H&R Real Estate Investment Trust
2019 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 $14.5
billion at December 31, 2019. H&R REIT has ownership interests in a North American portfolio of high
quality office, retail, industrial and residential properties comprising over 41 million square feet.
Additional information regarding H&R REIT and H&R Finance Trust is available at www.hr-reit.com and
on www.sedar.com.
Fair Value of Investment Properties
by Geographic region
Fair Value of Investment Properties
by Type of Asset
Ontario
28%
United
States
40%
Other Canadian
Provinces 9%
Alberta
23%
Residential 20%
Industrial 7%
Retail 30%
Office 43%
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 13, 2020
Fellow Unitholders,
Over the past several years, management and the board of H&R REIT (“H&R”) have been actively
reviewing the REITs operations and strategy, with the objectives of improving the quality and value of the
REITs portfolio, and improving the profile of an investment in H&R. We have previously discussed many
of the changes we have made including with respect to governance, capital recycling, enhancing the
REIT’s internal growth prospects, and simplifying and streamlining the REIT’s portfolio.
In 2020 we plan to make further progress in the areas of diversity and our environmental, social and
governance practices (ESG). In 2019 we formally adopted our diversity policy including a 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, and a sustainability policy focused on improving the environmental footprint
of our property portfolio, including through increasing energy efficiency and reducing waste, consumption
and pollution. H&R’s commitment is to build on our established policies, and enhance the disclosure of
our successes on these fronts.
Property Portfolio
In 2019 H&R took advantage of robust property market conditions to further our strategic priorities of
streamlining and simplifying our portfolio, recycling capital into higher growth properties and improving the
investment profile of H&R.
Notable accomplishments in 2019 include the sale of The Atrium, a 1.1 million square foot office and retail
complex for $640 million, (approximately 86% higher than our 2011 purchase price); investing
approximately U.S. 260 million into our pipeline of value creating residential and mixed use developments
in the United States; significant lease extensions with Bell Canada, H&R’s second largest tenant; and the
acceleration of our industrial development pipeline, including the first phase of our 2.7 million square foot
Caledon development project. As noted in our previous Letter to Unitholders in 2019, we also advanced
our intensification pipeline of projects within our existing portfolio, including Dufferin Grove Village at
Dufferin Mall, which will include over 1,100 residential units, and redevelopment of our downtown Toronto
properties on Wellington, Yonge and Front Streets.
The net result of all the REIT’s capital recycling over the past five years is a changed portfolio profile, with
our high-quality multi-residential properties accounting for 23% of fair value of investment properties
including developments, up from 1% at year end 2014. Over the same period, retail has reduced from
39% to 28%, office has reduced from 51% to 41%, and industrial has remained at approximately 8% of
assets, respectively. Geographically, our portfolio has shifted significantly towards high-growth Sun Belt
markets including Dallas, Austin, San Antonio, Orlando, Tampa and Charlotte, as well as gateway cities
including New York City, Miami, San Francisco, Los Angeles, and Seattle, with the portfolio’s United States
market exposure increasing to 42%, up from 23% five years earlier. Accordingly, Canadian markets
declined from 77% to 58% with Ontario accounting for 28% today.
With the considerable changes to our portfolio over the past five years, we believe we have significantly
enhanced the REIT’s internal growth profile, including higher same-asset property operating income
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prospects, exciting development investments under way, as well as intensification opportunities in the
planning stages.
In 2019, Jackson Park, our flagship development in New York City was completed, several other projects
were advanced including River Landing in Miami, and added new projects to the pipeline. We expect these
investments, which amounted to $829 million at cost as at December 31, 2019, to contribute meaningfully
to growth in H&R’s net asset value over the next few years.
Outlook
We are excited about H&R’s future prospects. Our portfolio is concentrated in major North American
population centres with strong demographic and economic growth prospects. Our balance sheet is strong,
and we expect to benefit from significant development completions, contractual rent increases and positive
leasing spreads.
Management and the board remain focused on increasing unitholder value. Improving the profile of an
investment in H&R units is a goal we have outlined in recent years, and while we believe we have made
progress, we continue to see our units trading at a discount to net asset value. We remain committed to
narrowing this discount, addressing factors that have contributed to a higher cost of equity for H&R, and
pursuing further opportunities to simplify the investment profile of H&R. Management, members of the
board and their families are strongly aligned with unitholders as we work towards this goal, collectively
owning more than $400 million of equity in H&R REIT.
H&R has considerable scale with many advantages, including 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
455 properties across 41 million square feet. These are all attributes we intend to leverage as we advance
the interests of unitholders in 2020.
We would like to thank our employees who have all contributed to the success of the REIT as we chart the
course for H&R through the 2020s.
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, 2019
Dated: February 13, 2020
TABLE OF CONTENTS
SECTION I .................................................................................................................................................................................................................................................... 1
Basis Of Presentation ................................................................................................................................................................................................................................. 1
Forward-Looking Disclaimer ....................................................................................................................................................................................................................... 1
Non-GAAP Financial Measures ................................................................................................................................................................................................................. 2
Overview .................................................................................................................................................................................................................................................... 3
SECTION II ................................................................................................................................................................................................................................................... 4
Financial Highlights .................................................................................................................................................................................................................................... 4
Key Performance Drivers ........................................................................................................................................................................................................................... 5
Summary Of Significant 2019 Activity ........................................................................................................................................................................................................ 5
SECTION III .................................................................................................................................................................................................................................................. 9
Financial Position ....................................................................................................................................................................................................................................... 9
Assets ....................................................................................................................................................................................................................................................... 10
Liabilities And Unitholders’ Equity ............................................................................................................................................................................................................ 16
Results Of Operations .............................................................................................................................................................................................................................. 21
Property Operating Income ...................................................................................................................................................................................................................... 22
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
Off-Balance Sheet Items .......................................................................................................................................................................................................................... 36
Derivative Instruments .............................................................................................................................................................................................................................. 37
SECTION IV ............................................................................................................................................................................................................................................... 38
Selected Financial Information ................................................................................................................................................................................................................. 38
Portfolio Overview .................................................................................................................................................................................................................................... 39
SECTION V ................................................................................................................................................................................................................................................ 42
Critical Accounting Estimates And Judgments ......................................................................................................................................................................................... 42
Significant Accounting Policies................................................................................................................................................................................................................. 43
Discloure Controls and Procedures And Internal Control Over Financial Reporting ............................................................................................................................... 43
SECTION VI ............................................................................................................................................................................................................................................... 44
Risks And Uncertainties ........................................................................................................................................................................................................................... 44
Outstanding Unit Data .............................................................................................................................................................................................................................. 49
Additional Information ............................................................................................................................................................................................................................... 49
Subsequent Events .................................................................................................................................................................................................................................. 49
H&R REIT - MD&A - DECEMBER 31, 2019
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, 2019 includes material information up to February 13, 2020. 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 (refer to “Overview” on page 3). Financial data for the years ended December 31, 2019 and 2018 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, 2019 (“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 on page 3) 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 “Assets”, “Segmented Information”, “Liquidity and Capital Resources”,
“Risks and Uncertainties” and “Subsequent Events” relating to H&R’s objectives, beliefs, plans, estimates, projections and intentions and similar statements
concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts, including the statements made under
the heading “Summary of Significant 2019 Activity” including with respect to H&R’s future plans, including significant development projects, H&R’s
expectation with respect to the activities of its development properties, including redevelopment of existing properties such as Dufferin Mall and 145
Wellington St. W. and building of new properties, the annual base rent from former Target and Sears space in 2020, the expected Brownfield tax credit to
be received from Jackson Park, the expected total cost, stabilized property operating income, levered yield on the REIT’s expected net cash investment and
yield on budgeted cost from Jackson Park, and the anticipated projected amounts of net income and FFO in 2020 resulting from Jackson Park, the expected
increase in H&R’s mortgage receivable, the timing of the construction on the REIT’s industrial lands, the expected yield on cost from the REIT’s development
properties, the timing of construction, the timing of stabilization, the timing of occupancy, the expected total cost and stabilized property operating income
from River Landing, the expected timing of construction and total budget for Sunrise, the impact of the replacement of tenants, expected capital and tenant
expenditures, the expected property operating income generated by the Residential segment’s five properties in lease-up, the REIT’s proforma debt to total
assets, capitalization rates used to estimate fair values, 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. 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 are not 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 and climate change risk; co-ownership interest in properties; joint arrangement and investment risks; unit price risk;
availability of cash for distributions; ability to access capital markets; dilution; unitholder liability; redemption right risk; risks relating to debentures and the
inability of the REIT to purchase senior debentures on a change of control; tax risk, U.S. tax reform and tax consequences to U.S. holders. H&R cautions
that these lists of factors, risks and uncertainties are not exhaustive. Although the forward-looking statements contained in this 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. All forward-looking statements in this MD&A are qualified by these cautionary statements. These forward-looking statements are made as
of February 13, 2020 and the REIT, except as required by applicable Canadian law, assumes no obligation to update or revise them to reflect new information
or the occurrence of future events or circumstances.
Page 1 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
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 associates, 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, 2018. 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, 2019 (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).
(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 2019 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
Page 2 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
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 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 (ii) 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.
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 per Unit through ongoing active management of H&R’s assets, acquisition of additional properties and the development and
construction of projects; and
to provide unitholders with stable and growing cash distributions, generated by the revenue it derives from a diversified portfolio of income producing
real estate assets.
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H&R REIT - MD&A - DECEMBER 31, 2019
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 four 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 Office segment, the largest of the four segments, holds a portfolio of single tenant and multi-tenant office properties
across Canada and in select markets in the United States. H&R’s Retail segment operates as Primaris, and holds a portfolio of enclosed shopping centres,
single tenant retail properties and multi-tenant retail plazas throughout Canada and 16 single tenant retail properties in the United States. In addition, it also
holds a 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 Industrial segment holds a portfolio of single tenant and multi-tenant industrial
properties across Canada and four single tenant industrial properties 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. Management
assesses the results of these operations separately. Effective January 1, 2019, the REIT has combined its previous three retail segments (Primaris, H&R
Retail, and ECHO) into one Retail segment. The comparative period figures have been re-stated to reflect this change in operating segments.
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 (in thousands of Units)
Unitholders' equity per Unit
NAV per Unit(2)(3)
Unit price
December 31,
2019
December 31,
2018
December 31,
2017
$14,483,342
$14,691,009
$14,558,863
44.4%
47.7%
7,043,917
286,690
$24.57
$25.79
$21.10
44.6%
47.1%
7,200,100
285,678
$25.20
$26.30
$20.65
44.6%
46.6%
7,179,763
291,320
$24.65
$25.57
$21.36
Three months ended December 31
2018
2019
% Change
Year ended
2018
2019
% Change
Rentals from investment properties
Property operating income
$282,221
$297,416
184,775
192,009
Same-Asset property operating income (cash basis) total in Canadian dollars(2)
177,950
183,111
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. Refer to page 31.
36,958
148,165
163,402
61,115
133,687
130,470
301,573
301,200
$0.44
$0.35
77.9%
3.18
$0.43
$0.35
79.7%
3.06
(1) Debt includes mortgages payable, debentures payable, unsecured term loans and lines of credit.
(2) These are non-GAAP measures. Refer to the “Non-GAAP Financial Measures” section of this MD&A.
(3) Refer to page 20 for a detailed calculation of NAV per Unit.
(5.1%)
(3.8%)
(2.8%)
(75.1%)
167.4%
2.5%
0.1%
2.3%
-%
(1.8%)
3.9%
$1,149,450 $1,176,558
710,975
715,779
31,201
340,289
529,118
301,487
$1.76
$1.38
78.6%
3.05
733,932
715,676
169,409
337,918
525,696
302,605
$1.74
$1.38
79.4%
3.03
(2.3%)
(3.1%)
-%
(81.6%)
0.7%
0.7%
(0.4%)
1.1%
-%
(0.8%)
0.7%
Page 4 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
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
Retail
Industrial
Residential
Total
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
98.6%(3)
98.5%
98.6%(3)
98.6%
$26.13
$26.41
$32.15
$33.14
12.4
11.1
3.4
4.1
91.5%(4)
90.0%
97.2%(5)
98.5%
91.5%
90.0%
$21.33
$21.68
$19.08
$17.61
6.6
6.7
4.5
4.7
97.2%
98.4%
$6.80
$6.86
$3.76
$3.37
6.7
6.7
6.0
6.5
90.7%(6)
88.0%(6)
92.4%
91.9%
N/A
N/A
$21.92(7)
$16.94
N/A
N/A
8.5
8.3
94.5%
94.0%
95.0%
94.7%
$18.36
$18.80
$21.86
$18.60
9.6
9.0
5.7
5.5
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Same-Asset refers to those properties owned by H&R for the 2-year period ended December 31, 2019.
Excludes properties sold in their respective year.
Committed occupancy for the Office segment (which includes signed leases for currently vacant space) would be 99.6%.
Committed occupancy for the Retail segment (which includes signed leases for currently vacant space) would be 94.1%.
Committed occupancy for the Industrial segment (which includes signed leases for currently vacant space) would be 98.9%.
Excluding properties in lease up, occupancy for the Residential segment would have been 92.4% and 92.5% as at December 31, 2019 and 2018, respectively.
In Q1 2019, Jackson Park was transferred from properties under development to investment properties which was the primary reason for average contractual rent per sq.ft. in U.S. dollars
increasing from $16.94 for the year ended December 31, 2018 to $21.92 for the year ended December 31, 2019.
SUMMARY OF SIGNIFICANT 2019 ACTIVITY
During 2019, H&R has continued to actively reallocate capital through property dispositions to fund value-creating developments, expand its residential
rental platform and strengthen the balance sheet. The REIT has completed approximately $1.8 billion of asset sales over the past two years, substantially
repositioning the portfolio, enhancing the internal growth profile and reducing leverage.
Developments
H&R’s active development pipeline in the United States is currently comprised of six residential developments and one mixed-used development. As at
December 31, 2019, the total development budget was U.S. $713.1 million, of which U.S. $452.9 million was included in properties under development with
U.S. $260.1 million of budgeted costs remaining to complete, in each case at the REIT’s proportionate share.
The largest current development project is River Landing, an urban in-fill mixed use development site in Miami, FL, which is adjacent to the Health District
with approximately 1,000 feet of waterfront on the Miami River, two miles from downtown Miami. River Landing includes approximately 373,000 square feet
of retail space, approximately 118,000 square feet of office space and 528 residential rental units. Construction is nearing completion with occupancy
scheduled to commence in Q2 2020. The total cost of the project is expected to be approximately U.S. $467.9 million. As at December 31, 2019,
approximately U.S. $367.0 million had been invested in the development.
In June 2019, construction commenced on the first phase of a 2.7 million square foot industrial development in Caledon, ON. The first phase consists of
three buildings, which will total approximately 526,000 square feet upon completion. Subsequent to December 31, 2019, H&R completed a 10-year lease
with Deutsche Post AG to occupy the largest of the three buildings totalling 342,821 square feet. The total budget for these three buildings is $83.0 million.
In June 2019, H&R acquired a 100% leasehold interest to develop up to 670 residential rental units in Orlando, FL, known as “Sunrise”. Sunrise is located
within the heart of the I-4 Tourism Corridor in Orlando and is a seven-minute drive from Walt Disney World. Construction on Phase 1 is expected to commence
in Q1 2020 with completion expected by Q4 2021. The total budget for Phase 1, which will consist of 321 residential rental units, is expected to be U.S.
$61.8 million.
Page 5 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
Proposed Developments
In July 2019, H&R submitted combined applications for rezoning and for the redevelopment of the surface parking lots, drive-through restaurants and strip
plaza that currently occupy the north end of Dufferin Mall in Toronto, ON to create “Dufferin Grove Village”. The proposed project would replace the surface
parking with four residential buildings over two blocks. Divided by a new road, the blocks would form the backdrop for Dufferin Commons, a new public park.
The west block would support two residential buildings of 35 and 39 storeys, and the east block would support two residential buildings of 14 and 23 storeys.
Combined, they would introduce approximately 1,135 residential units to the site.
In August 2019, H&R submitted a rezoning application for the redevelopment of 145 Wellington St. W., in Toronto, ON which is currently a 13-storey office
building. The proposed project would redevelop the subject site with a full office replacement in a new modern 13-storey podium, topped with a 52-storey
residential tower, for an overall building height of 65 storeys. A total of 157,581 square feet of office space and 1,722 square feet of grade-related retail is
proposed, along with 476 new residential units comprising 384,971 square feet of residential space. Of these residences, approximately 57% will be larger,
family-oriented two or three-bedroom units.
In August 2019, H&R acquired a 50% ownership interest in excess lands, held for future re-development, at 3791 Kingsway in Burnaby, BC for $6.7 million.
This property is located adjacent to the REIT’s 3777 Kingsway office tower of which it has a 50% ownership interest.
In September 2019, H&R acquired a 100% interest in approximately 8.4 acres of land for the development of 201 residential rental units in Tampa, FL
(“Pinellas”) for U.S. $6.0 million.
For a complete list of H&R’s current development projects, refer to page 13 of this MD&A.
Office
In January 2019, H&R sold a 79,570 square foot single tenanted U.S. office property in Lithia Springs, GA for gross proceeds of U.S. $69.8 million, which
was acquired in May 2011 for U.S. $60.8 million. The mortgage of U.S. $43.7 million was repaid at closing.
In June 2019, H&R sold The Atrium, a 1.1 million square foot office and retail complex in Toronto, ON for $640.0 million. The Atrium was acquired in June
2011 for $344.8 million. The sale price equated to a capitalization rate of 4.56%. The property was unencumbered and H&R provided the purchaser with a
vendor take-back mortgage of $256.0 million, bearing interest at an annual rate of 4.56% which was repaid on January 9, 2020. The net proceeds from the
sale were used to repay debt including the repayment on maturity of H&R’s Series M senior debentures on July 23, 2019.
H&R extended its office leases with Bell Canada at six office properties in Toronto, Montreal and Ottawa totaling 2,415,515 square feet for an additional 10
years effective January 1, 2019. As at December 31, 2019 the weighted average lease term to maturity for these leases is 15.6 years with annual contractual
rental increases of 1.5% per annum. The cash rent received in 2019 decreased by $7.3 million compared to 2018 while the straight lining of the contractual
rents added $10.1 million resulting in a net $0.01 positive impact to 2019 FFO per Unit. H&R will be responsible for certain capital expenditures at these
properties. These lease extensions provide greater certainty and commitment to these properties. The new rental arrangement has been reset at current
market levels and the built-in contractual rental growth will contribute meaningfully to H&R’s organic growth for the next 15 years.
H&R extended two Calgary office leases with AltaLink, L.P. to 20-year terms effective March 1, 2019. Although the cash rent did not change as a result of
the extended leases, the leases provide for future contractual rental escalations every three years. H&R’s office portfolio in Calgary has a 100% occupancy
rate with an average lease term to maturity of 17.0 years.
H&R has made significant leasing progress in its office portfolio having achieved a committed occupancy rate of 99.6% as at December 31, 2019.
Industrial
In June 2019, H&R sold its 50.5% ownership interests in two U.S. industrial properties (previously held through an equity accounted investment) for U.S.
$20.1 million and repaid the two respective mortgages aggregating U.S. $13.8 million upon closing. In addition, H&R purchased the remaining 49.5% interest
in 510 E. Courtland St., Morton, IL for U.S. $2.2 million. As H&R owns 100% of this property, it is now consolidated in the REIT’s Financial Statements.
In August 2019, H&R signed a 12-year lease with Amazon.com, Inc. (“Amazon”) at 7575 Brewster Ave., Philadelphia, PA commencing September 1, 2019
for 82,788 square feet, at H&R’s ownership interest. The previous tenant vacated the premises in July 2019.
In September 2019, H&R sold its 50% ownership interest in a 139,694 square foot multi-tenanted industrial property in Kanata, ON for $24.3 million, at
H&R’s ownership interest.
In November 2019, H&R signed a 10-year lease with Amazon at 2121 Cornwall Rd., Oakville, ON commencing January 1, 2020 for 157,083 square feet, at
H&R’s ownership interest. The previous tenant had vacated the premises in April 2019.
Page 6 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
As at December 31, 2019, a 363,983 square foot industrial property in Boucherville, QC was classified as held for sale for $17.1 million at H&R’s ownership
interest, pursuant to the exercise of a tenant option to purchase at a pre-determined price.
Committed occupancy for the Industrial segment was 98.9% compared to actual occupancy of 97.2% as at December 31, 2019.
Residential
In Q1 2019, Jackson Park, the 1,871 luxury residential rental unit development in Long Island City, NY in which H&R has a 50% ownership interest, reached
substantial completion and was transferred from properties under development to investment properties. Average occupancy was 85.8% for 2019 and
occupancy as at December 31, 2019 was 96.0%. Stabilized occupancy was achieved in Q3 2019.
In September 2019, H&R, together with its partners, secured a U.S. $1.0 billion interest-only first mortgage for Jackson Park (U.S. $500.0 million, at H&R’s
ownership interest) at a fixed rate of 3.25% for a 10-year term. Upon closing, Jackson Park’s existing U.S. $640.0 million construction facility was discharged
and the outstanding balance prior to this refinancing was repaid. After closing costs, H&R received a cash distribution of U.S. $194.8 million which was used
to repay other debt.
Jackson Park’s annualized unlevered yield on budgeted cost is expected to be 6.0%. The total cost projected is expected to be approximately U.S. $580.7
million (at H&R’s ownership interest). As part of the New York City Brownfield Cleanup Program, H&R expects to receive approximately U.S. $49.9 million
which will reduce the net budgeted cost to U.S. $530.8 million. With the new financing in place, the REIT’s levered yield on its expected net cash investment
of U.S. $30.8 million is approximately 50.4%.
In June 2019, H&R acquired 314 residential rental units at 3512 Grande Reserve Way in Orlando, FL at a purchase price, before transaction costs, of U.S.
$74.7 million which equates to U.S. $238,000 per residential rental unit. The property was built in 2018.
In July 2019, H&R acquired 322 residential rental units at 2725 Reseda Place in Charlotte, NC at a purchase price, before transaction costs, of U.S. $62.8
million which equates to U.S. $195,000 per residential rental unit. The property was constructed in 2019 and occupancy was 47.2% upon acquisition. The
property is currently in lease-up and is expected to be fully stabilized by Q3 2020.
In September 2019, H&R sold 12101 Fountainbrook Blvd., in Orlando, FL for U.S. $77.0 million, which was acquired in April 2015 for U.S. $53.3 million. The
mortgage of U.S. $38.3 million was repaid upon the sale.
As at December 31, 2019, the residential portfolio consisted of 24 properties comprising 8,443 residential rental units at H&R’s ownership interest. The
portfolio is comprised of 11 properties in Texas, seven in Florida, five in North Carolina and one in Long Island City, NY.
During the year ended December 31, 2019, there were five properties (excluding Jackson Park) in lease-up with a weighted average occupancy rate of
81.9%. As at December 31, 2019, one property has reached stabilization, one property is targeted for stabilization in Q1 2020, two properties are targeted
for stabilization in Q3 2020 and one property is targeted for stabilization in Q4 2020. For the three months and year ended December 31, 2019, the properties
in lease-up contributed U.S. $2.8 million and U.S. $8.7 million, respectively, to property operating income (excluding non-cash items) and they are expected
to contribute U.S. $13.5 million in 2020.
Subsequent to December 31, 2019, H&R sold two properties which were classified as held for sale as at December 31, 2019: (i) 12601 South Green Dr. in
Houston, TX for U.S. $23.9 million, which was acquired in November 2014 for U.S. $16.7 million; and (ii) 8401 Memorial Lane in Plano, TX for U.S. $66.0
million, which was acquired in February 2015 for U.S. $52.3 million. The mortgage of U.S. $38.0 million was assumed by the purchaser upon closing.
Retail
During 2019, H&R sold three Canadian retail properties totalling 105,776 square feet for gross proceeds of $20.4 million.
During 2019, $123.3 million was invested in redevelopment at Primaris enclosed shopping centre properties primarily relating to the redevelopment of the
former Sears stores and one remaining Target store. As 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, 2019, H&R capitalized $0.1 million and $1.2 million, respectively, of property operating costs and
$1.3 million and $5.3 million, respectively, of finance costs attributable to the former Target and Sears space.
For the three months and year ended December 31, 2019, the lease-up of the former Target and Sears space generated net rent of $2.5 million and $8.2
million, respectively, and these tenants are expected to contribute approximately $12.5 million in 2020 and $16.3 million in 2021.
Committed occupancy for the Retail segment was 94.1% compared to actual occupancy of 91.5% as at December 31, 2019.
Page 7 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
Mortgages Receivable
In December 2019, H&R issued a mortgage receivable for U.S. $124.1 million secured against 12.4 acres of land in Jersey City, NJ for a two-year term. The
loan is expected to increase up to U.S. $160.0 million, and bears interest at 10.0% per annum. The land is adjacent to Liberty State Park with views of
downtown Manhattan and the Hudson River. The project is zoned for 1.7 million square feet of commercial space and 1,544 residential units, with a full
residential development option encompassing 2,835 units. The location is accessible to multiple modes of transportation including the Grove Street PATH
station 0.7 miles away with direct access to Manhattan (Penn Station and Wall St.) and an 11-minute ferry transit ride to Google’s new Manhattan campus
as well as access to Manhattan’s lower west side. The REIT has an option to convert its loan into an 80% equity ownership interest.
Debt Highlights
As at December 31, 2019, debt to total assets was 44.4% compared to 44.6% as at December 31, 2018. Subsequent to December 31, 2019, the $256.0
million mortgage receivable secured by The Atrium was received, reducing proforma debt to total assets to 43.4%. The weighted average interest rate of
H&R’s debt as at December 31, 2019 was 3.8% with an average term to maturity of 3.9 years.
Mortgages:
During 2019, H&R secured 10 new mortgages (excluding Jackson Park’s mortgage described above) totalling $229.1 million at a weighted average interest
rate of 3.6% for an average term of 9.4 years and repaid eight mortgages totalling $499.8 million at an interest rate of 4.4%.
Debentures:
In March 2019, H&R repaid all of its Series K senior debentures upon maturity for a cash payment of $200.0 million.
In July 2019, H&R repaid all of its Series M senior debentures upon maturity for a cash payment of $150.0 million.
Unsecured Term Loan:
In March 2019, H&R borrowed $250.0 million by way of a new unsecured term loan maturing in March 2024. Through an interest rate swap, H&R fixed the
interest rate at 3.3% per annum. This is H&R’s third unsecured term loan which demonstrates H&R’s creditworthiness and access to multiple sources of
capital.
Lines of Credit:
In December 2019, H&R, through Primaris, extended the maturity date of its $300.0 million secured operating facility which was originally due in July 2020
to December 2021.
As at December 31, 2019, H&R had $290.6 million of unused borrowing capacity available under its lines of credit.
Page 8 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
SECTION III
FINANCIAL POSITION
The following foreign exchange rates have been used in the statement of financial position when converting U.S. dollars to Canadian dollars except where
otherwise noted:
For each U.S. $1.00
(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
Liabilities classified as held for sale
Unitholders’ equity
December 31,
2019
December 31,
2018
$1.30 CAD
$1.36 CAD
December 31,
December 31,
2019
2018
$11,988,347
$12,683,709
683,145
404,814
12,671,492
13,088,523
1,002,773
1,284,985
135,673
624,764
48,640
110,940
153,488
53,073
$14,483,342
$14,691,009
$6,375,860
$6,546,072
323,173
409,381
281,595
49,416
7,439,425
7,043,917
329,482
392,214
223,141
-
7,490,909
7,200,100
$14,483,342
$14,691,009
Page 9 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
ASSETS
Real Estate Assets:
Change in Investment Properties
(in thousands of Canadian dollars)
Opening balance, January 1, 2019
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 and straight-lining of contractual rents
Right-of-use asset(2)
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, 2019
REIT's Financial
Statements
Plus: equity accounted
investments
REIT's proportionate
share(1)
$12,683,709
188,454
(749,830)
(116,805)
64,234
44,756
130,409
4,807
-
-
(103,903)
(157,484)
$930,299
7,717
(52,527)
(12,872)
4,632
1,484
8,669
496
43,517
1,065,803
(11,290)
(64,108)
$13,614,008
196,171
(802,357)
(129,677)
68,866
46,240
139,078
5,303
43,517
1,065,803
(115,193)
(221,592)
$11,988,347
$1,921,820
$13,910,167
(1) The REIT’s proportionate share is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.
(2) The right-of-use asset in a leasehold interest was measured at an amount equal to the corresponding lease liability (refer to page 14 of this MD&A).
2019 Acquisitions:
Property
3512 Grande Reserve Way, Orlando, FL
510 E. Courtland St., Morton, IL(2)
2725 Reseda Pl., Charlotte, NC
Total
Year
Built
2018
2000
2019
Segment
Date
Acquired
Number of
Residential
Rental Units
Purchase Price
($ Millions)(1)
Ownership
Interest
Acquired
Residential
Jun 13, 2019
Industrial
Jun 28, 2019
Residential
Jul 31, 2019
314
-
322
636
$99.4
2.9
82.3
$184.6
100%
49.5%
100%
(1) Purchase price is listed at H&R’s ownership interest. U.S. acquisitions have been translated to Canadian dollars at the exchange rate as at the date acquired.
(2) H&R purchased the remaining 49.5% interest it did not previously own and now owns 100% of this property. The additional square footage acquired was 60,930.
Page 10 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
Segment
Date
Acquired
Number of
Residential
Rental Units
Purchase Price
($ Millions)(1)
Ownership
Interest
Acquired
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
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
(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.
2019 Dispositions:
Property
2480 Rockhouse Rd., Lithia Springs, GA(2)
8754 Hwy 60, Eganville, ON
3621 Dufferin St., Toronto, ON(3)
3619 61st Ave. S.E., Calgary, AB
595 Bay St., 20 & 40 Dundas St. and 306 Yonge St., Toronto, ON
12101 Fountainbrook Blvd., Orlando, FL(4)
500 Palladium Dr., Kanata, ON(5)
9320 Hwy 93, Midland, ON
Total
Segment
Office
Retail
Office
Retail
Office
Date
Sold
Jan 15, 2019
Jan 21, 2019
Feb 4, 2019
Apr 1, 2019
Jun 6, 2019
Residential
Sep 25, 2019
Industrial
Sep 26, 2019
Retail
Nov 14, 2019
(1) U.S. dispositions have been translated to Canadian dollars at the exchange rate as at the date sold.
(2) Classified as held for sale as at December 31, 2018.
(3) Approximately 3.4 acres of excess lands adjacent to the REIT’s head office in Toronto, ON.
(4) Property consisted of 400 residential rental units.
(5) Square feet and selling price are based on the ownership interest disposed.
305
-
322
328
-
308
375
1,638
Square
Feet
79,570
25,296
-
40,480
1,059,281
379,588
139,694
40,000
$98.9
4.0
74.9
62.9
13.3
95.4
111.4
$460.8
100%
50%
100%
100%
33.3%
100%
100%
Selling Price
($ Millions)(1)
Ownership
Interest Sold
$92.8
4.2
15.4
10.8
640.0
102.4
24.3
5.4
100%
100%
100%
100%
100%
100%
50%
100%
1,763,909
$895.3
2018 Dispositions:
Property
7350 Catherine St., Windsor, ON
1880 Matheson Blvd. E., Mississauga, ON(2)
1377 The Queensway, Toronto, ON(2)
411 1st Street, Calgary, AB(2)
10300 Rue Henri Bourassa, St. Laurent, QC(2)
U.S. Retail portfolio - 63 properties
380 Spinnaker Way, Vaughan, ON(2)
650 Cataraqui Woods Dr., Kingston, ON(2)
101 Granada Blvd., Sherwood Park, AB
Total
Segment
Date
Sold
Square
Feet
Selling Price
($ Millions)(1)
Ownership
Interest Sold
Retail
Jan 31, 2018
Industrial
Industrial
Feb 20, 2018
Feb 23, 2018
Office
Apr 10, 2018
Industrial
Apr 19, 2018
102,997
194,657
92,449
353,140
40,750
Retail
June 2018
4,235,943
Industrial
Industrial
Jul 11, 2018
Jul 31, 2018
Retail
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
100%
50%
50%
50%
50%
100%
75%
50%
100%
5,177,185
$948.9
(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.
Page 11 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
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, 2019
REIT's Financial Statements
Equity Accounted Investments
Operating Segment
(in millions of Canadian dollars)
Investment
Properties
Properties
Under
Development
$5,988
3,311
1,004
1,685
$7
-
105
571
$11,988
$683
$12,671
Sub
Total
$5,995
3,311
1,109
2,256
Investment
Properties
Properties
Under
Development
$ -
846
36
1,040
$1,922
$ -
23
-
123
$146
Sub
Total
$ -
869
36
1,163
$2,068
REIT's
proportionate
share(1)
$5,995
4,180
1,145
3,419
$14,739
Office
Retail
Industrial
Residential
Total
(1)
The REIT’s proportionate share is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.
Geographic Location
(in millions of Canadian dollars)
Ontario
Alberta
Other
Canada
United States
Total
December 31, 2019
REIT's Financial Statements
Equity Accounted Investments
Investment
Properties
Properties
Under
Development
Sub
Total
Investment
Properties
Properties
Under
Development
$3,956
$105
$4,061
$ -
$ -
3,201
1,260
8,417
3,571
-
7
112
571
3,201
1,267
8,529
4,142
$11,988
$683
$12,671
-
-
-
1,922
$1,922
-
-
-
146
$146
Sub
Total
$ -
-
-
-
2,068
$2,068
REIT's
proportionate
share(1)
$4,061
3,201
1,267
8,529
6,210
$14,739
(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, 2019
Canada
United States
December 31, 2018
Canada
United States
Office
5.72%
5.22%
Office
5.54%
5.27%
Retail
Industrial Residential
6.12%
7.15%
5.51%
7.52%
-
4.75%
Retail
Industrial
Residential
6.06%
7.25%
5.68%
8.55%
-
5.09%
Total
5.84%
5.34%
Total
5.73%
5.68%
Page 12 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
Canadian Properties Under Development:
Industrial Lands, Caledon, ON
H&R owns approximately 144 acres of land which is being held for development for up to 2.7 million square feet of industrial space. In June 2019, construction
commenced on the first three buildings totalling approximately 526,000 square feet.
Subsequent to December 31, 2019, H&R completed a 10-year lease with Deutsche Post AG to occupy the largest of the three buildings totalling 342,821
square feet. Occupancy is expected to commence in Q3 2020. The total budget for this building is approximately $54.6 million, an increase of $8.8 million
primarily to account for a tenant allowance which has increased the expected yield on cost to 6.7%. As at December 31, 2019, $24.4 million was included
in properties under development with $30.2 million of budgeted costs remaining to complete.
The total budget for the remaining two buildings consisting of approximately 183,000 square feet is approximately $28.4 million with an expected yield on
cost of 6.0%. As at December 31, 2019, $10.0 million was included in properties under development with $18.4 million of budgeted costs remaining to
complete. These two buildings are expected to be completed in Q4 2020.
3791 Kingsway, Burnaby, BC
In August 2019, H&R acquired a 50% ownership interest in excess lands, held for future re-development, at 3791 Kingsway in Burnaby, BC for $6.7 million.
This property is located adjacent to the REIT’s 3777 Kingsway office tower of which it has a 50% ownership interest.
U.S. Properties Under Development:
As at December 31, 2019
Current Developments:
River Landing, Miami, FL(1)
Shoreline, Long Beach, CA(2)
Sunrise (Phase 1), Orlando, FL(3)(4)
Hercules Project (Phase 1), Hercules, CA(5)
Hercules Project (Phase 2), Hercules, CA(5)
The Pearl, Austin, TX(6)
Esterra Park, Seattle, WA(7)
Future Developments:
Prosper, Dallas, TX(8)
2214 Bryan St., Dallas, TX(8)
Pinellas, Tampa, FL(8)
Sunrise (Phase 2), Orlando, FL(3)(4)(8)
Hercules Project (Remaining Phases), Hercules, CA(5)(8)
Total per the REIT's Proportionate Share (excluding ECHO)
At H&R Ownership Interest
(in thousands of U.S. dollars)
Ownership
Interest
Number
of Acres
Total
Development
Budget
Properties
Under
Development
Costs
Remaining
to
Complete
Expected
Yield
on Cost
Expected
Completion
Date
5.3%
6.2%
6.1%
6.5%
6.6%
6.2%
6.0%
Q2 2020
Q2 2021
Q4 2021
Q2 2020
Q1 2021
Q3 2020
Q1 2021
100.0%
31.2%
100.0%
31.7%
31.7%
33.3%
33.3%
100.0%
100.0%
100.0%
100.0%
31.7%
8.1
0.9
11.6
2.2
2.8
5.0
1.1
31.7
20.3
3.3
8.4
12.4
33.4
109.5
$467,860
$367,008
$100,852
71,097
61,826
26,041
31,186
23,201
24,690
2,376
19,424
11,190
13,189
46,407
59,450
6,617
19,996
10,012
31,859
$713,070
15,058
$452,935
16,801
$260,135
-
-
-
-
15,120
23,616
6,287
350
-
-
-
-
-
$713,070
11,393
$509,701
-
$260,135
(1) Mixed use development consisting of 528 residential rental units, approximately 373,000 square of retail space and 118,000 square feet of office space.
(2)
(3)
35-storey residential tower consisting of 315 luxury residential rental units and 6,450 square feet of retail.
Acquired a leasehold interest to develop up to 670 residential rental units. Located within the heart of the I-4 Tourism Corridor in Orlando and the site is a seven-minute drive from Walt
Disney World. Construction of Phase 1 is expected to commence in Q1 2020 which will consist of 321 residential rental units.
Excludes the right-of-use asset, which is a leasehold interest measured at an amount equal to the corresponding lease liability of U.S. $24.6 million.
Total project spans 38.4 acres. Construction commenced in June 2018 on Phase 1 of this project which will consist of 172 residential rental units and 13,979 square feet of retail. Construction
commenced in March 2019 on Phase 2 of this project which will consist of 232 residential rental units. Future phases will be announced as further development information becomes
available.
383 residential rental units. Close to major technology employers including Apple, IBM, Oracle and 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 2023.
Development budget metrics have not been determined as at December 31, 2019.
(4)
(5)
(6)
(7)
(8)
Page 13 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
Equity Accounted Investments:
(in thousands of Canadian
dollars)
Jackson
Park
ECHO
December 31, 2019
Three U.S.
Industrial
Properties
Hercules
Project The Pearl
Esterra
Park
December 31
2018
Shoreline
Other(1)
Total(2)
Total(2)
Investment properties
$1,040,336 $845,377
$36,107
$ -
$ -
$ -
$ -
$ - $1,921,820
$930,299
Properties under development
Assets classified as held for sale
Other assets
-
-
22,809
12,872
6,236
20,409
Cash and cash equivalents
22,757
9,668
Debt
Lease liability
Other liabilities
(640,560)
(352,697)
-
(43,517)
-
-
117
1,391
-
-
54,609
17,147
19,576
32,097
-
-
693
-
10
2
-
32
-
-
1,682
341
(16,381)
(5,893)
(4,733)
-
-
-
-
-
-
-
41
229
-
-
146,238
1,145,018
12,872
26,845
36,763
-
31,376
42,597
(1,020,264)
(780,552)
(43,517)
-
(18,682)
(46,064)
(446)
(5,292)
(1,749)
(2,910)
(1,449)
(1,392)
(77,984)
(83,753)
Equity accounted investments
$410,087 $468,857
$37,169
$33,629
$9,517
$13,647
$30,989
($1,122)
$1,002,773
$1,284,985
(1)
(2)
Relates to previous equity accounted properties that have been sold.
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.
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, reached substantial
completion and was transferred from properties under development to investment properties in Q1 2019. Jackson Park, at the 100% level, has been valued
at approximately U.S. $1.6 billion as at December 31, 2019 compared to costs to date of approximately U.S. $1.1 billion, resulting in a fair value increase of
U.S. $508.6 million since the start of the project.
In September 2019, H&R, together with its partners, secured a U.S. $1.0 billion interest-only first mortgage for Jackson Park (U.S. $500.0 million, at H&R’s
ownership interest) at a fixed rate of 3.25% for a 10-year term. Upon closing, Jackson Park’s existing U.S. $640.0 million construction facility was discharged
and the outstanding balance prior to this refinancing was repaid. After closing costs, H&R received a cash distribution of U.S. $194.8 million which was used
to repay other debt.
Refer to pages 7 and 8 of this MD&A for more information on Jackson Park.
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, 2019 and November 30, 2018, respectively.
During the twelve months ended November 30, 2019, ECHO acquired two investment properties totalling 15,343 square feet and four properties under
development for an aggregate purchase price of U.S. $11.5 million, at H&R’s ownership interest. During this period, ECHO sold a parcel of vacant land,
seven investment properties and two outparcels which were previously part of existing properties totalling 805,611 square feet for gross proceeds of U.S.
$37.7 million, at H&R’s ownership interest. ECHO also transferred one property under development to investment properties totalling 1,774 square feet for
a total value of U.S. $1.2 million, at H&R’s ownership interest.
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.
As a result of the adoption of IFRS 16 Leases (“IFRS 16”) on January 1, 2019, ECHO recognized a right-of-use asset and a lease liability of approximately
U.S. $100.0 million, at the 100% level. As at December 31, 2019, the fair value of investment properties owned by ECHO is equal to approximately U.S.
$1.8 billion, which is equivalent to investment properties of approximately U.S. $1.9 billion less the lease liability of approximately U.S. $99.6 million, at the
100% level.
Page 14 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
Three U.S. Industrial Properties
As at December 31, 2019, H&R owns a 50.5% interest in three industrial properties through a joint venture with its partners, all of which are located in the
United States (December 31, 2018 - 6 properties). During the year ended December 31, 2019, H&R sold its 50.5% interest in the following properties:
Property(1)(2)
1801 Blairtown Rd., Rock Springs, WY
260 Jordan Rd., Tifton, GA
Total
Segment
Industrial
Industrial
Date
Sold
Jun 11, 2019
Jun 18, 2019
Square
Feet
114,453
341,396
455,849
Selling Price
($ Millions)
Ownership
Interest Sold
$14.9
12.0
$26.9
50.5%
50.5%
(1)
(2)
Square feet and selling price are based on the ownership interest disposed.
U.S. dispositions have been translated to Canadian dollars at the exchange rate as at the date sold.
In addition, H&R purchased the remaining 49.5% interest in 510 E. Courtland St., Morton, IL for $2.9 million. As H&R owns 100% of this property, it is now
consolidated in the REIT’s Financial Statements.
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, 2019, H&R’s equity investment
was approximately U.S. $26.2 million.
Phase 1 of the Hercules Project, known as “The Exchange at Bayfront” 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 Phase 1 is 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. As at December 31, 2019, U.S. $27.6 million has been drawn on this construction facility at the 100% level.
Phase 2 of the Hercules Project, known as “The Grand at Bayfront” will consist of 232 residential rental units including a state-of-the-art fitness centre, bike
shop, residents lounge and sporting club. It is situated on 2.8 acres of land and is located north/northeast of Phase 1. Construction commenced in March
2019. The total budget for Phase 2 is approximately U.S. $98.4 million and construction financing of approximately U.S. $65.4 million was secured in March
2019, both at the 100% level.
The remaining land parcels are secured against a U.S. $12.2 million land loan. Future phases will be announced as further development information
becomes available.
The Pearl
H&R has a 33.3% non-managing ownership interest in approximately 5.0 acres of land in Austin, TX for the 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, 2019, H&R’s equity
investment was approximately U.S. $7.3 million and U.S. $13.6 million had been drawn on the construction facility, at the 100% level.
Esterra Park
H&R has a 33.3% non-managing ownership interest in a residential development site in Seattle, WA for the development of 263 residential rental units which
will be known as “Esterra Park”. This residential development site 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 2023. 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, 2019, H&R’s equity investment was approximately U.S. $10.5 million and U.S. $10.9 million had been drawn on the construction facility, at
the 100% level.
Page 15 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
Shoreline
H&R has a 30.9% non-managing ownership interest in a residential development site which will consist of a 315 luxury residential rental unit tower with
6,450 square feet of retail space. 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 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, 2019, H&R’s equity
investment was approximately U.S. $22.1 million.
Assets and Liabilities Classified as Held for Sale
As at December 31 2019, H&R had two U.S. residential properties and a 50% ownership interest in one industrial property with total assets of $135.7 million
and liabilities of $49.4 million classified as held for sale. As at December 31, 2018, H&R had one U.S. office property and a 50% ownership interest in one
industrial property totalling $110.9 million 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, 2019
December 31, 2018
$555,030
49,691
7,931
11,360
752
$96,909
25,861
12,872
12,401
5,445
$624,764
$153,488
Mortgages receivable increased by $458.1 million to $555.0 million as at December 31, 2019, primarily due to the following: (i) H&R sold The Atrium in
Toronto, ON in June 2019 and provided the vendor with a mortgage of $256.0 million, earning 4.56% per annum; (ii) H&R provided a loan of $161.4 million
in December 2019 secured against 12.5 acres of land in Jersey City, NJ, earning interest at 10.0% per annum; and (iii) H&R provided two other loans
secured by land totalling $40.3 million. Subsequent to December 31, 2019, the $256.0 million mortgage receivable secured by The Atrium was received.
Refer to the “Derivative Instruments” section of this MD&A for further information on H&R’s derivative instruments.
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)
Weighted average interest rate of debt at the REIT's proportionate share(1)(2)
Weighted average term to maturity of debt (in years) at the REIT's proportionate share(1)(2)
December 31, 2019
December 31, 2018
44.4%
47.7%
$3,959,871
$2,399,902
1.65
3.05
3.8%
3.9
3.8%
4.6
44.6%
47.1%
$3,438,151
$2,069,419
1.66
3.03
3.8%
4.4
3.9%
4.3
(1) Debt includes mortgages payable, debentures payable, unsecured term loans and lines of credit.
(2) These are non-GAAP measures. Refer to 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 debentures payable,
unsecured term loans and unsecured lines of credit.
Page 16 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
Debt
H&R’s debt consists of the following items:
(in thousands of Canadian dollars)
December 31, 2019
December 31, 2018
Mortgages payable
Debentures payable
Unsecured term loans
Lines of credit
$3,630,858
1,257,731
692,229
795,042
$4,150,459
1,613,040
450,629
331,944
$6,375,860
$6,546,072
(in thousands of Canadian dollars)
Opening balance, January 1, 2019
Scheduled amortization payments
Debt repayment and redemptions
New debt
Debt reclassified to liabilities held for sale
Net advances (repayments)
Effective interest rate accretion
Change in foreign exchange
Mortgages
Payable
$4,150,459
(123,651)
(494,038)
224,631
(49,416)
-
2,552
(79,679)
Debentures
Payable
$1,613,040
-
(350,000)
-
-
-
2,191
(7,500)
Closing balance, December 31, 2019
$3,630,858
$1,257,731
Unsecured
Term Loans
$450,629
-
-
250,000
-
-
-
(8,400)
$692,229
Lines of Credit
Total
$331,944
$6,546,072
-
-
-
-
463,878
-
(780)
(123,651)
(844,038)
474,631
(49,416)
463,878
4,743
(96,359)
$795,042
$6,375,860
Mortgages Payable
Future Mortgage Principal Payments
2020
2021
2022
2023
2024
Thereafter
Financing costs and mark-to-market adjustments arising on acquisitions(1)
Total balance outstanding as at December 31, 2019
Periodic
Amortized
Principal
($000’s)
$118,841
105,129
66,700
59,146
51,204
Principal on
Maturity
($000’s)
Total Principal
($000’s)
% of Total
Principal
Weighted
Average Interest
Rate on Maturity
$64,827
826,799
539,940
386,897
5,901
$183,668
931,928
606,640
446,043
57,105
1,419,041
3,644,425
(13,567)
$3,630,858
4.5%
3.9%
3.9%
3.9%
3.9%
5.0
25.6
16.6
12.2
1.6
39.0
100%
(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, 2019 bear interest at a weighted average rate of 4.1% (December 31, 2018 - 4.2%) and mature between
2020 and 2032 (December 31, 2018 - maturing between 2019 and 2032). The weighted average term to maturity of the REIT’s mortgages is 4.8 years
(December 31, 2018 - 5.2 years). For a further discussion of liquidity refer to “Funding of Future Commitments”. For a further discussion of interest rate
risk, refer to “Risks and Uncertainties”.
Page 17 of 49
Debentures Payable
(in thousands of Canadian Dollars)
Senior Debentures
Series K Senior Debentures(1)
Series M Senior Debentures(2)
Series P Senior Debentures(3)
Series F Senior Debentures
Series L Senior Debentures
Series O Senior Debentures
Series N Senior Debentures
H&R REIT - MD&A - DECEMBER 31, 2019
Contractual
interest
rate
Effective
interest
rate
Maturity
Principal
amount
Carrying
value
Carrying
value
December 31
2019
December 31
2018
March 1, 2019
July 23, 2019
February 13, 2020
March 2, 2020
May 6, 2022
January 23, 2023
January 30, 2024
2.36%
3.35%
3.67%
4.45%
2.92%
3.42%
3.37%
3.45%
(1)
(2)
(3)
4.58%
3.11%
3.44%
3.45%
3.55%
$ -
-
162,500
175,000
325,000
250,000
350,000
$ -
$199,943
-
162,469
174,954
322,862
249,065
348,381
149,902
169,667
174,731
321,996
248,782
348,019
$1,262,500
$1,257,731
$1,613,040
(1)
(2)
(3)
Bore 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. In March 2019, the REIT repaid all of its Series K senior debentures upon maturity for a cash payment of $200.0 million.
Bore 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, 2019 was 3.35%. In July 2019,
the REIT repaid all of its Series M senior debentures upon maturity for a cash payment of $150.0 million.
Denominated as $125,000 U.S. dollars and bears interest at a rate equal to 3-month London Interbank Offered Rate plus 79 basis points. The REIT entered into an interest rate swap on
the Series P senior debentures to fix the interest rate at 3.67% per annum.
Unsecured Term Loans
(in thousands of Canadian Dollars)
H&R unsecured term loan #1(1)
H&R unsecured term loan #2(2)
H&R unsecured term loan #3(3)
Maturity
Date
December 31,
2019
December 31,
2018
March 17, 2021
$192,229
$200,629
March 7, 2024
January 6, 2026
250,000
250,000
$692,229
-
250,000
$450,629
(1) The total facility as at December 31, 2019 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. The REIT entered into an interest rate swap 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. The swap
matures March 17, 2021.
(2) The REIT entered into an interest rate swap to fix the interest rate at 3.33% per annum. The swap matures on March 7, 2026.
(3) The REIT entered into an interest rate swap to fix the interest rate at 3.91% per annum. The swap matures on January 6, 2026.
Page 18 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
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 20, 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 and CrestPSP revolving secured line of credit
April 30, 2020
Primaris revolving secured line of credit
December 31, 2021
Sub-total
200,000
350,000
60,000
760,000
62,500
300,000
362,500
($146,100)
(194,350)
(109,492)
-
(449,942)
(51,500)
(293,600)
(345,100)
$ -
-
(1,985)
(34,791)
(36,776)
(105)
-
(105)
$3,900
5,650
238,523
25,209
273,282
10,895
6,400
17,295
December 31, 2019
December 31, 2018
(1) Secured by certain investment properties.
$1,122,500
$1,126,014
($795,042)
($331,944)
($36,881)
($25,874)
$290,577
$768,196
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.
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, 2019, there were 639,302 exchangeable units exchanged for Units (year ended December 31, 2018 - 23,889
exchanged for Units).
The following number of exchangeable units are issued and outstanding:
As at December 31, 2019
As at December 31, 2018
Number of
Exchangeable Units
Quoted Price
of Units
Amounts per the
REIT's Financial
Statements ($000’s)
15,316,239
15,955,541
$21.10
$20.65
$323,173
$329,482
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 and NAV 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
23.6% in 2019 (2018 - 24.3%).
Page 19 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
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,
2019
December 31,
2018
$24.9
0.9
1.0
26.8
309.7
126.5
436.2
$22.6
0.6
1.4
24.6
284.0
132.8
416.8
($409.4)
($392.2)
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 of a property that is not subject to a Section 1031 property exchange. Deferred tax liability
increased by $17.2 million from $392.2 million as at December 31, 2018 to $409.4 million as at December 31, 2019 primarily due to unrealized fair value
gains on U.S. office properties recognized during the year ended December 31, 2019. This was offset by the strengthening of the Canadian dollar.
Unitholders’ Equity
Unitholders’ equity decreased by $156.2 million from $7.2 billion as at December 31, 2018 to $7.0 billion as at December 31, 2019. The decrease is primarily
due to the unrealized loss on translation of U.S. denominated foreign operations.
Normal Course Issuer Bid (“NCIB”)
On December 10, 2019, 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, 2020 or the date on which the REIT purchased the maximum number
of Units permitted under the NCIB. During the year ended December 31, 2019, the REIT did not purchase and cancel any Units. 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 $136.3 million.
Unitholders’ Equity per Unit and NAV per Unit
Unitholders' equity
Exchangeable units
Deferred tax liability
Total
Units outstanding (in thousands of Units)
Exchangeable units outstanding (in thousands of Units)
Total (in thousands of Units)
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. Refer to the “Non-GAAP Financial Measures” section of this MD&A.
Page 20 of 49
December 31,
2019
December 31,
2018
$7,043,917
$7,200,100
323,173
329,482
409,381
392,214
$7,776,471
$7,921,796
286,690
285,678
14,883
15,522
301,573
301,200
$24.57
$25.79
$21.10
$25.20
$26.30
$20.65
H&R REIT - MD&A - DECEMBER 31, 2019
RESULTS OF OPERATIONS
The following foreign exchange rates have been used in the results of operations when converting U.S. dollars to Canadian dollars except where otherwise
noted:
For each U.S. $1.00
(in thousands of Canadian dollars)
Property operating income:
Rentals from investment properties
Property operating costs
Net income from equity accounted investments
Finance costs - 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
Gain on foreign exchange
Net income before income taxes
Income tax 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
2019
2018
2019
2018
$1.33 CAD
$1.33 CAD
$1.33 CAD
$1.30 CAD
Three months ended December 31
Year ended December 31
2019
2018
2019
2018
$282,221
(97,446)
184,775
36,958
(61,107)
6,012
8,372
42,607
(43,689)
(11)
-
173,917
(10,515)
163,402
(43,918)
$119,484
$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
$1,149,450
$1,176,558
(438,475)
(442,626)
710,975
31,201
733,932
169,409
(256,496)
(267,087)
15,036
(27,293)
(19,483)
(103,903)
25,632
-
375,669
(35,380)
340,289
(125,326)
$214,963
8,638
(18,271)
11,197
(246,967)
(19,602)
6,886
378,135
(40,217)
337,918
194,876
$532,794
During 2019, H&R continued to actively reallocate capital through property dispositions to fund value-creating developments, expand its residential rental
platform and strengthen its balance sheet. The REIT has completed approximately $1.8 billion of asset sales over the past two years, substantially
repositioning its portfolio, enhancing its internal growth profile and reducing leverage. This is the main reason for the decrease in property operating income.
Net income from equity accounted investments for the three months ended and year ended December 31, 2019 compared to the respective 2018 periods
decreased by $111.2 million and $138.2 million, respectively, primarily due to greater fair value increases to Jackson Park in Q4 2018 compared to 2019.
Net income before income taxes increased by $75.5 million for the three months ended December 31, 2019 compared to the respective 2018 period primarily
due to fair value adjustments on financial instruments and real estate assets as well as fair value adjustments to unit-based compensation included in trust
expenses, partially offset by the decrease in property operating income and net income from equity accounted investments noted above.
Net income before income taxes decreased by $2.5 million for the year-ended December 31, 2019 compared to the respective 2018 period primarily due to
the decrease in property operating income and net income from equity accounted investments noted above, as well as fair value adjustments on financial
instruments, partially offset by fair value adjustments on real estate assets and gain (loss) on sale of real estate assets.
Page 21 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
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, 2019. It excludes acquisitions, business combinations, dispositions and transfers of properties under development to investment
properties during the two-year period ended December 31, 2019 (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.
(in thousands of Canadian dollars)
2019
2018
Change
2019
2018
Change
Three months ended December 31
Year ended December 31
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)
$282,221
$297,416
($15,195)
$1,149,450
$1,176,558
($27,108)
(97,446)
(105,407)
7,961
(438,475)
(442,626)
4,151
184,775
192,009
(7,234)
710,975
733,932
(22,957)
25,099
20,165
4,934
93,856
60,939
32,917
(1,950)
1,175
(3,125)
(8,848)
3,683
(12,531)
(12,436)
(11,166)
(1,270)
-
-
-
Same-Asset property operating income (cash basis)(2)
$177,950
$183,111
($5,161)
$715,779
$715,676
(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.
(17,538)
(19,072)
1,534
(80,204)
(82,878)
2,674
$103
Property operating income per the REIT’s Financial Statements decreased by $7.2 million and $23.0 million, respectively, for the three months and year
ended December 31, 2019 compared to the respective 2018 periods primarily due to properties sold, partially offset by residential property acquisitions
during the past 2 years. For a list of property acquisitions and dispositions, refer to pages 10 and 11 of this MD&A. This net decrease for the year ended
December 31, 2019 compared to the respective 2018 period, was further offset by lease termination fees received of $7.6 million and $2.4 million,
respectively.
Property operating income from equity accounted investments for the three months and year ended December 31, 2019 compared to the respective 2018
period increased by $4.9 million and $32.9 million, respectively, primarily due to the lease-up of Jackson Park.
Page 22 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
SEGMENTED INFORMATION
Operating Segments and Geographic Locations:
H&R has four reportable operating segments (Office, which also includes the REIT’s head office, Retail (operating as Primaris), Industrial and Residential
(operating as Lantower Residential)), in two geographical locations (Canada and the United States). Effective January 1, 2019, the REIT has combined its
previous three retail segments (Primaris, H&R Retail and ECHO) into one segment known as Retail. The comparative period figures have been re-stated
to reflect this change in operating segments. 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.
H&R's Office portfolio is comprised of 27 properties throughout Canada and six properties in select markets in the United States, aggregating 10.8 million
square feet, at H&R’s ownership interest, with an average lease term to maturity of 12.4 years as at December 31, 2019. The Office portfolio is leased on
a long-term basis to creditworthy tenants, with 87.1% 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 Retail segment consists of a portfolio of 69 properties throughout Canada which includes enclosed shopping centres, single-tenant retail properties and
multi-tenant retail plazas as well as 16 single-tenant retail properties in the United States. In addition, it also holds a 33.6% interest in ECHO, a privately held
real estate and development company which focuses on developing and owning a core portfolio of grocery anchored shopping centres in the United States.
In total, this segment includes 69 properties in Canada and 242 properties in the United States comprising 13.5 million square feet, at H&R’s ownership
interest, with an average lease term to maturity of 6.6 years as at December 31, 2019.
The Industrial segment consists of 83 industrial properties throughout Canada and four properties in the United States comprising 9.2 million square feet, at
H&R’s ownership interest, with an average lease term to maturity of 6.7 years as at December 31, 2019.
The Residential segment consists of 24 residential properties in select markets in the United States comprising 8,443 residential rental units, at H&R’s
ownership interest, as at December 31, 2019. The investment policy of Lantower Residential is to acquire or develop class A properties in U.S. Sun Belt
cities where there is strong population and employment growth and to develop properties with partners in gateway cities.
Further disclosure of segmented information for property operating income can be found in the REIT’s Financial Statements.
(in thousands of Canadian dollars)
2019
2018
% Change
2019
2018
% Change
2019
2018
Property operating income
Occupancy
Three months ended December 31
Year ended December 31
As at December 31
Operating Segment:
Office(1)
Retail
Industrial
Residential
$91,882
$101,721
65,607
14,825
37,560
68,741
16,111
25,601
(9.7%)
(4.6%)
(8.0%)
$377,723
$389,856
251,153
278,142
61,385
46.7%
114,570
62,884
63,989
The REIT's proportionate share
209,874
212,174
(1.1%)
804,831
794,871
Less: equity accounted investments
(25,099)
(20,165)
24.5%
(93,856)
(60,939)
(3.1%)
(9.7%)
(2.4%)
79.0%
1.3%
54.0%
The REIT's Financial Statements
$184,775
$192,009
(3.8%)
$710,975
$733,932
(3.1%)
Geographic Location:
Canada(2)
United States(2)
$126,323
$138,238
(8.6%)
$523,733
$538,141
(2.7%)
83,551
73,936
13.0%
281,098
256,730
9.5%
The REIT's proportionate share
209,874
212,174
(1.1%)
804,831
794,871
Less: equity accounted investments
(25,099)
(20,165)
24.5%
(93,856)
(60,939)
1.3%
54.0%
The REIT's Financial Statements
$184,775
$192,009
(3.8%)
$710,975
$733,932
(3.1%)
(1)
(2)
Includes the REIT’s head office.
Property operating income relating to corporate entities has been included in Canada for Canadian properties and the United States for U.S. properties.
Page 23 of 49
98.6%
91.5%
97.2%
90.7%
94.5%
97.2%
94.2%
94.8%
94.0%
94.5%
97.2%
94.2%
98.5%
90.0%
98.5%
88.0%
94.0%
96.6%
93.7%
94.6%
92.8%
94.0%
96.6%
93.7%
H&R REIT - MD&A - DECEMBER 31, 2019
The average exchange rate for both the three months and year ended December 31, 2019 was $1.33 for each U.S. $1.00 (Q4 2018 - $1.33, December 31,
2018 - $1.30). Property operating income across all operating segments was positively impacted by the weakening of the Canadian dollar compared to the
U.S. dollar for the year ended December 31, 2019 compared to the respective 2018 period. The following explanations for changes in property operating
income are in addition to the foreign exchange impact.
Property operating income from office properties decreased by 9.7% and 3.1%, respectively, for the three months and year ended December 31, 2019
compared to the respective 2018 periods primarily due to the sale of The Atrium in Toronto, ON in June 2019. The decrease for the year ended December
31, 2019 compared to the respective 2018 period was partially offset by lease termination fees of $5.9 million received in 2019 compared to $0.7 million in
2018.
Property operating income from retail properties decreased by 4.6% and 9.7%, respectively, for the three months and year ended December 31, 2019
compared to the respective 2018 periods, primarily due to the following: (i) properties sold throughout 2018 and 2019; (ii) Canadian tenant bankruptcies;
and (iii) a decrease in lease termination fees. The decrease for the year ended December 31, 2019 compared to the year ended December 31, 2018 was
partially offset by contractual rental escalations at ECHO as well as ECHO including a positive adjustment of $0.4 million as a result of the initial adoption of
IFRS 16 on January 1, 2019.
Property operating income from industrial properties decreased by 8.0% and 2.4%, respectively, for the three months and year ended December 31, 2019
compared to the respective 2018 periods, primarily due to properties sold throughout 2018 and 2019 and lower occupancy. H&R has re-leased 2121 Cornwall
Rd., Oakville, ON to Amazon commencing January 1, 2020. The previous tenant vacated the premises in April 2019. Committed occupancy for the Industrial
segment was 98.9% compared to actual occupancy of 97.2% as at December 31, 2019.
Property operating income from residential properties increased by 46.7% and 79.0%, respectively, for the three months and year ended December 31,
2019 compared to the respective 2018 periods primarily due to properties acquired throughout 2018 and 2019 and the lease-up of Jackson Park.
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.
Same-Asset property operating income (cash basis)(1)
Occupancy (same asset)
Three months ended December 31
Year ended December 31
As at December 31
(in thousands of Canadian dollars)
2019
2018
% Change
2019
2018
% Change
2019
2018
Operating Segment:
Office(2)
Retail
Industrial
Residential
$85,255
$90,048
63,538
14,308
14,849
65,289
15,038
12,736
(5.3%)
(2.7%)
(4.9%)
16.6%
$352,928
$355,254
248,149
249,153
57,629
57,073
58,676
52,593
The REIT's proportionate share (page 22)
$177,950
$183,111
(2.8%)
$715,779
$715,676
Geographic Location:
Ontario(3)
Alberta
Other Canada
Total – Canada
United States(3)
$52,067
$57,076
50,979
20,545
51,764
21,436
123,591
130,276
(8.8%)
(1.5%)
(4.2%)
(5.1%)
$219,604
$223,383
200,914
203,139
77,803
81,290
498,321
507,812
54,359
52,835
2.9%
217,458
207,864
The REIT's proportionate share (page 22)
$177,950
$183,111
(2.8%)
$715,779
$715,676
United States in U.S. dollars:
Office(2)
Retail
Industrial
Residential
$16,892
$16,858
0.2%
$67,955
$67,459
12,398
12,718
414
11,165
583
9,559
(2.5%)
(29.0%)
16.8%
50,860
1,770
42,912
49,948
2,032
40,456
U.S. total in U.S. dollars
$40,869
$39,718
2.9%
$163,497
$159,895
(0.7%)
(0.4%)
(1.8%)
8.5%
-%
(1.7%)
(1.1%)
(4.3%)
(1.9%)
4.6%
-%
98.6%
91.5%
97.2%
92.4%
95.0%
94.9%
94.1%
95.2%
94.7%
95.5%
95.0%
98.6%
90.0%
98.4%
91.9%
94.7%
95.4%
93.8%
93.1%
94.4%
95.3%
94.7%
0.7%
1.8%
100.0%
100.0%
97.0%
96.9%
(12.9%)
100.0%
100.0%
6.1%
2.3%
92.4%
95.5%
91.9%
95.3%
(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.
Page 24 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
The average exchange rate for both the three months and year ended December 31, 2019 was $1.33 for each U.S. $1.00 (Q4 2018 - $1.33, December 31,
2018 - $1.30). Same-Asset property operating income (cash basis) across all operating segments was positively impacted by the weakening of the Canadian
dollar compared to the U.S. dollar for the year ended December 31, 2019 compared to the respective 2018 period. Excluding the impact of foreign exchange,
Same-Asset property operating income (cash basis) decreased by 0.7% for the year ended December 31, 2019 compared to the respective 2018 period.
The following explanations for changes in Same-Asset property operating income (cash basis) are in addition to the positive foreign exchange impact.
Same-Asset property operating income (cash basis) from office properties decreased by 5.3% and 0.7% for the three months and year ended December
31, 2019 compared to the respective 2018 periods primarily due to a decrease in rent from Bell Canada as part of an additional 10-year lease renewal at six
office properties in Toronto, Montreal and Ottawa totalling 2,415,515 square feet effective January 1, 2019. In addition, several tenants vacated 25 Sheppard
Ave. W., in Toronto, ON in Q3 2019 totalling 87,297 square feet, of which most of this space and other vacant space totaling approximately 101,000 square
feet, has been re-leased to the Financial Services Regulatory Authority, a Government of Ontario regulatory agency, commencing November 1, 2020 for 10
years. Committed occupancy for the Office segment was 99.6% compared to actual occupancy of 98.6% as at December 31, 2019. For the year ended
December 31, 2019 compared to the respective 2018 period, this decrease was partially offset by lease termination fees received in 2019 of $5.8 million
compared to $0.7 million in 2018 as well as occupancy increasing from 91.0% as at December 31 2018 to 96.9% as at December 31, 2019 at 160 Elgin St.,
in Ottawa, ON.
Same-Asset property operating income (cash basis) from industrial properties decreased by 4.9% and 1.8%, respectively, for the three months and year
ended December 31, 2019 compared to the respective 2018 periods primarily due to lower occupancy. H&R has re-leased 2121 Cornwall Rd., Oakville,
ON to Amazon commencing January 1, 2020. The previous tenant vacated the premises in April 2019.
Same-Asset property operating income (cash basis) from residential properties in U.S. dollars increased by 16.8% and 6.1%, respectively, for the three
months and year ended December 31, 2019 compared to the respective 2018 periods primarily due to an increase in revenue from rental rate growth and
the stabilization of various assets in the portfolio. Same-Asset property operating income (cash basis) further increased for the three months ended
December 31, 2019 compared to the respective 2018 period due the receipt of final 2019 tax bills which were lower than the amounts accrued for at
September 30, 2019.
Same-Asset property operating income (cash basis) from retail properties decreased by 2.7% and 0.4%, respectively, for the three months and year ended
December 31, 2019 compared to the respective 2018 periods primarily due to tenant bankruptcies and lower lease termination fees. The decrease for the
year ended December 31, 2019 compared to the year ended December 31, 2018 was partially offset by contractual rental escalations at ECHO as well as
ECHO including a positive adjustment of $0.4 million as a result of the initial adoption of IFRS 16 on January 1, 2019.
Redevelopment of the former Sears stores is in progress. As 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, 2019, H&R capitalized $0.1 million and $1.2 million, respectively, of property operating costs
attributable to the former Target and Sears space. 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 attributable to this space. For the three months and year ended December 31, 2019, the lease-up of the
former Target and Sears space generated net rent of $2.5 million and $8.2 million, respectively, and these tenants are expected to contribute approximately
$12.5 million in 2020 and $16.3 million in 2021.
Page 25 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
Commercial retail unit (“CRU”) sales reports enable management to monitor tenant CRU sales for potential weakness, tailor marketing programs to boost
sales of tenants approaching their breakpoint or nearing lease expiry and adjust a shopping centre’s merchandise mix to address changing customer
demands.
The following sales figures generally include CRU tenants occupying less than 15,000 square feet. As at December 31, 2019 and 2018, CRU tenants
comprised 2,302,931 square feet and 2,380,030 square feet respectively, and 27.6% and 28.2%, respectively, of Primaris’s total enclosed shopping centre
space at the 100% level.
All Store CRU Sales
(in thousands of Canadian dollars)
Rolling 12 month ended December 31
Same Store CRU Sales
(per square foot)
Rolling 12 month ended December 31
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
% Change
2019
$82,583
111,330
26,225
78,085
52,275
47,966
$88,315
116,551
26,367
80,923
55,427
49,036
164,242
171,110
81,917
68,744
84,879
82,048
80,180
41,625
33,823
103,609
87,509
81,669
71,551
90,472
87,426
80,841
42,751
34,025
111,664
93,839
(6.5%)
(4.5)
(0.5)
(3.5)
(5.7)
(2.2)
(4.0)
0.3
(3.9)
(6.2)
(6.2)
(0.8)
(2.6)
(0.6)
(7.2)
(6.7)
2019
$529
2018
$562
% Change
(5.9%)
642
478
531
430
432
665
595
684
481
437
580
488
472
619
493
673
484
561
447
459
694
595
727
499
444
595
485
476
661
511
(4.6)
(1.2)
(5.3)
(3.8)
(5.9)
(4.2)
-
(5.9)
(3.6)
(1.6)
(2.5)
0.6
(0.8)
(6.4)
(3.5)
$1,227,040
$1,281,967
(4.3%)
$545
$567
(3.9%)
(1)
(2)
(3)
(4)
All store sales and same store sales have been reported as if H&R owned 100% of these enclosed shopping centres.
Location previously had a Sears store.
The total same-store sales figures have been presented on a weighted average basis.
Excludes Northland Village which is slated for redevelopment.
All store and same store CRU sales for the Primaris portfolio of enclosed shopping centres for the rolling 12 months ended December 31, 2019 decreased
by 4.3% and 3.9%, respectively, compared to the respective 2018 period. The decrease in all store CRU sales and same store CRU sales is primarily due
to the impact tenant bankruptcies and e-commerce which has negatively impacted certain retail segments such as travel agencies, jewelry, fashion and
electronics.
Commencing January 1, 2020, H&R will begin disclosing CRU tenant sales on an annual basis only, as CRU tenants comprised only 27.6% of the total
enclosed shopping centre space. Furthermore, all store CRU sales figures may fluctuate when tenants temporarily close for the purpose of a renovation,
expand to a large non-major tenant or change their use of space whereby no longer required to report sales.
Page 26 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
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
2019
2018
$31,912
$26,937
(6,813)
25,099
147
(10,816)
129
(467)
656
22,444
11
(6)
(239)
(6,772)
20,165
130
(9,104)
681
(904)
(2,037)
139,726
271
-
(763)
2019
$124,033
(30,177)
93,856
649
(39,510)
1,250
(3,417)
(6,845)
(10,941)
(2,612)
(56)
(1,173)
2018
$86,533
(25,594)
60,939
406
(25,511)
1,311
(2,894)
3,236
133,520
(20)
(46)
(1,532)
Net income from equity accounted investments
36,958
148,165
31,201
169,409
Realty taxes in accordance with IFRIC 21
Fair value adjustments on financial instruments and real estate assets
Gain (loss) on sale of real estate assets
Deferred income tax expense (recovery)
Operational revenue and expenses from right-of-use 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
(1,263)
(23,100)
(11)
-
-
23
636
13,243
261
(1,441)
(888)
(23)
$11,152
(1,252)
(137,689)
(271)
-
-
48
1,051
10,052
(181)
(694)
(1,122)
(48)
$8,007
-
17,786
2,612
(164)
(415)
98
2,490
53,608
(1,687)
(4,632)
(1,484)
(98)
-
(136,756)
20
-
-
231
7,827
40,731
(430)
(2,754)
(2,730)
(231)
$45,707
$34,586
(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 and year ended December 31, 2019 compared to the respective 2018
periods increased by $4.9 million and $32.9 million, respectively, primarily due to the lease-up of Jackson Park.
Net income from equity accounted investments for the three months ended and year ended December 31, 2019 compared to the respective 2018 periods
decreased by $111.2 million and $138.2 million, respectively, primarily due to greater fair value increases to Jackson Park in Q4 2018 compared to 2019.
FFO from equity accounted investments for the three months and year ended December 31, 2019 compared to the respective 2018 periods increased by
$3.2 million and $12.9 million, respectively, primarily due to an increase in property operating income partially offset by higher finance costs and lower
notional interest capitalization as a result of the substantial completion of Jackson Park.
Page 27 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
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:
Contractual interest on mortgages payable
Contractual interest on debentures payable
Bank interest and charges
Effective interest rate accretion
Exchangeable unit distributions
Capitalized interest
Finance income
Fair value adjustments on financial instruments
Three months ended December 31
Year ended December 31
2019
2018
Change
2019
2018
Change
($39,001)
(11,034)
(9,877)
(1,129)
(5,358)
($42,271)
(14,355)
(5,639)
(1,073)
(5,511)
(66,399)
(68,849)
5,292
3,015
(61,107)
(65,834)
$3,270
($164,867)
($165,855)
3,321
(4,238)
(56)
153
2,450
2,277
4,727
3,758
(47,312)
(35,793)
(4,301)
(21,872)
(61,213)
(20,709)
(3,666)
(22,050)
(274,145)
(273,493)
17,649
6,406
(256,496)
(267,087)
6,012
42,607
2,254
15,036
(17,332)
59,939
(19,483)
8,638
11,197
$988
13,901
(15,084)
(635)
178
(652)
11,243
10,591
6,398
(30,680)
($12,488)
($80,912)
$68,424
($260,943)
($247,252)
($13,691)
The decrease in contractual interest on mortgages payable of $3.3 million and $1.0 million, respectively, for the three months and year ended December 31,
2019 compared to the respective 2018 periods is primarily due to mortgages repaid upon maturity and sale, partially offset by the issuance of new mortgages.
The decrease in contractual interest on debentures payable of $3.3 million and $13.9 million, respectively, for the three months and year ended December
31, 2019 compared to the respective 2018 periods is primarily due to the repayment of an aggregate of $1.0 billion of senior and convertible debentures
since February 2018, partially offset by the issuance of an aggregate of $409.2 million of senior debentures since January 2018.
The increase in bank interest and charges of $4.2 million and $15.1 million, respectively, for the three months and year ended December 31, 2019 compared
to the respective 2018 periods is primarily due to unsecured term loans and lines of credit increasing to $1.5 billion as at December 31, 2019 compared to
$782.6 million as at December 31, 2018.
The increase in capitalized interest of $2.3 million and $11.2 million, respectively, for the three months and year ended December 31, 2019 compared to the
respective 2018 periods is due to the increase in funding for the River Landing development and the re-development of the former Sears and Target space.
The increase in finance income of $3.8 million and $6.4 million, respectively, for the year ended December 31, 2019 compared to the respective 2018 periods
is primarily due to interest earned from H&R providing a vendor take-back mortgage to the purchaser upon the sale of The Atrium.
The fair value adjustments on financial instruments of $42.6 million and ($19.5 million), respectively, for the three months and year ended December 31,
2019 are due to the following non-cash items: (i) gain (loss) on fair value of exchangeable units of $31.4 million and ($8.1 million), respectively, which are
fair valued at the end of each reporting period based on the quoted price of Units on the TSX and (ii) gain (loss) on derivative instruments of $11.2 million
and ($11.4 million), respectively, 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.
Page 28 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
Trust Expenses
(in thousands of Canadian dollars)
Other expenses
Unit-based compensation recovery (expense)
Trust expenses
Three months ended December 31
Year ended December 31
2019
($3,654)
12,026
$8,372
2018
Change
2019
2018
($4,369)
(4,279)
($8,648)
$715
($17,149)
($15,858)
16,305
(10,144)
(2,413)
$17,020
($27,293)
($18,271)
Change
($1,291)
(7,731)
($9,022)
Other expenses decreased by $0.7 million for the three months ended December 31, 2019 compared to the respective 2018 period primarily due to salary
and professional fee over-accruals for the nine months ended September 30, 2019 which were trued-up in Q4 2019. Other expenses increased by $1.3
million for the year ended December 31, 2019 compared to the respective 2018 period primarily due to the expansion of Lantower Residential.
Unit-based compensation is comprised of the following two compensation plans: the Unit Option Plan and the Incentive Unit Plan. Both plans are considered
to be cash-settled under IFRS 2, Share-based Payments and as a result, are measured at each reporting period and settlement date at their fair value as
defined by IFRS 2 based on the quoted prices of Units on the TSX. The fair value adjustment to unit-based compensation was $13.5 million and ($3.2
million), respectively, for the three months ended December 31, 2019 and 2018 as well as ($4.5 million) and $1.5 million, respectively, for the year ended
December 31, 2019 and 2018.
Fair Value Adjustment on Real Estate Assets
Three months ended December 31
Year ended December 31
(in thousands of Canadian dollars)
2019
2018
Change
2019
2018
Change
Fair value adjustment on real estate assets
($43,689)
($151,884)
$108,195
($103,903)
($246,967)
$143,064
H&R records its real estate assets at fair value. Fair value adjustments on real estate assets are determined based on the movement of various parameters,
including changes in capitalization rates, discount rates and future cash flow projections. Changes in fair value can also occur due to the following factors:
(i) realty taxes in accordance with IFRIC 21, (ii) capital and tenant expenditures, (iii) redevelopment costs, and (iv) straight-lining of contractual rent and
these factors contributed to the negative fair value adjustment on real estate assets for the three months and year ended December 31, 2019 and 2018. In
addition, the fair value adjustment on real estate assets for the three months and year ended December 31, 2018 included fair value decreases to the Retail
segment as a result of the changing retail landscape and increased competition in the retail industry.
Gain (Loss) on Sale of Real Estate Assets
(in thousands of Canadian dollars)
Gain (loss) on sale of real estate assets
Three months ended December 31
Year ended December 31
2019
($11)
2018
($267)
Change
2019
2018
Change
$256
$25,632
($19,602)
$45,234
For a list of property dispositions, refer to page 11 in this MD&A.
The gain on sale of real estate assets for the year ended December 31, 2019 of $25.6 million is primarily due to the sale of The Atrium in Toronto, ON. 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.
Gain on Foreign Exchange
Three months ended December 31
Year ended December 31
(in thousands of Canadian dollars)
2019
2018
Change
2019
2018
Change
Gain on foreign exchange
$ -
$ -
$ -
$ -
$6,886
($6,886)
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 combined financial statements of the Trusts. 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.
Page 29 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
Income Tax Expense
Three months ended December 31
Year ended December 31
(in thousands of Canadian dollars)
2019
2018
Change
2019
2018
Change
Income tax computed at the Canadian statutory rate of nil applicable to H&R
for 2019 and 2018
Current U.S. income taxes (expense) recovery
$ -
36
$ -
(142)
$ -
178
$ -
(113)
$ -
(760)
Deferred income taxes applicable to U.S. Holdco
(10,551)
(37,206)
26,655
(35,267)
(39,457)
$ -
647
4,190
Income tax expense in the determination of net income
($10,515)
($37,348)
$26,833
($35,380)
($40,217)
$4,837
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) recovery is
primarily due to U.S. state taxes and a refund of previously paid alternative minimum tax.
H&R’s deferred income tax 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 taxes decreased by $26.7 million and $4.2 million, respectively, for the
three months and year ended December 31, 2019 compared to the respective 2018 periods primarily due to fair value adjustments on real estate assets.
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, 2019, H&R had net deferred tax liabilities of $409.4 million (December 31, 2018 - $392.2 million) primarily related to taxable temporary
differences between the tax and accounting bases of U.S. real estate assets.
Page 30 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
FUNDS FROM OPERATIONS AND ADJUSTED FUNDS FROM OPERATIONS
The REIT presents its FFO and AFFO calculations in accordance with REALpac’s February 2019 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 financial instruments and real estate assets
Fair value adjustment to unit-based compensation
(Gain) loss on sale of real estate assets
(Gain) 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)(1)
Diluted weighted average number of Units (in thousands of Units) for
the calculation of FFO and AFFO(1)(2)(3)
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
2019
$163,402
(11,173)
(23,715)
5,358
1,082
(13,525)
11
-
10,551
1,696
$133,687
(2,211)
(21,247)
(17,948)
(1,696)
(2,091)
$88,494
2018
$61,115
(9,914)
(138,113)
5,511
169,216
3,291
267
-
37,206
1,891
$130,470
1,356
(23,330)
(9,575)
(1,891)
(2,045)
2019
$340,289
-
22,407
21,872
123,386
4,512
(25,632)
-
35,267
7,017
2018
$337,918
-
(128,678)
22,050
235,770
(1,493)
19,602
(6,886)
39,457
7,956
$529,118
$525,696
(7,161)
(64,234)
(44,756)
(7,017)
(7,901)
4,113
(57,825)
(32,441)
(7,956)
(6,145)
$94,985
$398,049
$425,442
301,573
301,200
301,487
302,605
302,855
$0.443
$0.441
$0.293
$0.292
$0.345
77.9%
301,881
$0.433
$0.432
$0.315
$0.315
$0.345
79.7%
302,978
$1.755
$1.746
$1.320
$1.314
$1.380
78.6%
304,131
$1.737
$1.732
$1.406
$1.403
$1.380
79.4%
(1)
(2)
(3)
For the three months ended December 31, 2019 and 2018, included in the weighted average and diluted weighted average number of Units are exchangeable units of 15,154,073 and
15,540,024, respectively. For the year ended December 31, 2019 and 2018, included in the weighted average and diluted weighted average number of Units are exchangeable units of
15,429,564 and 15,544,685, respectively.
For the three months ended December 31, 2019 and 2018, included in the determination of diluted FFO and AFFO with respect to H&R’s Unit Option Plan and Incentive Unit Plan are
1,281,677 Units and 681,054 Units, respectively. For the year ended December 31, 2019 and 2018, included in the determination of diluted FFO and AFFO with respect to H&R’s Unit
Option Plan and Incentive Unit Plan are 1,491,567 Units and 701,032 Units, respectively.
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.
FFO for the three months and year ended December 31, 2019 compared to the respective 2018 periods increased by $3.2 million and $3.4 million,
respectively, primarily due to an increase in FFO from Jackson Park. The increase in FFO for the year ended December 31, 2019 compared to the respective
2018 period was also due to higher lease termination fees, lower finance costs and higher finance income, partially offset by a decrease in property operating
income as a result of property dispositions and higher trust expenses.
AFFO for the three months and year ended December 31, 2019 compared to the respective 2018 periods decreased by $6.5 million and $27.4 million,
respectively, primarily due to property operating income excluding straight-lining of contractual rent as well as higher capital and tenant expenditures.
Page 31 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
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
Adjustments to straight-lining of contractual rent
Mortgage prepayment penalties
Three months ended December 31
Year ended December 31
2019
$ -
-
-
$ -
2018
$705
-
(153)
$552
Change
($705)
-
153
2019
$7,624
(1,485)
(449)
2018
Change
$2,631
-
(153)
$4,993
(1,485)
(296)
($552)
$5,690
$2,478
$3,212
Excluding the above items, FFO would have been $133.7 million for the three months ended December 31, 2019 (Q4 2018 - $129.9 million) and $0.44 per
basic Unit (Q4 2018 - $0.43 per basic Unit). For the year ended December 31, 2019, FFO would have been $523.4 million (Q4 2018 - $523.2 million) and
$1.74 per basic Unit (Q4 2018 - $1.73 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)
2019
2018
Change
2019
2018
Change
Three months ended December 31
Year ended December 31
Additional current year capital expenditure recoveries net of capital
expenditures
($273)
$1,003
($1,276)
($591)
Lease termination fees
Mortgage prepayment penalties
Capital expenditures
Leasing expenses and tenant inducements
-
-
(22,688)
(18,836)
705
(153)
(24,024)
(10,697)
(705)
153
7,624
(449)
1,336
(68,866)
(8,139)
(46,240)
(60,579)
(35,171)
$852
2,631
(153)
($1,443)
4,993
(296)
(8,287)
(11,069)
Excluding the above items, AFFO would have been $130.3 million for the three months ended December 31, 2019 (Q4 2018 - $128.2 million) and $0.43 per
basic Unit (Q4 2018 - $0.43 per basic Unit). For the year ended December 31, 2019, AFFO would have been $506.6 million (Q4 2018 - $517.9 million) and
$1.68 per basic Unit (Q4 2018 - $1.71 per basic Unit).
($41,797)
($33,166)
($8,631)
($108,522)
($92,420)
($16,102)
Page 32 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
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)
2019
2018
Change
2019
2018
Change
Three months ended December 31
Year ended December 31
Office:
Capital expenditures
Leasing expenditures and tenant inducements
Retail:
Capital expenditures
Leasing expenditures and tenant inducements
Industrial:
Capital expenditures
Leasing expenditures and tenant inducements
Residential:
Capital expenditures
Leasing expenditures and tenant inducements
Total at the REIT's proportionate share
Less: equity accounted investments
$8,523
5,150
9,562
10,590
1,666
3,096
$10,207
($1,684)
$21,856
$24,855
($2,999)
4,016
1,134
22,360
12,439
9,921
10,268
5,931
167
750
(706)
4,659
1,499
2,346
32,171
18,561
26,756
14,397
5,415
4,164
3,434
5,319
1,619
8,335
1,815
(3,016)
2,937
3,382
(445)
11,405
7,349
4,056
-
41,524
(2,329)
-
34,721
(1,816)
-
6,803
(513)
-
115,106
(6,116)
-
95,750
(5,484)
-
19,356
(632)
Total per the REIT's Financial Statements(1)
$39,195
$32,905
$6,290
$108,990
$90,266
$18,724
(1)
Equal to the sum of capital expenditures and leasing expenses and tenant inducements per the REIT’s Financial Statements.
Tenant expenditures from the Office segment for the year ended December 31, 2019 included $7.7 million in tenant allowances paid as part of a lease
renewal at two single tenant Calgary office properties.
The largest capital expenditures from the Retail segment for the year ended December 31, 2019 included: (i) backfilling a former Future Shop location with
a new Best Buy store at Sunridge Mall in Calgary, AB totalling $10.2 million; (ii) a food court relocation at Place d’Orleans in Orleans, ON totalling $5.1
million; and (iii) backfilling a former Safeway location with a new Marshalls store at Garden City Square in Winnipeg, MB totalling $4.8 million.
Tenant expenditures from the Retail segment for the three months and year ended December 31, 2019 included a $3.5 million tenant allowance paid as part
of a lease renewal to an anchor tenant at an Alberta enclosed shopping centre as well as a $1.8 million tenant allowance paid as part of a lease renewal to
a single tenant at a Manitoba retail property.
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 lease
renewal to a single tenant at an Ontario industrial property.
The increase in capital expenditures from the Residential segment for the year ended December 31, 2019 is primarily due to H&R having acquired 2,274
residential rental units over the last two years. The largest capital expenditures from the Residential segment for the three months and year ended December
31, 2019 included: (i) a roof replacement and exterior painting at a Florida property totalling $1.2 million; and (ii) a roof replacement at a Texas property
totalling $0.9 million.
Page 33 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
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,
2019
Year ended
December 31,
2019
Year ended
December 31,
2018
Year ended
December 31,
2017
$107,263
163,402
98,685
8,578
64,717
$418,039
$462,123
$479,239
340,289
394,181
23,858
(53,892)
337,918
395,568
66,555
(57,650)
667,870
397,908
81,331
269,962
(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 for the year ended December 31, 2019 (December 31, 2018 - $16.6 million, December 31, 2017 - $107.4
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 year ended December 31, 2019 as well as the year ended December 31, 2018 primarily due to non-cash items. Non-cash items relating
to the fair value adjustments on financial instruments, real estate assets and unit-based compensation, 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 period
Three months ended December 31
Year ended December 31
2019
2018
Change
2019
2018
Change
$73,481
107,263
$93,492
($20,011)
122,239
(14,976)
(78,506)
$53,073
418,039
$42,284
462,123
$10,789
(44,084)
(5,407)
175,186
(180,593)
(311,128)
(232,622)
179,024
69,964
109,060
(417,065)
(626,520)
209,455
$48,640
$53,073
($4,433)
$48,640
$53,073
($4,433)
Cash flows from operations decreased by $15.0 million and $44.1 million, respectively, for the three months and year ended December 31, 2019 compared
to the respective 2018 periods, primarily due to a decrease in non-cash working capital. Cash flows from operations for the year ended December 31, 2019
compared to the respective 2018 period was further reduced due to a decrease in property operating income as a result of properties sold throughout 2018
and 2019.
Cash flows from (used) investing decreased by $78.5 million for the three months ended December 31, 2019 compared to the respective 2018 period
primarily due to the issuance of mortgages receivable in Q4 2019 and restricted cash released from escrow as a result of H&R completing Section 1031
property exchanges in Q4 2018, partially offset by cash used to fund property acquisitions in Q4 2018. Cash flows (used) from investing activities decreased
by $180.6 million for the year ended December 31, 2019 compared to the respective 2018 period primarily due to the following: (i) a decrease in net proceeds
on disposition of real estate assets; (ii) an increase in mortgages receivable; and (iii) cash spent on properties under development. This was partially offset
by less cash spent on acquisitions as well as a cash distribution of U.S. $194.8 million received by H&R in Q3 2019 as part of the Jackson Park refinancing
(equity accounted investment).
Cash flows from (used) financing increased by $109.1 million and $209.5 million, respectively, for the three months and year ended December 31, 2019
compared to the respective 2018 periods primarily due to the repayment of debt. Cash flows from (used) financing further increased for the year ended
December 31, 2019 compared to the respective 2018 period due to the REIT repurchasing and cancelling $136.3 million of Units during 2018 compared to
nil in 2019.
Page 34 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
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 $48.6 million
and amounts available under its lines of credit totalling $290.6 million as at December 31, 2019. In addition, the REIT has $131.7 million available under
its secured construction facilities held through equity accounted investments as at December 31, 2019. As at December 31, 2019, 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, 2019, H&R had 90 unencumbered properties, with a fair value of approximately $4.0 billion. Also, due to H&R’s 23-year history and
management’s conservative strategy of securing long-term financing on individual properties, H&R has numerous other properties with very low loan to
value ratios. As at December 31, 2019, H&R had 40 properties valued at approximately $1.5 billion which are encumbered with mortgages totalling $221.8
million. In this pool of assets, the average loan to value is 14.8%, the minimum loan to value is 0.7% and the maximum loan to value is 29.2%. The weighted
average remaining term to maturity of this pool of mortgages is 2.4 years.
The following is a summary of material contractual obligations including payments due as at December 31, 2019 for the next five years and thereafter:
Contractual Obligations(1)
(in thousands of Canadian dollars)
2020
2021-
2022
2023-
2024
2025 and
thereafter
Total
Mortgages payable
$183,668
$1,538,568
$503,148
$1,419,041
$3,644,425
Payments Due by Period
Senior debentures
Unsecured term loans
Lines of credit
Lease liability(2)
Property acquisition
337,500
-
51,500
1,029
6,608
325,000
192,229
439,700
2,301
-
600,000
250,000
303,842
2,394
-
-
1,262,500
250,000
-
182,326
-
692,229
795,042
188,050
6,608
Total contractual obligations
$580,305
$2,497,798
$1,659,384
$1,851,367
$6,588,854
(1)
(2)
The amounts in the above table are the principal amounts due under the contractual agreements.
Corresponds to a right-of-use asset in a leasehold interest.
DBRS Morningstar (“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, 2019. This is a rating achieved by only four Canadian
REITs (including H&R) as at December 31, 2019. 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.
Page 35 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
Funding of Future Commitments
Management believes that as at December 31, 2019, through cash on hand of $48.6 million and the total amount available under its lines of credit of $290.6
million and its unencumbered property pool of approximately $4.0 billion, H&R has sufficient funds for future commitments.
The following summarizes the estimated loan to value ratios on properties for which mortgages mature over the next five years:
Year
2020
2021
2022
2023
2024
Number of
Properties
Mortgage Debt due
on Maturity ($000’s)
Weighted Average
Interest Rate on Maturity
Fair Value of Investment
Properties ($000’s)
Loan to
Value
13
11
39
9
5
77
$64,827
826,799
539,940
386,897
5,901
$1,824,364
4.5%
3.9%
3.9%
3.9%
3.9%
3.9%
$220,955
2,367,358
1,652,177
737,839
385,030
$5,363,359
29%
35%
33%
52%
2%
34%
Based on the low percentage of the projected loan to values of the maturing mortgages, H&R is confident it will be able to refinance these mortgages upon
maturity should it choose to do so.
OFF-BALANCE SHEET ITEMS
In the normal course of operations, H&R has issued letters of credit in connection with developments, financings, operations and acquisitions. As at
December 31, 2019, H&R has outstanding letters of credit totalling $36.9 million (December 31, 2018 - $25.9 million), including $16.6 million (December 31,
2018 - $17.3 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. As at December 31, 2019, such guarantees amounted to
$199.0 million expiring between 2021 and 2027 (December 31, 2018 - $263.9 million, expiring between 2019 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 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 H&R’s guarantee. As at December 31, 2019, the estimated amount of debt subject to such guarantees,
and therefore the maximum exposure to credit risk is approximately $41.3 million, which expires in 2020 (December 31, 2018 - $44.0 million, expiring in
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.
Page 36 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
DERIVATIVE INSTRUMENTS
Where appropriate, H&R uses interest rate swaps 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
(loss).
Where appropriate, H&R uses forward exchange contracts to lock-in foreign exchange rates. There were no forward exchange contracts outstanding as at
December 31, 2019. This strategy manages risks related to foreign exchange rates on transactions that will occur in the future.
During 2018 and 2019, H&R had the following interest rate swaps outstanding:
(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
Term loan interest rate swap
Fair value asset (liability)*
December 31
2019
December 31
2018
(1)
(2)
(3)
(4)
(5)
(6)
$ -
(404)
-
752
(2,777)
(6,171)
($8,600)
$592
(331)
-
4,853
-
(2,370)
$2,744
Net gain (loss) on derivative instruments
December 31
2019
($592)
(73)
-
(4,101)
(2,777)
(3,801)
($11,344)
December 31
2018
($1,639)
(331)
(177)
887
-
(2,370)
($3,630)
(1)
(2)
(3)
(4)
(5)
(6)
*
To fix the interest rate at 2.36% per annum for the Series K senior debentures (settled when these debentures matured on March 1, 2019).
To fix the interest rate at 3.67% per annum for the Series P senior debentures. The swap matures on February 13, 2020.
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 term loan. The swap matures on March 17, 2021.
To fix the interest rate at 3.33% per annum on $250.0 million term loan. The swap matures on March 7, 2026.
To fix the interest rate at 3.91% per annum on $250.0 million term loan. The swap matures 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.
Page 37 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
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
Summary of Quarterly Results
The following tables summarize certain financial information for the quarters indicated below:
Year Ended
December 31,
2019
$1,149,450
Year Ended
December 31,
2018
$1,176,558
Year Ended
December 31,
2017
$1,168,454
31,201
15,036
340,289
214,963
169,409
8,638
337,918
532,794
167,407
4,999
667,870
536,598
14,483,342
14,691,009
14,558,863
7,439,425
7,490,909
7,379,100
$1.38
$1.38
$1.38
(in thousands of Canadian dollars)
Rentals from investment properties
Net income (loss) from equity accounted investments
Net income (loss)
Total comprehensive income (loss)
Rentals from investment properties
Net income from equity accounted investments
Net income
Total comprehensive income
Q4
2019
$282,221
36,958
163,402
119,484
Q4
2018
Q3
2019
$281,571
(18,414)
69,301
89,458
Q3
2018
Q2
2019
$286,972
3,556
109,583
67,813
Q2
2018
Q1
2019
$298,686
9,101
(1,997)
(61,792)
Q1
2018
$297,416
$286,223
$294,302
$298,617
148,165
61,115
200,450
8,143
105,509
71,065
6,864
108,194
144,329
6,237
63,100
116,950
Fluctuations between quarterly results are generally due to property acquisitions, dispositions, changes in foreign exchange rates and changes in the fair
value of financial instruments and real estate assets.
Net income (loss) from equity accounted investments increased by $55.4 million in Q4 2019 compared to Q3 2019 primarily due to fair value adjustments to
Jackson Park.
Net income increased by $94.1 million in Q4 2019 compared to Q3 2019 primarily due to the net income (loss) from equity accounted investments noted
above and fair value adjustments on financial instruments.
Total comprehensive income increased by $30.0 million in Q4 2019 compared to Q3 2019 primarily due to the increase in net income noted above, partially
offset by a loss from investment in foreign operations of $43.9 million in Q4 2019 compared to a gain of $20.2 million in Q3 2019.
Page 38 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
PORTFOLIO OVERVIEW
The geographic diversification of the portfolio of properties in which the REIT has an interest and the related square footage is disclosed at the REIT’s
proportionate share as at December 31, 2019 in the tables below:
Number of Properties(1)
Office
Retail(2)
Industrial
Residential(3)
Total
Square Feet (in thousands)(1)
Office
Retail(2)
Industrial
Residential(3)
Total
Ontario
19
38
35
-
92
Ontario
5,367
3,684
4,462
-
13,513
Canada
Alberta
4
17
19
-
40
Canada
Alberta
2,607
3,969
2,030
-
8,606
Other
4
14
29
-
47
Other
893
2,758
2,012
-
5,663
Subtotal
27
United States
6
69
83
-
179
242
4
24
276
Subtotal
8,867
United States
1,944
10,411
8,504
-
27,782
3,068
673
7,735
13,420
Total
33
311
87
24
455
Total
10,811
13,479
9,177
7,735
41,202
(1) H&R has 11 properties under development which are not included in the tables above.
(2) Retail, which includes ECHO’s equity accounted investment, has 13 properties under development which are not included in the tables above.
(3) The residential properties contain 8,443 residential rental units.
Page 39 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
LEASE MATURITY PROFILE
The following tables disclose H&R’s leases expiring in Canada and the United States at the REIT’s proportionate share, excluding the Residential segment
where leases typically expire annually.
Canadian Portfolio:
LEASE EXPIRIES
2020
2021
2022
2023
2024
Total % of each segment
13.5%
Office
Retail
Industrial
Total
Rent per sq.ft.
($)
on expiry
20.85
20.21
24.49
31.50
11.97
17.61
Sq.ft.
48,049
346,821
120,645
100,049
581,168
1,196,732
Rent per sq.ft.
($)
on expiry
25.50
22.88
23.37
34.22
23.89
25.12
Sq.ft.
837,481
1,013,196
799,649
493,647
927,757
4,071,730
39.1%
Rent per sq.ft.
($)
on expiry
5.31
5.83
6.84
6.62
7.68
6.69
Sq.ft.
488,321
249,956
1,166,368
387,312
749,382
3,041,339
35.8%
Rent per sq.ft.
($)
on expiry
18.16
19.66
14.20
23.05
15.44
17.29
Sq.ft.
1,373,851
1,609,973
2,086,662
981,008
2,258,307
8,309,801
29.9%
U.S. Portfolio(1):
LEASE EXPIRIES
2020
2021
2022
2023
2024
Total % of each segment
(1) U.S. dollars.
Office
Retail
Industrial
Total
Rent per sq.ft.
($)
on expiry
-
-
61.74
5.86
24.93
18.68
Sq.ft.
-
-
563
85,725
172,039
258,327
13.3%
Rent per sq.ft.
($)
on expiry
23.68
20.79
24.70
24.48
15.69
22.20
Sq.ft.
190,917
160,001
221,446
186,933
159,342
918,639
29.9%
Rent per sq.ft.
($)
on expiry
-
-
4.94
3.00
3.75
3.34
Sq.ft.
-
-
54,654
412,585
123,090
590,329
87.7%
Rent per sq.ft.
($)
on expiry
23.68
20.79
20.87
9.22
15.95
15.38
Sq.ft.
190,917
160,001
276,663
685,243
454,471
1,767,295
31.1%
Page 40 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
TOP TWENTY SOURCES OF REVENUE BY TENANT
The following table discloses H&R’s top twenty tenants at the REIT’s proportionate share:
Tenant
Ovintiv Inc. (formerly Encana Corporation)(3)
Bell Canada
Hess Corporation
New York City Department of Health
Giant Eagle, Inc.
Canadian Tire Corporation(4)
TC Energy Corporation
Lowe's Companies, Inc.(5)
Corus Entertainment Inc.
Telus Communications
Shell Oil Products
Public Works and Government Services, Canada
Toronto-Dominion Bank
Loblaw Companies Limited(6)
Royal Bank of Canada
Empire Company Limited(7)
The TJX Companies Inc.(8)
Canadian Imperial Bank of Commerce
Hudson's Bay Company
Metro Inc.
Total
% 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)
11.7%
8.1%
5.4%
3.8%
3.4%
2.8%
1.9%
1.8%
1.7%
1.3%
1.2%
1.1%
1.0%
0.9%
0.9%
0.8%
0.8%
0.6%
0.6%
0.6%
50.4%
1
23
1
1
190
20
1
14
1
17
16
5
7
19
5
14
17
9
7
12
380
1,997
2,537
845
660
1,652
2,659
466
1,710
472
357
209
342
286
273
247
492
625
191
958
420
18.4
14.8
(9)
10.9
11.3
6.9
11.3
11.8
13.2
6.0
2.7
4.5
7.3
8.8
5.4
11.1
5.7
5.3
6.8
5.5
17,398
11.7
Credit Ratings
(S&P)
BBB Stable
BBB+ Stable
BBB- Stable
AA Stable
Not Rated
BBB+ Stable
BBB+ Stable
BBB+ Stable
BB Negative
BBB+ Negative
AA- Stable
AAA Stable
AA- Stable
BBB Stable
AA- Stable
BB+ Positive
A+ Stable
A+ Stable
Not rated
BBB Stable
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.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
(1)
Lowe’s Companies, Inc. includes Rona.
Average lease term to maturity is weighted based on net rent.
(2)
(3) Ovintiv Inc. has sublet 27 floors to Cenovus Energy at The Bow located in Calgary, AB. Ovintiv Inc.’s lease obligations expire on May 13, 2038.
(4) Canadian Tire Corporation includes Canadian Tire, Mark’s, Sport Chek, Atmosphere and Sports Experts.
(5)
(6)
(7)
(8)
(9) Due to the confidentiality under the tenant’s lease, the term is not disclosed.
Empire Company Limited includes Sobeys, Sobey’s Liquor, Safeway and Lawtons Drugs.
The TJX Companies Inc. includes Winners, T.J. Maxx, Marshalls and Home Sense.
Loblaw Companies Limited includes Loblaw, No Frills and Shoppers Drug Mart.
Page 41 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
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
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) of the 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, 2019 in respect of its Canadian entities.
H&R will not be subject to income tax in a year to the extent that it continues to qualify as a real estate investment trust and distributes all of its taxable
income to its unitholders. Income allocated to unitholders will be taxed at the unitholder level. H&R currently distributes, and is required to distribute,
all of its income to its unitholders. Accordingly, for financial statement reporting purposes, the tax deductibility of H&R’s distributions is treated as an
exemption from taxation.
Impairment of equity accounted investments
H&R determines at each reporting date whether there is any objective evidence that the equity accounted investments are impaired. If there is an
indication of impairment in respect of the REIT’s investment in associates or joint ventures, the whole carrying value of the investment will be tested for
impairment as a single asset under IAS 36, Impairment of Assets (“IAS 36”) by comparing the recoverable amount with its carrying value. Any resulting
impairment loss will be charged against the carrying value of the investment in associates or joint ventures and recognized in net income.
Page 42 of 49
H&R REIT - MD&A - DECEMBER 31, 2019
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.
SIGNIFICANT ACCOUNTING POLICIES
Accounting standards adopted in 2019:
(i) Leases (“IFRS 16”)
IFRS 16, Leases, replaced previous lease guidance in IFRS and related interpretations, and requires lessees to bring most leases on-balance sheet.
Lessor accounting remains similar to the previous standard. The REIT adopted IFRS 16 beginning on January 1, 2019, the mandatory effective date.
There was no material impact from the adoption of IFRS 16 on the REIT’s Financial Statements.
(ii)
IFRIC Interpretation 23, Uncertainty over Income Tax Treatments (“IFRIC 23”)
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 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 adopted IFRIC
23 beginning on January 1, 2019, the mandatory effective date. There was no material impact from the adoption of IFRIC 23 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”) have 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, 2019, 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, 2019. 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, 2019 using the framework and
criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission in May
2013 (2013 COSO Framework). Based on this evaluation, the CEO and the CFO have concluded that internal control over financial reporting was effective
as of December 31, 2019. No changes were made to H&R’s internal control over financial reporting during the three-month period ended December 31,
2019 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.
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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, 2019, approximately 25.3% 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 Retail 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 Retail 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.
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
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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 Ovintiv Inc., 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 30.1% 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
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.
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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.
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.
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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, L, 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.
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 2019.
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.
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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 to ensure
that H&R 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 H&R, 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 2018, H&R made loans to U.S.
Holdco (“U.S. Holdco Loans”), including a revolving loan that U.S. Holdco drew upon in 2019, to refinance existing loans, including U.S. Holdco Notes, or
indirectly fund additional U.S. Holdco acquisitions of income generating real property. 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 Internal Revenue Code (prior to its amendment by the Tax Cuts and Jobs Act of
2017 (“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).
Under 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.
Management believes U.S. Holdco was eligible to make this election and did so for 2018 onwards.
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 passive foreign
investment company, or “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. 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 non-corporate taxpayers.
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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.
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 of H&R (including taxable capital gains deemed to be “TCP gains distributions” for purposes of the Tax Act)
paid or credited (whether in cash or in specie) in respect of such Units, subject to reduction under the Canada-U.S. Tax Convention (the “U.S. Treaty”) if
applicable. 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% in the case of income arising in Canada and to 0% in the case of income arising outside of Canada. 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 5, 2020, there were 286,690,236 Units issued and outstanding and 9,500,000 special voting
units outstanding.
As at December 31, 2019, the maximum number of Units authorized to be issued under H&R’s Unit Option Plan was 17,723,110. Of this amount, 10,647,642
options to purchase Units have been granted and are outstanding and 7,075,468 options have not yet been granted. As at February 5, 2020, there were
10,647,642 options to purchase Units outstanding and fully vested.
As at December 31, 2019, the maximum number of incentive units authorized to be granted under H&R’s Incentive Unit Plan was 5,000,000. The REIT has
granted 1,018,896 incentive units which remain outstanding, 11,452 have been settled for Units and 3,969,652 incentive units have not yet been granted.
As at February 5, 2020, there were 1,024,323 incentive units outstanding.
As at December 31, 2019 and February 5, 2020, there were 15,316,239 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 2020, the REIT sold two U.S. residential properties which were classified as held for sale as at December 31, 2019, for gross proceeds of
U.S. $89.9 million.
(b)
In January 2020, the REIT received $256.0 million for the repayment of a mortgage receivable.
Page 49 of 49
Consolidated Financial Statements of
H&R REAL ESTATE INVESTMENT TRUST
Years ended December 31, 2019 and 2018
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 REIT (“the Entity”), which
comprise:
•
•
•
•
•
the consolidated statement of financial position as at December 31, 2019 and December
31, 2018;
the consolidated statement of comprehensive income for the years then ended;
the consolidated statements of changes in equity for the years then ended;
the consolidated statement of cash flows for the years 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, 2019 and December 31,
2018, and its consolidated financial performance and its 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.
H&R Real Estate Investment Trust
February 13, 2020
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; and
the information, other than the financial statements and the auditors’ report
thereon, included in a document entitled “2019 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 “2019 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.
2
H&R Real Estate Investment Trust
February 13, 2020
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.
3
H&R Real Estate Investment Trust
February 13, 2020
• 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.
• 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 Larry Toste.
Toronto, Canada
February 13, 2020
4
Note
December 31
2019
December 31
2018
3
3
4
5
6
7
8
9
21
10
5
22
24
$ 11,988,347
683,145
12,671,492
$ 12,683,709
404,814
13,088,523
1,002,773
135,673
624,764
48,640
1,284,985
110,940
153,488
53,073
$ 14,483,342
$ 14,691,009
$ 6,375,860
323,173
409,381
281,595
49,416
$ 6,546,072
329,482
392,214
223,141
-
7,439,425
7,490,909
7,043,917
7,200,100
$ 14,483,342
$ 14,691,009
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
Liabilities classified as held for sale
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, 2019 and 2018
Property operating income:
Rentals from investment properties
Property operating costs
Net income from equity accounted investments
Finance cost - operations
Finance income
Trust expenses
Fair value adjustment on financial instruments
Fair value adjustment on real estate assets
Gain (loss) on sale of real estate assets, net of related costs
Gain on foreign exchange
Net income before income taxes
Income tax 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
2019
2018
14
4
15
15
15
3
3
21
$ 1,149,450
(438,475)
710,975
$ 1,176,558
(442,626)
733,932
31,201
(256,496)
15,036
(27,293)
(19,483)
(103,903)
25,632
-
375,669
(35,380)
340,289
169,409
(267,087)
8,638
(18,271)
11,197
(246,967)
(19,602)
6,886
378,135
(40,217)
337,918
13
(125,326)
194,876
$ 214,963
$ 532,794
2
H&R REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Changes in Unitholders' Equity
(In thousands of Canadian dollars)
Years ended December 31, 2019 and 2018
UNITHOLDERS' EQUITY
Note
Unitholders' equity, January 1, 2018
Proceeds from issuance of Units
Net income
Distributions to unitholders
Conversion of convertible debentures
Units repurchased and cancelled
Other comprehensive income
Unitholders' equity, December 31, 2018
Proceeds from issuance of Units
Net income
Distributions to unitholders
Other comprehensive loss
12(c)
8(b)
12(d)
13
12(c)
13
Value of
Units
Accumulated
net income
Accumulated
distributions
$ 5,483,353
19,313
-
-
70
(136,272)
-
5,366,464
23,035
-
-
-
$ 5,220,144
-
337,918
-
-
-
-
5,558,062
$ (3,700,682)
-
-
(395,568)
-
-
-
(4,096,250)
-
340,289
-
-
-
-
(394,181)
-
Accumulated
other
comprehensive
income
$ 176,948
-
-
-
-
-
194,876
371,824
-
-
-
(125,326)
Total
$ 7,179,763
19,313
337,918
(395,568)
70
(136,272)
194,876
7,200,100
23,035
340,289
(394,181)
(125,326)
Unitholders' equity, December 31, 2019
$ 5,389,499
$ 5,898,351
$ (4,490,431)
$ 246,498
$ 7,043,917
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, 2019 and 2018
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 on foreign exchange
Fair value adjustment on real estate assets
(Gain) loss on sale of real estate assets, net of related costs
Fair value adjustment on financial instruments
Unit-based compensation expense
Deferred income taxes
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, net
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
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
2019
2018
15
4
14
3
3
15
12(b)
21
16
3, 16
3, 16
3
3, 16
3
3
4
5, 6
8(d)
8(d)
8(a)
8(a)
8(b)
8(b)
12(d)
12(c)
7
7
$ 340,289
256,496
(273,701)
$ 337,918
267,087
(268,156)
(31,201)
2,354
-
103,903
(25,632)
19,483
10,144
35,267
(19,363)
418,039
(169,409)
1,988
(6,886)
246,967
19,602
(11,197)
2,413
39,457
2,339
462,123
(14,595)
(233,638)
(31,876)
(115,491)
612,510
(188,454)
(125,060)
(64,234)
(44,756)
253,941
(204,294)
3,173
(5,407)
879,347
(463,299)
(58,121)
(57,825)
(32,441)
110,603
(68,150)
12,439
175,186
250,000
463,878
250,000
(196,323)
224,631
(617,689)
(350,000)
-
6,296
-
(394,181)
(417,065)
(4,433)
53,073
$ 48,640
619,788
(536,908)
(657,082)
409,205
8
(136,272)
(378,936)
(626,520)
10,789
42,284
$ 53,073
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, 2019 and 2018
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 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 (together with the REIT, the “Trusts”) 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 results of the REIT and Finance Trust as previously reported on a combined basis, as units of the
Trusts were previously stapled (“Stapled Units”), up to August 31, 2018. For the period 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 13, 2020.
(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, 2019 and 2018
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:
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,
where the REIT is the lessor, are operating leases.
Income taxes
The REIT is a mutual fund trust and a real estate investment trust pursuant to the Income Tax Act (Canada) (“Tax Act”). Under current
tax legislation, the REIT is not liable to pay Canadian income tax provided that its taxable income is fully distributed to unitholders each
year. The REIT is a real estate investment trust if it meets prescribed conditions under the Tax Act relating to the nature of its assets
and revenue (the "REIT Conditions"). The REIT has reviewed the REIT Conditions and has assessed its interpretation and application
to the REIT's assets and revenue, and it has determined that it qualifies as a real estate investment trust pursuant to the Tax Act. The
REIT expects to continue to qualify as a real estate investment trust; however, should it no longer qualify, the REIT would be subject to
tax on its taxable income distributed to unitholders.
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, 2019 and 2018
1. Basis of preparation (continued):
Impairment of equity accounted investments
The REIT determines at each reporting date whether there is any objective evidence that the equity accounted investments are impaired.
If there is an indication of impairment in respect of the REIT’s investment in associates or joint ventures, the whole carrying value of the
investment will be tested for impairment as a single asset under IAS 36, Impairment of Assets (“IAS 36”) by comparing the recoverable
amount with its carrying value. Any resulting impairment loss will be charged against the carrying value of the investment in associates
or joint ventures and recognized in net income.
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.
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 2018 comparative combined financial statements for the period prior to August 31, 2018 are similar to those
used to prepare consolidated financial statements. For the period prior to August 31, 2018, the combined financial statements include other
comprehensive income (loss) and cash flows of the Trusts, after elimination of the REIT's interest expense and Finance Trust's interest income
on the REIT’s notes payable to Finance Trust.
The gain 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 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.
(c)
Investment properties:
The REIT’s investment properties are held to earn rental income or for capital appreciation, or both, but not for sale in the ordinary course of
business. As such, they are measured at fair value, under IAS 40, Investment Property (“IAS 40”).
The REIT performs an assessment of each investment property acquired to determine whether the acquisition is to be accounted for as an asset
acquisition or a business combination. A transaction is considered to be a business combination if the acquired property meets the definition of
a business under IFRS 3, as set out in note 1(d)(ii). The REIT expenses transaction costs on business combinations and capitalizes transaction
costs on asset acquisitions.
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, 2019 and 2018
2. Significant accounting policies (continued):
Upon acquisition, investment properties are initially recorded at cost. Subsequent to initial recognition, the REIT uses the fair value model to
account for investment properties. Under the fair value model, investment properties are recorded at fair value, determined based on available
market evidence at each reporting date. The related gain or loss in fair value is recognized in net income in the year in which it arises.
Subsequent capital expenditures are capitalized to investment properties only when it is probable that future economic benefits of the expenditure
will flow to the REIT and the cost can be measured reliably. All other repairs and maintenance costs are expensed when incurred. Leasing
costs, such as commissions incurred in negotiating tenant leases, are 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 qualifying assets until substantially complete. 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, 2019 and 2018
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
2019 and the 2018 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.
(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, 2019 and 2018
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 lines
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 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, 2019 and 2018
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 has 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 (“IFRIC”) 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) Revenue from contracts with customers:
IFRS 15, Revenue from Contracts with Customers (“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.
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.
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, 2019 and 2018
2. Significant accounting policies (continued):
(s) Financial instruments:
IFRS 9, Financial Instruments (“IFRS 9”) 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.
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 of the REIT’s financial assets not classified as measured at amortized cost as described above are measured at FVTPL.
Under IFRS 9, the change in fair value of financial liabilities 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.
For impairment of financial assets, IFRS 9 has a forward-looking ‘expected credit loss’ (“ECL”) model. This 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 applies 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 general hedge accounting standard which aligns hedge accounting more closely with risk management. The REIT’s risk
management strategy is disclosed in note 18. 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 foreign operations.
(t) Accounting standards adopted in 2019:
(i) Leases (“IFRS 16”)
IFRS 16, Leases, replaced previous lease guidance in IFRS and related interpretations, and requires lessees to bring most leases on-
balance sheet. Lessor accounting remains similar to the previous standard. The REIT adopted IFRS 16 beginning on January 1, 2019, the
mandatory effective date. There was no material impact from the adoption of IFRS 16 on the consolidated financial statements.
The objective of IFRS 16 is to report information that faithfully represents lease transactions and provides a basis for users of financial
statements to assess the amount, timing and uncertainly of cash flows arising from leases. To meet that objective, a lessee should
recognize assets and liabilities arising from a lease. IFRS 16 introduces a single lessee accounting model and requires a lessee to
recognize assets and liabilities for all leases with a term of more than twelve months, unless the underlying asset is of low value. A lessee
is required to recognize a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its
obligation to make lease payments.
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, 2019 and 2018
2. Significant accounting policies (continued):
(ii)
IFRIC Interpretation 23, Uncertainty over Income Tax Treatments (“IFRIC 23”)
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 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 adopted IFRIC 23 beginning on January 1, 2019, the mandatory effective date. There was no
material impact from the adoption of IFRIC 23 on the consolidated financial statements.
3. Real estate assets:
Opening balance, beginning of year
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
Development capital:
Redevelopment (including capitalized interest)
Additions to properties under development (including capitalized interest)
Amortization of tenant inducements and straight-lining of contractual rents
Right-of-use asset(1)
Fair value adjustment on real estate assets
Change in foreign exchange
Closing balance, end of year
December 31, 2019
December 31, 2018
Investment
Properties
Properties
Under
Development
Investment
Properties
$ 12,683,709
$ 404,814
$ 13,074,123
188,454
(749,830)
(116,805)
64,234
44,756
130,409
-
4,807
-
(103,903)
(157,484)
14,595
-
-
-
-
-
245,938
-
32,002
-
(14,204)
463,299
(933,403)
(110,940)
57,825
32,441
60,892
-
3,088
-
(246,967)
283,351
Properties
Under
Development
$ 83,132
196,754
-
-
-
-
-
119,117
-
-
-
5,811
$ 11,988,347
$ 683,145
$ 12,683,709
$ 404,814
(1)
The right-of-use asset in a leasehold interest was measured at an amount equal to the corresponding lease liability (note 10).
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, 2019 and 2018
3. Real estate assets (continued):
Asset acquisitions:
During the year ended December 31, 2019, the REIT acquired two residential properties, one industrial property and two properties under
development (year ended December 31, 2018 - acquired five residential properties, partial ownership in two industrial properties and three properties
under development). The results of operations for these acquisitions are included in these consolidated financial statements from the date of
acquisition.
The following table summarizes the purchase price plus transaction costs of the assets and liabilities as at the respective dates of acquisition:
Assets
Investment properties
Properties under development
December 31
2019
December 31
2018
$ 188,375
$ 462,961
14,595
196,754
$ 202,970
$ 659,715
During the year ended December 31, 2019, the REIT incurred additional costs of $79 (year ended December 31, 2018 - $338) in respect of prior year
acquisitions which are not included in the above table.
Asset dispositions:
During the year ended December 31, 2019, the REIT sold two office properties, one residential property, three retail properties, a 50% ownership
interest in one industrial property and a parcel of land adjacent to the REIT’s head office and recognized a gain on sale of real estate assets of
$25,632.
During the year ended December 31, 2018, the REIT sold 65 retail properties, 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.
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) Obtaining external independent appraisals. During the year ended December 31, 2019, certain properties were valued by professional external
independent appraisers. These properties represent 37.1% of the fair value of investment properties as at December 31, 2019 (year ended
December 31, 2018 - 25.4%). 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, external independent appraisals are often obtained for properties acquired or for mortgage financing
purposes.
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, 2019 and 2018
3. Real estate assets (continued):
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.
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
5.84%
5.73%
United
States
5.34%
5.39%
Total
Canada
5.69%
5.64%
6.70%
6.48%
United
States
6.38%
6.29%
Total
Canada
6.61%
6.43%
6.08%
5.92%
United
States
5.77%
5.72%
Total
5.99%
5.86%
December 31, 2019
December 31, 2018
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, 2019:
Capitalization Rate
Sensitivity
Increase (Decrease)
(0.75%)
(0.50%)
(0.25%)
December 31, 2019
0.25%
0.50%
0.75%
Overall
Capitalization Rate
Fair Value of
Investment Properties
4.94%
5.19%
5.44%
5.69%
5.94%
6.19%
6.44%
$ 13,808,440
$ 13,143,294
$ 12,539,282
$ 11,988,347
$ 11,483,787
$ 11,019,983
$ 10,592,189
Fair Value
Variance
$ 1,820,093
$ 1,154,947
$ 550,935
$ -
$ (504,560)
$ (968,364)
$ (1,396,158)
% Change
15.18%
9.63%
4.60%
0.00%
(4.21%)
(8.08%)
(11.65%)
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.
During the year ended December 31, 2019, the REIT: (i) transferred Jackson Park from properties under development to investment properties as it
had reached substantial completion; (ii) received net cash distributions of $253,941 including U.S. $194,800 from Jackson Park as part of Jackson
Park’s refinancing; (iii) disposed of three industrial properties; and (iv) increased its interest in Shoreline Developments Partners LP (“Shoreline”) to
31.2%.
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, a joint venture, for $5,973.
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, 2019 and 2018
4. Equity accounted investments (continued):
Investments in joint ventures:(1)
Three industrial properties (2018 - six)
Hercules Project
The Pearl
Esterra Park
Shoreline
Investments in associates:(2)
ECHO Realty LP ("ECHO")
LIC Operator Co., L.P. ("Jackson Park")
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
United States
Own and operate investment properties
Own and operate investment property
Ownership interest
December 31
December 31
2019
2018
50.5%
31.7%
33.3%
33.3%
31.2%
33.6%
50.0%
50.5%
31.7%
33.3%
33.3%
30.9%
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 as the individual investments are not individually material:
December 31, 2019
December 31, 2018
Equity accounted investments in:
-----Associates-----
ECHO Jackson Park
Joint Ventures
(1)
-----Associates-----
Total
ECHO Jackson Park
Joint Ventures
(1)
Total
Investment properties(2)
$ 2,493,118
$ 2,080,000
$ 71,500
$ 4,644,618
$ 2,565,646
$ -
$ 119,340
$ 2,684,986
Properties under development
Assets classified as held for sale
Other assets
Cash and cash equivalents
Debt
Deferred tax liability
67,898
38,316
60,753
28,778
-
-
12,471
45,515
385,070
452,968
37,046
2,151,304
176,493
2,364,843
-
459
11,777
38,316
73,683
86,070
-
41,586
32,970
-
34,319
53,126
-
538
11,192
-
76,443
97,288
(1,049,882)
(1,281,120)
(83,606)
(2,414,608)
(1,120,213)
(758,215)
(56,907)
(1,935,335)
-
-
-
-
-
-
(335)
(335)
Accounts payable and accrued liabilities
(66,168)
(37,364)
(39,593)
(143,125)
(61,130)
(62,347)
(14,679)
(138,156)
Lease liability(2)
Non-controlling interest
Net assets
(129,538)
(70,144)
1,373,131
-
-
-
-
(129,538)
-
(70,144)
(78,640)
-
-
-
-
-
(78,640)
819,502
345,607
2,538,240
1,417,265
1,418,187
235,642
3,071,094
REIT's share of net assets
$ 468,857
$ 410,087
$ 123,829
$ 1,002,773
$ 483,995
$ 709,425
$ 91,565
$ 1,284,985
(1)
(2)
The REIT’s investments in joint ventures are comprised of: three industrial properties (2018 - six) and four residential properties under development.
As a result of the adoption of IFRS 16 on January 1, 2019, equity accounted investees recognized a right-of-use asset and lease liability. As at December 31, 2019, the
total fair value of investment properties, within equity accounted investments, net of the lease liability is $4,515,080.
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, 2019 and November 30, 2018, respectively.
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, 2019 and 2018
4. Equity accounted investments (continued):
Net income (loss) from
equity accounted investments in:
------Associates------
ECHO Jackson Park
Joint Ventures
(1)
------Associates-------
Total
ECHO
Jackson Park
Joint Ventures
(1)
Total
Rentals from investment properties
$ 214,633
$ 95,658
$ 8,119
$ 318,410 $203,138
$ 25,384
$ 11,137
$239,659
Property operating costs
(45,971)
(28,910)
(384)
(75,265)
(44,206)
(20,215)
(1,235)
(65,656)
December 31, 2019
December 31, 2018
Net income from equity accounted investments
Finance income
Finance cost - operations
Trust expenses
Fair value adjustment 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
1,930
1,086
(53,445)
(9,961)
(7,571)
(22,556)
(513)
(161)
77,471
(3,489)
73,982
-
1,547
(42,173)
-
(8,604)
(18,601)
-
(67)
-
253
(932)
(139)
1,930
2,886
1,208
816
-
1,822
-
254
1,208
2,892
(96,550)
(48,989)
(16,054)
(2,033)
(67,076)
(10,100)
(8,200)
-
(16,175)
3,635
11,756
(29,401)
(13,982)
(4,803)
(5,316)
65
(163)
868
(48)
-
4,029
280,068
-
(8)
(277)
-
(8,477)
7,664
(3,599)
262,487
(628)
(54)
240
(110)
(1,150)
13,935
90,256
94,240
275,026
3,565
372,831
-
-
(3,489)
(4,559)
-
-
(4,559)
(1,150)
13,935
86,767
89,681
275,026
3,565
368,272
$ 24,853
$ (575)
$ 6,923
$ 31,201 $ 30,125
$ 137,513
$ 1,771
$169,409
(1)
The REIT’s investments in joint ventures are comprised of: three industrial properties (2018 - six) and four residential properties under development. The REIT’s share
of net income from joint ventures was earned from its investment in three industrial properties (2018 - six).
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, 2018 to November 30, 2019 and December 1, 2017 to November 30, 2018, respectively.
5. Assets and liabilities classified as held for sale:
As at December 31, 2019, the REIT had two U.S. residential properties and a 50% interest in one industrial property (December 31, 2018 - one U.S.
office property and a 50% interest in one industrial property) 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
Restricted cash
Liabilities
Mortgage payable
December 31
December 31
2019
2018
$ 133,905
$ 110,940
1,768
-
$ 135,673
$ 110,940
$ 49,416
$ -
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, 2019 and 2018
6. Other assets:
Mortgages receivable(1)
Prepaid expenses and sundry assets
Restricted cash
Accounts receivable
Derivative instruments
December 31
December 31
Note
2019
2018
$ 555,030
$ 96,909
49,691
7,931
11,360
752
25,861
12,872
12,401
5,445
$ 624,764
$ 153,488
11
(1) Mortgages receivable include $227,332 classified as FVTPL and $327,698 classified as amortized cost (December 31, 2018 - $44,731 and $52,178, respectively). There
were no defaults or anticipated defaults by borrowers of mortgages receivable. No expected credit losses were recorded in the year ended December 31, 2019 (December
31, 2018 - nil). As at December 31, 2019, mortgages receivable bear interest at effective rates between 3.25% and 14.32% per annum (December 31, 2018 - between
3.25% and 9.00% per annum) with a weighted average effective rate of 7.06% per annum (December 31, 2018 - 6.49%), and mature between 2020 and 2029 (December
31, 2018 - mature between 2019 and 2026).
Future repayments of mortgages receivable are as follows:
Years ending December 31:
2020
2021
2022
2023
2024
Thereafter
7. Cash and cash equivalents:
December 31
2019
$ 260,333
229,310
34,100
-
-
31,287
$ 555,030
Cash and cash equivalents at December 31, 2019 includes cash on hand of $48,370 (December 31, 2018 - $52,807) and bank term deposits of $270
(December 31, 2018 - $266) bearing interest at a rate of 1.61% (December 31, 2018 - 1.58%).
Included in cash and cash equivalents at December 31, 2019 are U.S. dollar denominated amounts of U.S. $21,620 (December 31, 2018 - U.S.
$25,129). The Canadian equivalent of these amounts is $28,106 (December 31, 2018 - $34,175).
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
2019
2018
$ 3,630,858
$ 4,150,459
1,257,731
1,613,040
692,229
795,042
450,629
331,944
$ 6,375,860
$ 6,546,072
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, 2019 and 2018
8. Debt (continued):
(a) Mortgages payable:
The mortgages payable are secured by 118 real estate assets with an aggregate fair value of $8,259,330, bear interest at fixed rates with a contractual
weighted average rate of 4.08% (December 31, 2018 - 4.17%) per annum and mature between 2020 and 2032 (December 31, 2018 - maturing
between 2019 and 2032). Included in mortgages payable at December 31, 2019 are U.S. dollar denominated mortgages of U.S. $1,045,921
(December 31, 2018 - U.S. $1,368,241). The Canadian equivalent of these amounts is $1,359,697 (December 31, 2018 - $1,860,808).
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:
December 31
2019
$ 183,668
931,928
606,640
446,043
57,105
1,419,041
3,644,425
(13,567)
$ 3,630,858
December 31
December 31
Note
2019
2018
$ 4,150,459
$ 3,958,631
5
(123,651)
(494,038)
224,631
(49,416)
2,552
(79,679)
(129,145)
(407,763)
619,788
-
382
108,566
$ 3,630,858
$ 4,150,459
Years ending December 31:
2020
2021
2022
2023
2024
Thereafter
Financing costs and mark-to-market adjustment arising on acquisitions
The following is a summary of the changes in mortgages payable:
Opening balance, beginning of year
Principal repayments:
Scheduled amortization on mortgages
Mortgage repayments
New mortgages
Mortgage reclassified to liabilities held for sale
Effective interest rate accretion on mortgages
Change in foreign exchange
Closing balance, end of year
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, 2019 and 2018
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:
Senior Debentures
Series K Senior Debentures(1)
Series M Senior Debentures(2)
Series P Senior Debentures(3)
Series F Senior Debentures
Series L Senior Debentures
Series O Senior Debentures
Series N Senior Debentures
Contractual
interest
rate
Effective
interest
rate
Maturity
Principal
amount
Carrying
value
Carrying
value
December 31
December 31
2019
2018
March 1, 2019
July 23, 2019
February 13, 2020
March 2, 2020
May 6, 2022
January 23, 2023
January 30, 2024
2.36%
3.35%
3.67%
4.45%
2.92%
3.42%
3.37%
3.45%
(1)
(2)
(3)
4.58%
3.11%
3.44%
3.45%
3.55%
$ -
$ -
$ 199,943
-
162,500
175,000
325,000
250,000
350,000
-
162,469
174,954
322,862
249,065
348,381
149,902
169,667
174,731
321,996
248,782
348,019
$ 1,262,500
$ 1,257,731
$ 1,613,040
(1)
(2)
Bore 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). In March 2019, the REIT repaid all of its Series K senior debentures upon maturity for a cash payment of $200,000.
Bore 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, 2019 was 3.35%.
In July 2019, the REIT repaid all of its Series M senior debentures upon maturity for a cash payment of $150,000.
(3) Denominated as $125,000 U.S. dollars and bears interest at a rate equal to 3-month London Interbank Offered Rate plus 79 basis points. The REIT entered into an interest
rate swap on the Series P senior debentures to fix the interest rate at 3.67% per annum (note 11).
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, L, 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 L
Series N
Series O
Series P
Interest Payment Dates
March 2 and September 2
May 6 and November 6
January 30 and July 30
January 23 and July 23
February 13, May 13, August 13 and November 13
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, 2019 and 2018
8.
Debt (continued):
The following is a summary of the changes in the carrying value of debentures payable:
Senior Debentures
Carrying value, beginning of year
Redemption - Series M Senior Debentures
Redemption - Series K Senior Debentures
Redemption - Series E Senior Debentures
Redemption - Series J Senior Debentures
Redemption - Series G Senior Debentures
Redemption - Series C Senior Debentures
Issuance - Series O Senior Debentures
Issuance - Series P Senior Debentures
Change in foreign exchange
Accretion adjustment
Carrying value, end of year
Convertible Debentures
Carrying value, beginning of year
Conversion - 2020 Convertible Debentures (HR.DB.D)
Redemption - 2020 Convertible Debentures (HR.DB.D)
Gain on change in fair value
Carrying value, end of year
(1)
(1)
(1)
(1)
(1)
(1)
(2)
(2)
(1)
December 31
December 31
2019
2018
$ 1,613,040
$ 1,749,650
(150,000)
(200,000)
-
-
-
-
-
-
(7,500)
2,191
-
-
(100,000)
(157,500)
(175,000)
(125,000)
248,525
160,680
8,737
2,948
1,257,731
1,613,040
-
-
-
-
-
103,140
(70)
(99,582)
(3,488)
-
$ 1,257,731
$ 1,613,040
(1) During the year ended December 31, 2019, the REIT redeemed debentures payable of $350,000 (year ended December 31, 2018 - $657,082).
(2) During the year ended December 31, 2019, the REIT issued debentures payable of nil (year ended December 31, 2018 - $409,205).
(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)
H&R REIT unsecured term loan #3(3)
Maturity Date
December 31
2019
December 31
2018
March 17, 2021
$ 192,229
$ 200,629
March 7, 2024
January 6, 2026
250,000
250,000
-
250,000
$ 692,229
$ 450,629
(1) The total facility as at December 31, 2019 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. The swap matures on March 17, 2021 (note 11).
(2) The REIT entered into an interest rate swap to fix the interest rate at 3.33% per annum. The swap matures on March 7, 2026 (note 11).
(3) The REIT entered into an interest rate swap to fix the interest rate at 3.91% per annum. The swap matures on January 6, 2026 (note 11).
Included in unsecured term loans at December 31, 2019, are U.S. denominated amounts of $140,000 (December 31, 2018 - U.S. $140,000). The
Canadian equivalent of these amounts is $182,000 (December 31, 2018 - $190,400).
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, 2019 and 2018
8. Debt (continued):
(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
$ (146,100)
$ -
$ 3,900
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
200,000
350,000
60,000
760,000
(194,350)
(109,492)
-
(449,942)
Revolving secured operating lines of credit(1):
H&R REIT and CrestPSP revolving secured line of credit
Primaris revolving secured line of credit
Sub-total
April 30, 2020
December 31, 2021
62,500
300,000
362,500
(51,500)
(293,600)
(345,100)
-
(1,985)
(34,791)
(36,776)
(105)
-
(105)
5,650
238,523
25,209
273,282
10,895
6,400
17,295
December 31, 2019
December 31, 2018
(1)
Secured by certain investment properties.
$ 1,122,500
$ (795,042)
$ (36,881)
$ 290,577
$ 1,126,014
$ (331,944)
$ (25,874)
$ 768,196
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.
Included in lines of credit at December 31, 2019 are U.S. dollar denominated amounts of U.S. $375,500 (December 31, 2018 - U.S. $13,000). The
Canadian equivalent of these amounts is $488,150 (December 31, 2018 - $17,680).
The following is a summary of the changes in unsecured term loans and lines of credit:
Opening balance, beginning of year
Net advances (repayments)
Change in foreign exchange
Closing balance, end of year
December 31, 2019
December 31, 2018
Unsecured
Term Loans
Lines of
Credit
Unsecured
Term Loans
Lines of
Credit
$ 450,629
$ 331,944
$ 186,629
$ 495,567
250,000
(8,400)
463,878
(780)
250,000
14,000
(196,323)
32,700
$ 692,229
$ 795,042
$ 450,629
$ 331,944
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, 2019 and 2018
9. Exchangeable units:
Certain of the REIT’s subsidiaries have in aggregate 15,316,239 (December 31, 2018 - 15,955,541) 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, 2018 - 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 of Units on the TSX as the exchangeable units are
exchangeable into Units at the option of the holder. The quoted price as at December 31, 2019 was $21.10 (December 31, 2018 - $20.65) per Unit.
A summary of the carrying value of exchangeable units is as follows:
Carrying value, beginning of year
Exchanged for Units
(Gain) loss on fair value of exchangeable units
Carrying value, end of year
December 31
December 31
2019
2018
$ 329,482
$ 341,321
(14,448)
8,139
(500)
(11,339)
$ 323,173
$ 329,482
The REIT has entered into various exchange agreements that provide, among other things, the mechanics whereby exchangeable units may be
exchanged for Units.
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:
Lease liability(1)
Security deposits
Unit-based compensation payable:
Options
Incentive units
(1) Corresponds to a right-of-use asset in a leasehold interest (note 3).
23
December 31
December 31
Note
2019
2018
$ 146,660
$ 148,106
9,147
41,564
13,460
9,352
12,016
4,576
32,002
5,890
-
6,928
9,885
24,030
14,869
2,701
1,834
1,688
-
6,051
9,045
4,932
$ 281,595
$ 223,141
11
12(b)
12(b)
12(b)
12(b)
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, 2019 and 2018
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
Term loan interest rate swap
(1)
(2)
(3)
(4)
(5)
(6)
Fair value asset (liability)*
Net gain (loss) on derivative instruments
December 31
December 31
December 31
December 31
2019
$ -
(404)
-
752
(2,777)
(6,171)
$ (8,600)
2018
2019
$ 592
$ (592)
2018
$ (1,639)
(331)
-
4,853
-
(2,370)
$ 2,744
(73)
-
(4,101)
(2,777)
(3,801)
$ (11,344)
(331)
(177)
887
-
(2,370)
$ (3,630)
The REIT entered into interest rate swaps as follows:
(1)
(2)
(3)
(4)
(5)
(6)
*
To fix the interest rate at 2.36% per annum for the Series K senior debentures (settled when these debentures matured on March 1, 2019).
To fix the interest rate at 3.67% per annum for the Series P senior debentures. The swap matures on February 13, 2020.
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. The swap matures on March 17, 2021.
To fix the interest rate at 3.33% per annum on $250,000 term loan. The swap matures on March 7, 2026.
To fix the interest rate at 3.91% per annum on $250,000 term loan. The swap matures 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).
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, 2019, 9,500,000 (December 31, 2018 - 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).
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, 2019 and 2018
12. Unitholders’ equity (continued):
The following is a summary of the issued and outstanding number of Units during the respective years:
Balance, beginning of year
Issuance of Units:
Issued under the Dividend Reinvestment Plan and Unit Purchase Plan ("DRIP")(1)
Options exercised
Incentive Units settled in Units
Exchangeable units exchanged into Units
Conversion of convertible debentures
Units repurchased and cancelled
Balance, end of year
December 31
December 31
2019
2018
285,677,811
291,320,218
-
933,594
368,306
4,817
639,302
-
-
1,271
5,281
23,889
2,978
(6,609,420)
286,690,236
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.
The weighted average number of basic Units for the year ended December 31, 2019 is 286,057,254 (December 31, 2018 - 287,060,425).
(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, 2019, a maximum of 17,723,110 (December 31, 2018 - 18,339,047) options to purchase Units were authorized to
be issued; 10,647,642 (December 31, 2018 - 11,263,579) options have been granted and are outstanding and 7,075,468 (December 31,
2018 - 7,075,468) options have not yet been 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:
Outstanding, beginning of year
Granted
Exercised
Expired
Outstanding, end of year
Vested, end of year
December 31, 2019
December 31, 2018
Options
11,263,579
-
(615,937)
-
10,647,642
10,647,642
Weighted average
exercise price
$ 20.51
-
(19.38)
-
$ 20.57
$ 20.57
Options
11,310,383
-
(21,210)
(25,594)
11,263,579
8,867,636
Weighted average
exercise price
$ 20.51
-
(18.98)
(20.71)
$ 20.51
$ 20.93
The outstanding and vested options at December 31, 2019 are exercisable at varying prices ranging from $18.98 to $23.18 (December
31, 2018 - $15.42 to $23.18) with a weighted average remaining life of 4.8 years (December 31, 2018 - outstanding options 5.8 years,
vested options 5.4 years).
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, 2019 and 2018
12. Unitholders’ equity (continued):
(ii)
Incentive unit plan:
As at December 31, 2019, a maximum of 5,000,000 (December 31, 2018 - 5,000,000) incentive units exchangeable into Units were
authorized to be issued. The REIT has granted 1,018,896 (December 31, 2018 - 561,242) incentive units which remain outstanding,
11,452 (December 31, 2018 - 6,635) incentive units have been settled for Units and 3,969,652 (December 31, 2018 - 4,432,123) incentive
units have not yet been granted.
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.
The REIT grants restricted units under the incentive unit plan. As at December 31, 2019, 64.61% of the restricted units granted vest on
the third anniversary and 35.39% of the restricted units granted vest on the fifth anniversary of their respective grant dates 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
2019
2018
Incentive units
Incentive units
561,242
556,961
(85,521)
(13,786)
1,018,896
431,533
284,023
(147,737)
(6,577)
561,242
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, 2019 and 2018
12. Unitholders’ equity (continued):
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
(c) Distributions:
December 31
December 31
2019
$ 12,016
11,504
$ 23,520
2018
$ 10,879
6,620
$ 17,499
2019
2018
$ 3,319
$ (1,642)
6,825
4,055
$ 10,144
$ 2,413
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, 2019, the REIT declared distributions per Unit of $1.38 (December 31, 2018 - $1.38).
The details of the distributions are as follows:
Cash distributions to unitholders
Unit distributions (issued under the DRIP)(1)
2019
2018
$ 394,181
$ 378,936
-
16,632
$ 394,181
$ 395,568
(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 10, 2019, 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, 2020 or the date on
which the REIT purchased the maximum number of Units permitted under the NCIB. During the year ended December 31, 2019, the REIT
did not purchase and cancel any Units. 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.
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, 2019 and 2018
13. Accumulated other comprehensive income:
Items that are or may be reclassified subsequently to net income:
Note
December 31, 2019
Cash flow
hedges
Foreign
operations
December 31
2018
Total
Total
Opening balance, beginning of year
$ (252)
$ 372,076
$ 371,824
$ 176,948
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
8
29
-
-
29
-
29
(108,675)
(16,680)
(125,355)
(108,675)
(16,680)
(125,326)
30
139,409
55,437
194,876
Closing balance, end of year
$ (223)
$ 246,721
$ 246,498
$ 371,824
14. Rentals from investment properties:
Rental income
Revenue from services
Straight-lining of contractual rent
Rent amortization of tenant inducements
Operating Leases:
2019
2018
$ 922,108
$ 962,429
222,535
7,161
(2,354)
220,230
(4,113)
(1,988)
$ 1,149,450
$ 1,176,558
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
2019
2018
$ 666,425
$ 686,133
2,116,371
3,477,225
2,150,004
3,182,837
$ 6,260,021
$ 6,018,974
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, 2019 and 2018
15. Finance costs:
Finance cost - operations
Contractual interest on mortgages payable
Contractual interest on debentures payable
Bank interest and charges
Effective interest rate accretion
Exchangeable unit distributions
Capitalized interest(1)
Finance income
Fair value adjustment on financial instruments
(1) The weighted average rate of borrowings for the capitalized interest is 3.90% (December 31, 2018 - 3.91%).
16. Supplemental cash flow information:
The following is a summary of changes in other non-cash operating items:
Accrued rents receivable
Prepaid expenses and sundry assets
Accounts receivable
Accounts payable and accrued liabilities
2019
2018
$ 164,867
47,312
35,793
4,301
21,872
274,145
(17,649)
256,496
(15,036)
19,483
$ 165,855
61,213
20,709
3,666
22,050
273,493
(6,406)
267,087
(8,638)
(11,197)
$ 260,943
$ 247,252
2019
2018
$ (12,700)
$ (5,077)
(25,000)
1,041
17,296
$ (19,363)
7,693
3,338
(3,615)
$ 2,339
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
Mortgages receivable from the sale of investment properties
Mortgages receivable used for the acquisition of property under development
Exchangeable units exchanged for Units
Other items:
Increase in accounts payable on lease liability and right-of-use asset
Decrease in accounts payable on redevelopment
Decrease in accounts payable included in finance cost - operations
Capitalized interest on redevelopment
Capitalized interest on properties under development
29
Note
12(c)
8(b)
9
3, 10
15
15
2019
2018
$ -
$ 16,632
-
-
2,291
256,000
-
14,448
32,002
-
3,857
(5,349)
(12,300)
70
2,033
140
34,100
(164,878)
500
-
9
362
(2,780)
(3,626)
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, 2019 and 2018
17. Capital risk management:
The REIT’s primary objectives when managing capital are:
(a)
(b)
to maximize Unit value through ongoing active management of the REIT’s assets, acquisition of additional properties and the development and
construction of projects; 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.
The REIT considers its capital to be:
Debt
Exchangeable units
Unitholders' equity
December 31
2019
$ 6,375,860
323,173
7,043,917
$ 13,742,950
December 31
2018
$ 6,546,072
329,482
7,200,100
$ 14,075,654
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%. As at December 31, 2019, this ratio was 44.4% (December 31, 2018 - 44.6%). 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, 2019 and December 31, 2018.
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 three tenants which individually account for more than 5% of the rentals from investment
properties of the REIT: Ovintiv Inc., Bell Canada and Hess Corporation. Each of these companies have a public debt rating that is rated with
at least a BBB- Stable rating by a recognized rating agency.
The REIT’s exposure to credit risk on receivables is as follows:
Mortgages receivable
Accounts receivable
Note
6
6
December 31
2019
$ 555,030
11,360
$ 566,390
December 31
2018
$ 96,909
12,401
$ 109,310
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, 2019 and 2018
18. Risk management (continued):
(b) Liquidity risk:
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, 2019 the consolidated amount
available under its lines of credit was $290,577 (note 8(d));
Maintaining a large unencumbered asset pool. As at December 31, 2019, there were 90 unencumbered properties with a fair value of
$3,959,871; 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).
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
2020
$ 572,668
224,759
$ 797,427
Thereafter
$ 5,821,528
44,820
$ 5,866,348
Total
$ 6,394,196
269,579
$ 6,663,775
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 $640,500
(2018 - U.S. $278,000) consisting of the Series P Senior Debentures, U.S. unsecured term loans and U.S. lines of credit (2018 - Series P
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. $1,621,000 (2018 - U.S. $1,492,000).
A $0.10 weakening of the U.S. dollar against the average Canadian dollar exchange rate of $1.33 for the year ended December 31, 2019
(December 31, 2018 - $1.30) as well as the Canadian dollar exchange rate as at December 31, 2019 of $1.30 (December 31, 2018 -
$1.36) would have decreased other comprehensive income (loss) by approximately $226,000 (December 31, 2018 - $177,000) and
decreased net income by approximately $18,500 (December 31, 2018 - $14,600). 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).
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, 2019 and 2018
18. Risk management (continued):
(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, 2019, the percentage of fixed rate debt to total debt was 87.3% (December 31, 2018 - 91.6%). 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, 2019, lines of credit of $795,042 and an unsecured term loan of $23,229 are subject to variable interest rates. An
increase in interest rates of 100 basis points for the year ended December 31, 2019 would have decreased net income by approximately
$8,200 (December 31, 2018 - $3,600). This analysis assumes that all other variables, in particular foreign exchange rates, remain
constant.
The floating rate Series P senior debentures are subject to variable rates, however the REIT entered into an interest rate swap to reduce
exposure to fluctuations in interest rates.
As at December 31, 2019, there were no mortgages payable subject to variable interest rates.
(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) Fair value of assets and liabilities:
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).
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, 2019 and 2018
18. Risk management (continued):
December 31, 2019
Assets measured at fair value
Investment properties
Properties under development
Assets classified as held for sale
Derivative instruments
Mortgages receivable
Assets for which fair values are disclosed
Mortgages receivable
Liabilities measured at fair value
Exchangeable units
Derivative instruments
Liabilities classified as held for sale
Liabilities for which fair values are disclosed
Mortgages payable
Debentures payable
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
5
8(a)
8(b)
8(c)
8(d)
$ -
-
-
-
-
$ -
-
-
752
-
$ 11,988,347
683,145
135,673
-
227,332
$ 11,988,347
683,145
135,673
752
227,332
$ 11,988,347
683,145
135,673
752
227,332
-
-
(323,173)
-
-
327,761
328,513
-
(9,352)
-
-
327,761
327,698
13,034,497
13,363,010
13,362,947
-
-
(49,416)
(323,173)
(9,352)
(49,416)
(323,173)
(9,352)
(49,416)
-
-
-
-
(3,725,176)
(1,291,301)
(693,924)
(796,994)
-
-
-
-
(3,725,176)
(1,291,301)
(693,924)
(796,994)
(3,630,858)
(1,257,731)
(692,229)
(795,042)
(323,173)
(6,516,747)
(49,416)
(6,889,336)
(6,757,801)
$ (323,173)
$ (6,188,234)
$ 12,985,081
$ 6,473,674
$ 6,605,146
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 classified as held for sale
Liabilities for which fair values are disclosed
Mortgages payable
Debentures payable
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
5
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
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, 2019 and 2018
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
20. Segmented disclosures:
2019
$ 6,696
8,260
$ 14,956
2018
$ 6,259
1,888
$ 8,147
The REIT has four reportable operating segments (Office, Retail, Industrial and Residential), in two geographical locations (Canada and the United
States). Effective January 1, 2019, the REIT has combined its previous three retail segments (Primaris, H&R Retail and ECHO) into one segment
known as Retail. The comparative period figures have been re-stated to reflect this change in operating segments. 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.
(i) Operating segments:
Real estate assets by reportable segment as at December 31, 2019 and December 31, 2018 are as follows:
December 31, 2019
Number of investment properties
Real estate assets:
Investment properties
Properties under development
Office
33
Retail
311
Industrial
Residential
87
24
Total
455
$ 5,988,561
$ 4,169,339
$ 1,057,242
$ 2,841,802
$ 14,056,944
6,970
22,810
104,991
694,612
829,383
5,995,531
4,192,149
1,162,233
3,536,414
14,886,327
Less: assets classified as held for sale
Less: REIT's proportionate share of real estate assets relating to
equity accounted investments
Less: REIT's proportionate share of assets classified as held for sale
relating to equity accounted investments
-
-
-
-
(17,100)
(116,805)
(133,905)
(868,186)
(36,108)
(1,163,764)
(2,068,058)
(12,872)
-
-
(12,872)
$ 5,995,531
$ 3,311,091
$ 1,109,025
$ 2,255,845
$ 12,671,492
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, 2019 and 2018
20. Segmented disclosures (continued):
December 31, 2018
Number of investment properties
Real estate assets:
Investment properties
Properties under development
Office
35
Retail
319
Industrial
Residential
90
22
Total
466
$ 6,752,450
$ 4,173,686
$ 1,043,220
$ 1,755,592
$ 13,724,948
-
12,444
85,567
6,752,450
4,186,130
1,128,787
1,451,821
3,207,413
1,549,832
15,274,780
Less: assets classified as held for sale
(93,840)
-
(17,100)
-
(110,940)
Less: REIT's proportionate share of real estate
assets relating to equity accounted investments
-
(882,477)
(60,267)
(1,132,573)
(2,075,317)
$ 6,658,610
$ 3,303,653
$ 1,051,420
$ 2,074,840
$ 13,088,523
Property operating income by reportable segment for the years ended December 31, 2019 and December 31, 2018 is as follows:
Office
Retail
Industrial
Residential
Sub-total
Less: Equity
Accounted
Investments
December 31
2019
Rentals from investment properties
$ 571,609
$ 406,218
$ 86,046
$ 209,610
$ 1,273,483
$ (124,033)
$ 1,149,450
Property operating costs
(193,886)
(155,065)
(24,661)
(95,040)
(468,652)
30,177
(438,475)
Property operating income
$ 377,723
$ 251,153
$ 61,385
$ 114,570
$ 804,831
$ (93,856)
$ 710,975
Office
Retail
Industrial
Residential
Sub-total
Less: Equity
Accounted
Investments
December 31
2018
Rentals from investment properties
$ 598,914
$ 438,939
$ 87,496
$ 137,742
$ 1,263,091
$ (86,533)
$ 1,176,558
Property operating costs
(209,058)
(160,797)
(24,612)
(73,753)
(468,220)
25,594
(442,626)
Property operating income
$ 389,856
$ 278,142
$ 62,884
$ 63,989
$ 794,871
$ (60,939)
$ 733,932
(ii) Geographical locations:
The REIT operates in Canada and the United States.
Real estate assets 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 and assets
classified as held for sale relating to equity accounted investments
35
December 31
December 31
2019
2018
$ 8,546,186
$ 9,186,352
6,340,141
6,088,428
14,886,327
15,274,780
(133,905)
(110,940)
(2,080,930)
(2,075,317)
$ 12,671,492
$ 13,088,523
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, 2019 and 2018
20. Segmented disclosures (continued):
Rentals from investment properties:
Canada
United States
Less: REIT's proportionate share of rentals relating to equity
accounted investments
21. Income tax expense:
Income tax computed at the Canadian statutory rate of nil applicable to the
REIT for 2019 and 2018
Current U.S. income taxes
Deferred income taxes applicable to U.S. Holdco
Income tax expense in the determination of net income
2019
2018
$ 845,371
428,112
1,273,483
$ 875,418
387,673
1,263,091
(124,033)
$ 1,149,450
(86,533)
$ 1,176,558
2019
2018
$ -
$ -
113
35,267
760
39,457
$ 35,380
$ 40,217
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 23.6% (2018 - 24.3%). 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
2019
2018
$ 24,947
$ 22,551
880
980
26,807
309,730
126,458
436,188
585
1,463
24,599
284,006
132,807
416,813
Deferred tax liability
$ (409,381)
$ (392,214)
The change in deferred tax liability is the result of a deferred income tax expense of $35,267 (2018 - $39,457) and foreign currency translation of
($18,100) (2018 - $27,626) recognized in other comprehensive income.
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, 2019 and 2018
21. Income tax expense (continued):
As at December 31, 2019, U.S. Holdco had accumulated net operating losses available for carryforward for U.S. income tax purposes of $105,744
(December 31, 2018 - $92,805), the benefit of which has been recognized and deferred interest deductions of $192,203 (December 31, 2018 -
$200,324), the benefit of which has not been recognized. 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. 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, 2019, the REIT has outstanding letters of credit totalling $36,881 (December 31, 2018 - $25,874), including
$16,575 (December 31, 2018 - $17,340) 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, 2019, the REIT issued guarantees
amounting to $199,009 (December 31, 2018 - $263,853), which expire between 2021 and 2027 (December 31, 2018 - expire between 2019
and 2029), relating to the co-owner’s share of mortgage liability.
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, 2019, the estimated amount of debt
subject to such guarantees, and therefore the maximum exposure to credit risk, is $41,259 (December 31, 2018 - $43,963) which expires in
2020 (December 31, 2018 - expires in 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.
23. Subsidiaries:
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
2019
100%
100%
100%
100%
100%
100%
2018
100%
100%
100%
100%
100%
100%
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, 2019 and 2018
24. Subsequent events:
(a)
In January 2020, the REIT sold two U.S. residential properties which were classified as held for sale as at December 31, 2019, for gross
proceeds of U.S. $89,850.
(b)
In January 2020, the REIT received $256,000 for the repayment of a mortgage receivable.
38
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)
Schuyler Levine, Vice-President, Taxation (H&R REIT)
(1) Investment Committee
(2) Audit Committee
(3) Compensation, Governance and Nominating Committee
Auditors: KPMG LLP
Legal Counsel: Blake, Cassels & Graydon LLP
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