distributions on their Units. Following the Reorganization, the REIT’s DRIP and Unit
Purchase Plan remain suspended until further notice and unitholders who elected to participate in the DRIP will receive the full cash distributions on their Units.
(d) Normal course issuer bid:
On December 14, 2018, the REIT received approval from the TSX for the renewal of its normal course issuer bid (“NCIB”), allowing the REIT
to purchase for cancellation up to a maximum of 15,000,000 Units on the open market until the earlier of December 16, 2019 or the date on
which the REIT purchased the maximum number of Units permitted under the NCIB. During the year ended December 31, 2018, under a
previous NCIB, the Trusts purchased and cancelled 6,609,420 Units at a weighted average price of $20.62 per Unit, for a total cost of
$136,272. During the year ended December 31, 2017, under a previous NCIB, the Trusts purchased and cancelled 755,420 Units at a
weighted average price of $21.10 per Unit, for a total cost of $15,939.
13. Accumulated other comprehensive income:
Items that are or may be reclassified subsequently to net income:
December 31, 2018
Cash flow
hedges
Foreign
operations
December 31
2017
Total
Total
Opening balance, beginning of year
$ (282)
$ 177,230
$ 176,948
$ 308,220
Transfer of realized loss on cash flow hedges to net income
Unrealized gain (loss) on translation of U.S. denominated foreign operations
Net gain (loss) on hedges of net investments in foreign operations
30
-
-
30
-
139,409
55,437
194,846
30
139,409
55,437
194,876
30
(86,022)
(45,280)
(131,272)
Closing balance, end of year
$ (252)
$ 372,076
$ 371,824
$ 176,948
30
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
14. Rentals from investment properties:
Rental income
Revenue from services
Straight-lining of contractual rent
Rent amortization of tenant inducements
2018
2017
$ 962,429
220,230
(4,113)
(1,988)
$ 1,177,626
(1)
(6,818)
(2,354)
$ 1,176,558
$ 1,168,454
(1) The REIT did not apply the requirements of IFRS 15 to the comparative year (as described in note 2).
Operating Leases:
The REIT leases its investment properties under operating leases. 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
15. 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(1)
Finance income
Fair value adjustments on financial instruments(2)
2018
2017
$ 686,133
$ 725,151
2,150,004
3,182,837
2,323,815
3,615,459
$ 6,018,974
$ 6,664,425
2018
2017
$ 165,855
$ 174,492
61,213
3,666
20,709
22,050
273,493
(6,406)
267,087
(8,638)
(11,197)
$ 247,252
62,565
1,808
11,877
22,254
272,996
(2,638)
270,358
(4,999)
(27,049)
$ 238,310
(1) The weighted average rate of borrowings for the capitalized interest is 3.91% (December 31, 2017 - 4.0%).
(2) During the year ended December 31, 2018, the REIT did not realize any gains on sale of investment previously classified as held for trading (December 31, 2017 – U.S.
$6,718).
31
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
16. Supplemental cash flow information:
Accrued rents receivable
Prepaid expenses and sundry assets
Accounts receivable
Accounts payable and accrued liabilities
2018
2017
$ (5,077)
$ (876)
7,693
3,338
(3,615)
8
(2,728)
6,109
$ 2,339
$ 2,513
The following amounts have been excluded from operating, investing and financing activities in the consolidated 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 from issuance of Units
Non-cash assumption of mortgage payable on disposition of investment properties
Mortgages receivable from the sale of investment properties
Mortgage receivable used for the acquisition of property under development
Restricted cash from the disposition of investment properties
Restricted cash used for the acquisition of investment properties
Exchangeable units exchanged for 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
17. Capital risk management:
The REIT’s primary objectives when managing capital are:
Note
12(c)
8(b)(iii)
9
15
15
2018
2017
$ 16,632
$ 107,411
70
2,033
140
-
34,100
(164,878)
-
-
500
9
362
(2,780)
(3,626)
2
11,051
7,523
(126,567)
4,200
-
26,265
(13,109)
13,324
336
(1,809)
(1,562)
(1,076)
(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:
Debt
Exchangeable units
Unitholders' equity
December 31
December 31
2018
2017
$ 6,546,072
329,482
7,200,100
$ 6,493,617
341,321
7,179,763
$ 14,075,654
$ 14,014,701
32
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
17. Capital risk management (continued):
As long as the REIT complies with its investment and debt restrictions set out in its Declaration of Trust, it is free to determine the appropriate level
of capital in context with its cash flow requirements, overall business risks and potential business opportunities. As a result of this, the REIT will
make adjustments to its capital based on its investment strategies and changes in economic conditions.
The REIT’s level of indebtedness is subject to the limitations set out in its Declaration of Trust. The REIT is limited to a total indebtedness to total
assets ratio of 65% (for this purpose “indebtedness” excludes Convertible Debentures and U.S. Holdco notes payable to Finance Trust). As at
December 31, 2018, this ratio was 44.6% (December 31, 2017 - 43.9%). Management uses this ratio as a key indicator in managing the REIT’s
capital.
In addition to the above key ratio, the REIT’s debt has various covenants calculated as defined within these agreements. The REIT monitors these
covenants and was in compliance as at December 31, 2018 and December 31, 2017.
18. 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-positive 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
December 31
2018
$ 96,909
12,401
2017
$ 153,211
15,739
$ 109,310
$ 168,950
The REIT is subject to liquidity risk whereby the REIT may not be able to refinance or pay its debt obligations when they become due.
The REIT manages liquidity risk by:
Ensuring appropriate unsecured term loans and lines of credit available are available. As at December 31, 2018 the consolidated amount
available under its lines of credit was $768,196 (note 8(d));
Maintaining a large unencumbered asset pool. As at December 31, 2018, there were 91 unencumbered properties with a fair value of
$3,438,151; and
Structuring its financing so as to stagger the maturities of its debt, thereby minimizing exposure to liquidity risk in any one year (note 8).
33
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
18. Risk management (continued):
Management monitors the REIT’s 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 REIT’s obligations are as follows:
Debt(1)
Accounts payable and accrued liabilities(2)
(1)
(2)
Amounts in the above table only include principal repayments.
Excludes options payable.
(c) Market risk:
Note
8
10
2019
$ 530,696
201,279
Thereafter
$ 6,036,707
10,983
Total
$ 6,567,403
212,262
$ 731,975
$ 6,047,690
$ 6,779,665
The REIT is subject to currency risk and interest rate risk. The REIT’s 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 U.S. denominated debt of $278,000 (2017
- U.S $592,000) consisting of the Series P Senior Debentures, U.S. unsecured term loans and U.S. lines of credit (2017 - Series J Senior
Debentures, U.S. unsecured term loans and U.S. lines of credit) as a hedge of its net investment in foreign operations of approximately
U.S. $1,492,000 (2017 - U.S. $1,404,000).
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, 2018
(December 31, 2017 - $1.30) as well as the Canadian dollar exchange rate as at December 31, 2018 of $1.36 (December 31, 2017 -
$1.26) would have decreased other comprehensive income (loss) by approximately $177,000 (December 31, 2017 - $146,900) and
decreased net income by approximately $14,600 (December 31, 2017 - $21,600). This analysis assumes that all other variables, in
particular interest rates, remain constant (a $0.10 strengthening of the U.S. dollar against the average Canadian dollar would have had
the equal but opposite effect).
(ii)
Interest rate risk:
The REIT is exposed to interest rate risk on its borrowings. It minimizes this risk by obtaining long-term fixed interest rate debt. At
December 31, 2018, the percentage of fixed rate debt to total debt was 91.6% (December 31, 2017 – 88.2%). Therefore, a change in
interest rates at the reporting date would not have a material impact on net income as the majority of the REIT’s borrowings are through
fixed rate instruments.
As at December 31, 2018, unsecured term loans and lines of credit of $355,773 are subject to variable interest rates. An increase in
interest rates of 100 basis points for the year ended December 31, 2018 would have decreased net income by approximately $3,600
(December 31, 2017 - $2,200). This analysis assumes that all other variables, in particular foreign exchange rates, remain constant.
The floating rate Series K and Series P senior debentures are subject to variable rates, however the REIT entered into interest rate
swaps to reduce exposure to fluctuations in interest rates. In 2018, 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, 2018 would have decreased net income
by approximately $1,500 (December 31, 2017 - $1,300). This analysis assumes that all other variables, in particular foreign exchange
rates, remain constant.
34
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
18. Risk management (continued):
As at December 31, 2018, a mortgage payable of $45,519 is subject to variable interest rates. An increase in interest rates of 100 basis
points for the year ended December 31, 2018 would have decreased net income by approximately $460 (December 31, 2017 - $1,300).
This analysis assumes that all other variables, in particular foreign exchange rates, remain constant.
(d) Fair value measurement:
(i) Financial assets and liabilities carried at amortized cost:
The fair values of the REIT’s 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 certain mortgages receivable, mortgages payable, senior debentures, unsecured term loans and lines of credit have been
determined by discounting the cash flows of these financial obligations using 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 consolidated 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).
December 31, 2018
Assets measured at fair value
Investment properties
Properties under development
Assets classified as held for sale
Derivative instruments
Mortgage receivable
Assets for which fair values are disclosed
Mortgages receivable
Liabilities measured at fair value
Exchangeable units
Derivative instruments
Liabilities for which fair values are disclosed
Mortgages payable
Senior debentures
Unsecured term loans
Lines of credit
Note
Level 1
Level 2
Level 3
Total
fair value
Carrying
value
3
3
5
6
6
6
9
10
8(a)
8(b)
8(c)
8(d)
$ -
-
-
-
-
$ -
-
-
5,445
-
$ 12,683,709
404,814
110,940
-
44,731
$ 12,683,709
404,814
110,940
5,445
44,731
$ 12,683,709
404,814
110,940
5,445
44,731
-
-
(329,482)
-
-
-
-
-
(329,482)
52,306
57,751
-
(2,701)
(4,226,404)
(1,611,734)
(452,143)
(332,739)
(6,625,721)
-
52,306
52,178
13,244,194
13,301,945
13,301,817
-
-
-
-
-
-
-
(329,482)
(2,701)
(329,482)
(2,701)
(4,226,404)
(1,611,734)
(452,143)
(332,739)
(6,955,203)
(4,150,459)
(1,613,040)
(450,629)
(331,944)
(6,878,255)
$ (329,482)
$ (6,567,970)
$ 13,244,194
$ 6,346,742
$ 6,423,562
35
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
18. Risk management (continued):
December 31, 2017
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
Liabilities for which fair values are disclosed
Mortgages payable
Senior debentures
Unsecured term loans
Lines of credit
3
3
6
6
8(b)
9
8(a)
8(b)
8(c)
8(d)
$ -
-
-
$ -
-
6,374
$ 13,074,123
83,132
-
$ 13,074,123
83,132
6,374
-
$ 13,074,123
83,132
6,374
-
-
155,656
162,030
-
13,157,255
155,656
13,319,285
153,211
13,316,840
(103,140)
(341,321)
-
-
-
-
(444,461)
-
-
(4,067,657)
(1,779,043)
(184,293)
(495,802)
(6,526,795)
-
-
-
-
-
-
-
(103,140)
(341,321)
-
(4,067,657)
(1,779,043)
(184,293)
(495,802)
(6,971,256)
(103,140)
(341,321)
(3,958,631)
(1,749,650)
(186,629)
(495,567)
(6,834,938)
$ (444,461)
$ (6,364,765)
$ 13,157,255
$ 6,348,029
$ 6,481,902
19. Compensation of key management personnel:
Key management personnel are those individuals who 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
2018
$ 6,259
1,888
$ 8,147
2017
$ 3,794
3,353
$ 7,147
36
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
20. Segmented disclosures:
(i) Operating segments:
The REIT has six reportable operating segments (Office, which also includes the REIT’s head office, 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 REIT. The CEO measures and evaluates the
performance of the REIT based on property operating income on a proportionately consolidated basis for the REIT’s equity accounted investments.
The accounting policies of the segments presented here are consistent with the REIT’s accounting policies as described in note 2.
Real estate assets by reportable segment as at December 31, 2018 and December 31, 2017 are as follows:
December 31, 2018
Number of investment properties
Real estate assets:
Investment properties
Office
Primaris
35
30
H&R
Retail
59
ECHO
Industrial
Lantower
Residential
230
90
22
Total
466
$ 6,752,450 $ 2,733,296
$ 570,357
$ 870,033 $ 1,043,220
$ 1,755,592
$ 13,724,948
Properties under development
-
-
-
12,444
85,567
1,451,821
1,549,832
6,752,450
2,733,296
570,357
882,477
1,128,787
3,207,413
15,274,780
Less: assets classified as held for sale
(93,840)
Less: REIT's proportionate share of real estate
assets relating to equity accounted investments
-
-
-
-
-
-
(17,100)
-
(110,940)
(882,477)
(60,267)
(1,132,573)
(2,075,317)
$ 6,658,610 $ 2,733,296
$ 570,357
$ - $ 1,051,420
$ 2,074,840
$ 13,088,523
December 31, 2017
Number of investment properties
Real estate assets:
Investment properties
Office
Primaris
36
31
H&R
Retail
123
ECHO
Industrial
Lantower
Residential
227
93
17
Total
527
$ 6,562,552 $ 2,945,800
$ 1,399,672 $ 789,419
$ 1,035,920
$ 1,187,191 $ 13,920,554
Properties under development
-
-
-
10,345
83,132
805,127
898,604
6,562,552
2,945,800
1,399,672
799,764
1,119,052
1,992,318
14,819,158
Less: REIT's proportionate share of real estate
assets relating to equity accounted investments
-
-
-
(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
37
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
20. Segmented disclosures (continued):
Property operating income by reportable segment for the years ended December 31, 2018 and December 31, 2017 is as follows:
Office
Primaris
H&R
Retail
ECHO
Industrial
Lantower
Residential
Sub-total
Less: Equity
Accounted
Investments
December 31
2018
Rentals from investment
properties
$ 598,914 $ 284,505 $ 86,197
$ 68,237
$ 87,496
$ 137,742 $ 1,263,091
$ (86,533)
$ 1,176,558
Property operating costs
(209,058)
(125,855)
(20,093)
(14,849)
(24,612)
(73,753)
(468,220)
25,594
(442,626)
Property operating income
$ 389,856 $ 158,650 $ 66,104
$ 53,388
$ 62,884
$ 63,989 $ 794,871
$ (60,939)
$ 733,932
Office
Primaris
H&R
Retail
ECHO
Industrial
Lantower
Residential
Sub-total
Less: Equity
Accounted
Investments
December 31
2017
Rentals from investment
properties
$ 600,792
$ 281,086 $125,194
$ 72,548
$ 96,838
$ 80,454 $1,256,912
$ (88,458)
$ 1,168,454
Property operating costs
(211,645)
(123,822)
(28,610)
(15,254)
(25,584)
(40,511)
(445,426)
18,413
(427,013)
Property operating income
$ 389,147
$ 157,264 $ 96,584
$ 57,294
$ 71,254
$ 39,943 $ 811,486
$ (70,045)
$ 741,441
(ii) Geographical locations:
The REIT operates 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: REIT's proportionate share of real estate assets relating to equity accounted investments
Rentals from investment properties:
Canada
United States
Less: REIT's proportionate share of rentals relating to equity
accounted investments
38
December 31
December 31
2018
2017
$ 9,186,352
6,088,428
$ 9,344,350
5,475,050
15,274,780
14,819,400
(110,940)
(2,075,317)
-
(1,662,145)
$ 13,088,523
$ 13,157,255
2018
2017
$ 875,418
$ 871,955
387,673
384,957
1,263,091
1,256,912
(86,533)
(88,458)
$ 1,176,558
$ 1,168,454
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
21. Income tax expense (recovery):
Income tax computed at the Canadian statutory rate of nil applicable to the REIT for 2018 and 2017
Current U.S. income taxes
Deferred income taxes (recovery) applicable to U.S. Holdco:
Impact of U.S. Tax Reform
Other
2018
2017
$ -
$ -
760
1,538
-
39,457
39,457
(87,970)
48,193
(39,777)
Income tax expense (recovery) in the determination of net income
$ 40,217
$ (38,239)
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 24% in 2018 (2017 - 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 have been measured based upon a 21% 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
Accounts payable and accrued liabilities
Other assets
Deferred tax liabilities:
Investment properties
Equity accounted investments
December 31
December 31
2018
2017
$ 22,551
$ 6,924
585
1,463
24,599
284,006
132,807
416,813
1,387
2,257
10,568
256,507
79,192
335,699
Deferred tax liability
$ (392,214)
$ (325,131)
The change in deferred tax liability is the result of deferred income tax expense (recovery) of $39,457 (2017 - ($39,777)) and change in foreign
exchange of $27,626 (2017 - ($21,867)) recognized in other comprehensive income.
39
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
21. Income tax expense (recovery) (continued):
As at December 31, 2018, U.S. Holdco had accumulated net operating losses available for carryforward for U.S. income tax purposes of $92,805
(December 31, 2017 - $28,879), the benefit of which has been recognized and deferred interest deductions of $200,324 (December 31, 2017 -
$194,489), 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. Certain of the net operating losses will expire
between 2031 and 2032. Net operating losses arising after December 31, 2017 do not generally expire under current tax legislation. The deductible
temporary differences do not generally expire under current tax legislation.
22. Related party transaction:
In 2018, the REIT paid approximately U.S. $14,600 for 20.3 acres of land in Dallas, TX, to be developed into approximately 1,000 multi-family units,
from an entity in which the CEO held a 50% ownership interest.
23. 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, 2018, the REIT has outstanding letters of credit totalling $25,874 (December 31, 2017 - $32,924), including
$17,340 (December 31, 2017 - $15,120) which has been pledged as security for certain mortgages payable. The letters of credit are
secured by certain investment properties.
The REIT provides guarantees on behalf of third parties, including co-owners. As at December 31, 2018, the REIT issued guarantees
amounting to $263,853 (December 31, 2017 - $497,539), which expire between 2019 and 2029 (December 31, 2017 - expire between 2020
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, 2018, the estimated amount of debt subject to such guarantees, and therefore the
maximum exposure to credit risk, is $43,963 (December 31, 2017 - $119,279) which expires in 2020 (December 31, 2017 - expires between
2018 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 consolidated 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 consolidated financial statements.
24. 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
2018
100%
100%
100%
100%
100%
100%
2017
100%
100%
100%
100%
100%
100%
40
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2018 and 2017
25. Subsequent events:
(a)
In January 2019, the REIT sold one U.S. office property which was classified as held for sale as at December 31, 2018, for gross proceeds of
U.S. $69,800.
(b)
In February 2019, the REIT secured two new mortgages totalling $36,550, bearing interest at 3.36% per annum for a term of 10 years.
41
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
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)
(1) Investment Committee
(2) Audit Committee
(3) Compensation, Governance and Nominating Committee
Auditors: KPMG LLP
Legal Counsel: Blake, Cassels & Graydon LLP
Taxability of Distributions: 33.3% of 2018 distributions (including those from H&R Finance Trust) will be treated
as a return of capital and 1.7% will be designated as taxable capital gains. For taxable Canadian unitholders, 35.0%
(2017 - 39.7%) of the distributions will not be subject to current income taxes.
Plan Eligibility: RRSP, RRIF, DPSP, RESP, RDSP, TFSA
Stock Exchange Listing: Units and debentures of H&R are listed on the Toronto Stock Exchange under the trading
symbols HR.UN.
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
Modera Westshore, Tampa
Dufferin Mall, Toronto
Corus Quay, Toronto
www.HR-REIT.com