H&R Real Estate Investment Trust
2020 Annual Report
The Bow, Calgary
Jackson Park, New York
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 $13.4
billion at December 31, 2020. H&R REIT has ownership interests in a North American portfolio of high
quality office, retail, industrial and residential properties comprising over 40 million square feet.
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
Alberta 17%
Other Canadian
Provinces 9%
Residential 21%
Industrial 10%
Ontario 31%
Retail 30%
United States 43%
Office 39%
Primary Objectives
H&R’s objective is 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. H&R’s strategy to
accomplish this objective is to accumulate a diversified portfolio of high-quality investment properties in
Canada and the United States leased by creditworthy tenants.
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 11, 2021
Fellow Unitholders,
The past year has been a challenging one on many fronts, and for many people. The COVID-19 pandemic
abruptly altered the course of 2020 in March, with broad-based shelter-in-place orders coming in response
to the public health threat, dramatically disrupting economic activity. H&R was quick to respond, taking
action to protect its tenants, employees and investors. These efforts included social distancing, working
from home, the temporary closures of some properties and development projects in accordance with public
health recommendations, significantly expanded liquidity through a new $500 million credit facility, and a
reduction to unitholder distributions to protect H&R’s balance sheet and enhance capital availability for
reinvestment into properties affected by pandemic-related circumstances.
The disruptions experienced in 2020 significantly reduced property market transactions and leasing
volumes, as well as general industry activity. Nevertheless, H&R has continued to make progress on the
REIT’s objectives outlined in recent years, including (i) improving the quality and value of the REITs
portfolio, and (ii) improving the profile of an investment in H&R units. Notable accomplishments in 2020
include a significant office lease extension with Hess Corporation at our 845,000 sq.ft. LEED Platinum
Hess Tower in Houston; reaching an agreement to sell our 172,000 sq.ft. Culver City office property leased
to Sony Pictures; substantial completion of our US$496 million River Landing development project in
central Miami, where we welcomed our first retail and residential tenants in Q4 2020; and reaching our
target for board gender diversity, with women now accounting for 25% of our trustees. In addition to board
diversity, H&R is proud to have been recognized in 2020 as one of the premier organizations in Canada
by the Globe & Mail’s Women Lead Here initiative. H&R was among 73 of Canada’s 500 largest companies
to receive this recognition for gender diversity among the executive and senior executive ranks, and one
of only 12 Canadian companies with a capitalization of over $5 billion.
Property Portfolio
Despite the pandemic, in 2020 H&R continued to recycle capital, streamlining and simplifying our portfolio,
re-investing into higher growth properties, and improving the profile of an investment in H&R units.
The successful sale of 9050 West Washington Boulevard in Culver City, California marked our most
notable disposition of 2020, closing in January 2021. The 172,000 sq.ft. office property leased to Sony
Pictures was acquired in 2004 for US$60 million and was sold for US$165 million, or approximately
US$960 per sq.ft. The sale not only crystalized a substantial gain and concluded a successful investment;
it was also consistent with the REIT’s capital allocation and risk management objectives. Similar to the
2019 sale of the REIT’s 1.1 million sq.ft. Atrium office and retail complex for $640 million, H&R once again
took advantage of strong market demand for office assets after several years of strong office market
performance, and historically high market rents and valuations, reducing near-term office leasing exposure
late in the office cycle. Combined with the 10-year lease extensions with Hess in 2020 and Bell in 2019,
these sales reduced H&R’s lease maturity exposure in its office portfolio to just 6% of GLA through the end
of 2023 and 18% through the end of 2025. With a weighted average remaining lease term of more than 12
years, and 85% of office revenues coming from investment grade tenants, H&R’s office portfolio continues
to be the defensive and resilient core of the REIT’s portfolio.
P a g e | 1
The REIT’s largest capital investment in 2020 was advancing the River Landing development to substantial
completion, with approximately US$80 million invested during the year. This unique US$496 million mixed-
use development is finding favourable tenant demand for the multi-residential, retail and office space
components, and stands to benefit from the significant boom in population growth and job creation in Miami
that has accelerated since the COVID-19 pandemic.
With River Landing being transferred from properties under development to investment properties in Q4
2020 and Q1 2021, development activities have turned to the completion of the individually smaller
remaining projects under development, all of which are expected to be completed during 2021.
Management is actively advancing subsequent phases of existing development projects, as well as future
intensification opportunities including significant multi-residential projects in Toronto and the Greater
Vancouver Area.
The REIT’s acquisitions, dispositions and development activities continue to enhance unitholder value
through fortifying the office portfolio, growing the multi-residential and industrial portfolios, and reducing
the REIT’s exposure to retail property. High-quality multi-residential property now accounts for 21% of fair
value assets, the REIT’s core office portfolio accounts for 39% of fair value assets, while retail has declined
to 30% and industrial has grown to 10% of assets, respectively. The REIT’s investment activities over the
past several years have repositioned the portfolio to significantly increase exposure to Sun Belt markets
and select gateway cities in the U.S.
Outlook
While 2020 proved much more challenging than anyone expected a year ago, we believe 2021 could
provide more opportunities than many might expect today. H&R spent much of 2020 focused on ensuring
the stability and durability of the REIT’s portfolio and balance sheet. As we look forward to 2021, H&R is
very well positioned to take advantage of opportunities, with a strong balance sheet and a portfolio
concentrated in large primary markets with strong population and economic growth prospects.
Management expects to see attractive investment opportunities in 2021, as the economy and property
markets transition from current pandemic conditions to a new post-pandemic normal.
Looking inwardly, management and the board remain committed to pursuing opportunities to increase
unitholder value and address the significant discount at which our units trade to the REIT’s $21.92 Net
Asset Value Per Unit. The REIT will advance opportunities to simplify it’s business, including the potential
for the creation of new public entities with more narrowly defined mandates consistent with investor
preferences, which could also result in a more narrowly focused H&R REIT.
Consideration of opportunities to simplify the REIT’s structure began in earnest in 2019, and while progress
was slowed by the pandemic, they remain a priority. Once further clarity regarding these opportunities is
available, the board and management expect to be in a position to revisit the topics of distributions, unit
repurchases and other strategic opportunities. Management, members of the board and their families
collectively own more than $400 million of equity in H&R REIT, providing strong alignment with unitholders
in pursuit of the REIT’s objectives.
We would like to thank our loyal and hard-working employees who have all contributed to the progress we
have made over the past 24 years. 2020 demonstrated just how critical our team members are to all that
we do.
P a g e | 2
Respectfully,
_______________________________
Ronald C. Rutman
Chairman
___________________________
Thomas J. Hofstedter
President & Chief Executive Officer
P a g e | 3
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF H&R REAL ESTATE INVESTMENT TRUST
For the year ended December 31, 2020
Dated: February 11, 2021
TABLE OF CONTENTS
SECTION I .................................................................................................................................................................................................................................................... 1
Basis Of Presentation ................................................................................................................................................................................................................................. 1
Forward-Looking Disclaimer ....................................................................................................................................................................................................................... 1
Non-GAAP Financial Measures ................................................................................................................................................................................................................. 2
Overview .................................................................................................................................................................................................................................................... 4
Environmental, Social And Governance (“ESG”) ....................................................................................................................................................................................... 4
SECTION II ................................................................................................................................................................................................................................................... 6
Financial Highlights .................................................................................................................................................................................................................................... 6
Key Performance Drivers ........................................................................................................................................................................................................................... 7
Business Update ........................................................................................................................................................................................................................................ 7
Summary Of Significant 2020 Activity ...................................................................................................................................................................................................... 11
SECTION III ................................................................................................................................................................................................................................................ 14
Financial Position ..................................................................................................................................................................................................................................... 14
Assets ....................................................................................................................................................................................................................................................... 15
Liabilities And Unitholders’ Equity ............................................................................................................................................................................................................ 22
Results Of Operations .............................................................................................................................................................................................................................. 27
Property Operating Income ...................................................................................................................................................................................................................... 28
Segmented Information ............................................................................................................................................................................................................................ 29
Net Income (Loss), FFO And AFFO From Equity Accounted Investments(1) ........................................................................................................................................... 32
Income And Expense Items ..................................................................................................................................................................................................................... 33
Funds From Operations And Adjusted Funds From Operations .............................................................................................................................................................. 36
Liquidity And Capital Resources .............................................................................................................................................................................................................. 38
Off-Balance Sheet Items .......................................................................................................................................................................................................................... 40
Derivative Instruments .............................................................................................................................................................................................................................. 41
SECTION IV ............................................................................................................................................................................................................................................... 42
Selected Financial Information ................................................................................................................................................................................................................. 42
Portfolio Overview .................................................................................................................................................................................................................................... 43
SECTION V ................................................................................................................................................................................................................................................ 46
Critical Accounting Estimates And Judgments ......................................................................................................................................................................................... 46
Disclosure Controls And Procedures And Internal Control Over Financial Reporting ............................................................................................................................. 47
SECTION VI ............................................................................................................................................................................................................................................... 47
Risks And Uncertainties ........................................................................................................................................................................................................................... 47
Outstanding Unit Data .............................................................................................................................................................................................................................. 53
Additional Information ............................................................................................................................................................................................................................... 53
Subsequent Events .................................................................................................................................................................................................................................. 54
H&R REIT - MD&A - DECEMBER 31, 2020
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, 2020 includes material information up to February 11, 2021. Financial data for the years ended December 31,
2020 and 2019 have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting
Standards Board. This MD&A should be read in conjunction with the financial statements of the REIT and appended notes for the year ended December 31,
2020 (“REIT’s Financial Statements”). The REIT’s Financial Statements are defined to refer to the financial statements for the REIT 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.
Countries around the world have been affected by the COVID-19 virus, which was declared a pandemic by The World Health Organization on March 11,
2020. The outbreak of COVID-19 has resulted in the federal and provincial governments enacting emergency measures to combat the spread of the virus.
These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused material disruption
to businesses globally resulting in an economic slowdown. The governments have reacted with significant monetary and fiscal interventions designed to
stabilize economic conditions.
The duration and full impact of the COVID-19 pandemic on the REIT is unknown at this time, as is the efficacy of the governments’ interventions. The extent
of the effect of COVID-19 on the REIT’s operational and financial performance will depend on numerous factors including the duration, spread, time frame
and effectiveness of vaccination roll-out, all of which are uncertain and difficult to predict. As a result, it is not currently possible to ascertain the long term
impact of COVID-19 on the REIT’s business and operations. Certain aspects of the REIT’s business and operations that have been and will continue to be
impacted include rental income, occupancy, tenant inducements and future demand for space. In the preparation of the REIT’s Financial Statements and
MD&A, the REIT has incorporated the potential impact of COVID-19 into its estimates and assumptions that affect the carrying amounts of its assets. The
REIT has updated its future cash flows assumptions and its capitalization rates, terminal capitalization rates, and discount rates applied to these cash flows
as well as updated its assumptions around the valuation of its accounts receivable and mortgages receivable.
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 headings “Business Update” and “Summary of Significant 2020 Activity” including with respect to H&R’s future plans, including significant development
projects, H&R’s expectation with respect to the activities of its development properties, including the building of new properties, the expected yield on cost
from the REIT’s development properties, the timing of construction, the timing of transfer from properties under development to investment properties, the
timing of occupancy, the timing of lease-up and the expected total cost from development properties, management’s expectations regarding future
intensification opportunities including the timing of approvals for re-zoning and site plan applications, the impact of the COVID-19 virus on the REIT and the
REIT’s tenants, management’s expectations regarding abatement expenses and recoveries including tenants participation in the Canada Emergency Rent
Subsidy, the REIT’s bad debt expense and expected credit loss, expectations regarding tenant retention and closures, the expected rental revenues from
leases with replacement tenants, including any offset of a reduction in gross revenues relating to store closures, and the significant revenue opportunity
represented by percentage rent participation, the state of the retail market, expected capital and tenant expenditures, capitalization rates and cash flow
models used to estimate fair values, management’s expectations regarding the REIT’s leverage and portfolio quality, management’s belief that Jackson
Park’s decline is temporary and expectations regarding future operating fundamentals, management’s expectations regarding future distributions,
management’s belief that H&R has sufficient funds and liquidity for future commitments, management’s expectation to be able to meet all of its ongoing
obligations and management’s belief that the REIT satisfies the test to quality for REIT exemption. 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.
Material factors or assumptions that were applied in drawing a conclusion or making an estimate set out in the forward-looking statements include that the
general economy is currently volatile and in an economic downturn as a result of the COVID-19 pandemic and low oil and gas prices, the extent and duration
of which is unknown; interest rates are volatile as a result of general economic conditions; and debt markets continue to provide access to capital at a
reasonable cost, notwithstanding the ongoing economic downturn. Additional risks and uncertainties include, among other things, risks related to: real
Page 1 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
property ownership; the current economic environment; COVID-19; credit risk and tenant concentration; lease rollover risk; interest and other debt-related
risk; construction risks; currency risk; liquidity risk; financing credit risk; cyber security risk; environmental and climate change risk; co-ownership interest in
properties; joint arrangement and investment risks; Unit price risk; availability of cash for distributions; ability to access capital markets; dilution; unitholder
liability; redemption right risk; risks relating to debentures and the inability of the REIT to purchase senior debentures on a change of control; tax risk, and
additional tax risk applicable to unitholders. 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 11, 2021 and the REIT, except as required by applicable Canadian law, assumes no obligation to update or revise them to reflect new information
or the occurrence of future events or circumstances.
NON-GAAP FINANCIAL MEASURES
The REIT’s Financial Statements are prepared in accordance with IFRS. However, in this MD&A, a number of measures are presented that are not measures
under generally accepted accounting principles (“GAAP”) in accordance with IFRS. These measures, as well as the reasons why management believes
these measures are useful to investors, are described below.
None of these non-GAAP financial measures should be construed as an alternative to financial measures calculated in accordance with GAAP. Furthermore,
the REIT’s method of calculating these supplemental non-GAAP financial measures may differ from the methods of other real estate investment trusts or
other issuers, and accordingly may not be comparable.
(a) The REIT’s proportionate share
H&R accounts for investments in joint ventures and associates as equity accounted investments in accordance with IFRS. The REIT’s proportionate
share is a non-GAAP measure that adjusts the REIT’s Financial Statements to reflect H&R’s equity accounted investments and its share of net income
(loss) from equity accounted investments on a proportionately consolidated basis at H&R’s ownership interest of the applicable investment.
Management believes this measure is important for investors as it is consistent with how H&R reviews and assesses operating performance of its entire
portfolio. Throughout this MD&A, the balances at the REIT’s proportionate share have been reconciled back to relevant GAAP measures.
H&R does not independently control its unconsolidated joint ventures and 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, 2019. 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, transfers of properties under development to investment properties and transfers from
investment properties to properties under development during the two-year period ended December 31, 2020 (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).
Page 2 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
(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 (loss)
determined in accordance with IFRS. Management believes FFO to be a useful earnings measure for investors as it adjusts net income (loss) 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. Furthermore, since H&R adjusts for actual
tenant inducements paid, the amortization of tenant inducements per the REIT’s Financial Statements and at the REIT’s proportionate share is added
back in order to only deduct the actual costs incurred by the REIT. Capital expenditures excluded and not deducted in the calculation of AFFO relate
to capital expenditures which generate a new investment stream, such as the construction of a new retail pad during property expansion or
intensification, development activities or acquisition activities. H&R’s method of calculating FFO and AFFO may differ from other issuers’ calculations.
FFO and AFFO should not be construed as an alternative to net income (loss) 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 (loss) 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 (loss) 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 the fair value adjustment to 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 (as defined below) 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 as a % of FFO and payout ratio as a % of AFFO
Payout ratio as a % of FFO and payout ratio as a % of AFFO are non-GAAP measures which assess the REIT’s ability to pay distributions and are
calculated by dividing distributions per Unit (as defined below) by FFO or AFFO per Unit for the respective period. H&R uses these ratios 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 expenditures. Furthermore, H&R uses the payout ratio as a % of AFFO to further assess whether sufficient cash
is being held back for capital and tenant 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 as a % of FFO and payout ratio as a % of AFFO.
(g) 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.
Page 3 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
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.
H&R’s objective is 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.
H&R’s strategy to accomplish this objective 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 as well as 16 single tenant and one multi-tenant retail property 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 three 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 residential rental properties in the United
States. Management assesses the results of these operations separately.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (“ESG”)
As one of the largest REITs in Canada, H&R strives to lead by example within the industry and be a part of the ever-changing journey to a more sustainable
future. With the current pandemic landscape, having an integrated and forward-thinking sustainability program is of utmost importance. Although H&R
formally implemented its Sustainability Policy and established its Sustainability Committee in 2019, sustainability has always been part of H&R’s culture in
every facet of the REIT’s business. The REIT has always viewed sustainability as its responsibility to its unitholders in terms of transparency, to its employees
in terms of communication, collaboration and opportunity, to its tenants in terms of providing healthy working and living environments and to the greatest
extent, to its communities in which the REIT’s employees live and the REIT does business.
In furtherance of the foregoing, H&R is committed to, among other things, investing responsibly, monitoring its use of resources and associated emissions,
reducing consumption and pollution, increasing energy efficiency and integrating sustainability into the REIT’s business, including the REIT’s decision-
making processes.
H&R is proud to have shared its inaugural Sustainability Report in the Spring of 2020, highlighting Environmental, Social and Governance (“ESG”) initiatives
and accomplishments for the 2019 calendar year. H&R’s inaugural Sustainability Report has provided the REIT with an ESG framework to report, in a
consistent and efficient manner, the REIT’s commitment to drive sustainable performance and improvement. H&R continues to work alongside Energy
Profiles Limited to benchmark the REIT’s performance REIT-wide, ensuring transparency and continuous improvement year-over-year.
Page 4 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
Key programs and initiatives include:
Environmental
H&R continues to implement programs to reduce carbon emissions, energy use, water use and waste;
H&R has tracked and reported on investor grade utility data and emissions for the majority of H&R office properties since 2013;
In 2020, H&R expanded its reporting boundary to report utility consumption and emissions wherever H&R has control over utility use and/or is able to
access utility data;
H&R has reported to the Carbon Disclosure Project (CDP) since 2018;
H&R’s like-for-like Greenhouse Gas (“GHG”) market-based emissions decreased by 2% in 2019 compared to 2018; equivalent to taking 250 passenger
vehicles off the road, according to the United States Environmental Protection Agency;
H&R’s like-for-like electricity use decreased by 4% in 2019 compared to 2018; this reduction is equivalent to the electricity use of 800 single-family
homes in Ontario, according to the Ontario Energy Board;
H&R’s like-for-like water use decreased by 5.6% in 2019 compared to 2018; equivalent to the annual household water use of 229 people, according to
the U.S. Geological Survey;
As of 2020, H&R has opted to report using selected Standards with a Global Reporting Initiative (GRI)-refenced claim. In addition, H&R reports on
indicators from the Standards set out by the Sustainability Accounting Standards Board (SASB) Real Estate subsector. Both frameworks provide H&R
the capacity to benchmark its performance REIT-wide and within the REIT industry, ensuring transparency;
As of December 31, 2020, 11 of H&R’s properties have LEED Certification, some as part of the initial development of such properties and others through
subsequent renovation projects undertaken by H&R;
As of December 31, 2020, seven of H&R’s properties have been certified under BOMA's Canadian Green Building System: BOMA BEST; and
H&R conducts environmental due diligence prior to acquiring a property, obtains and/or peer reviews Phase I Environmental Site Assessment reports
conducted by independent and experienced consultants, and if recommended, undertakes further remedial reporting.
Social
• H&R’s residential division, Lantower Residential, is “Best Place to Work” certified;
• H&R supports employee charity initiatives as corporate and on-site staff participate in charity initiatives and programs;
•
Throughout the organization, job placements are first offered internally to staff to allow movement and growth within the organization, thereby enabling
H&R’s staff to learn and acquire new skills and achieve personal development;
• H&R offers professional fee coverage and contributions to relevant professional development courses;
• Accommodation for leaves of absence, flexible hours and paid time off for employees related to sick time and childcare;
• Use of a written diversity policy;
• H&R is proud to have been recognized by “Women Lead Here” highlighting the emphasis H&R places in diversity and inclusion in 2020; and
• As of December 31, 2020, 38% of H&R’s Tier 2 Executives and 47% of H&R’s Tier 3 Executives are women. Overall, 47% of H&R’s North American
workforce are women. As well, in accordance with the target set out in the REIT’s diversity policy, 25% of the current members of the REIT’s Board of
Trustees (the “Board”) are women, which proportion was achieved ahead of the targeted time of the close of the REIT’s 2021 annual meeting of
unitholders.
Governance
• Use of a code of business conduct and ethics policy, whistle-blower policy, trading policy and disclosure and social media policy;
• On an annual basis, each employee acknowledges the company’s policies have been reviewed and that they agree to comply with them;
• H&R has established policies governing the tenure and constitution of its Board including that the tenure for all new trustees is limited to 10 years;
• Use of an Independent Board Chairperson;
• Use of a “Say on Pay” vote;
• Use of a minimum unit ownership requirement for Trustees, the CEO and the CFO; and
• Use of a clawback policy applicable to all incentive compensation.
The REIT looks forward to sharing this Spring its 2021 Sustainability Report and to report to investors how the REIT’s commitment to sustainability is
manifesting itself in its portfolio and resulting in lasting changes for its properties, tenants, employees, stakeholders and communities at large.
For H&R’s Sustainability Policy and additional information about its Sustainability Committee and Report, visit H&R’s website under Sustainability.
Page 5 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
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
Rentals from investment properties
Property operating income
Same-Asset property operating income (cash basis)(2)
Net income (loss) from equity accounted investments
Fair value adjustment on real estate assets
Net income (loss)
FFO(2)
AFFO(2)
Weighted average number of basic Units for FFO(2)
FFO per basic Unit(2)
AFFO per basic Unit(2)
Distributions per Unit
Payout ratio as a % of FFO(2)
Payout ratio as a % of AFFO(2)
Interest coverage ratio(2)
December 31,
2020
December 31,
2019
December 31,
2018
$13,355,444
$14,483,342
$14,691,009
47.7%
51.1%
44.4%
47.7%
44.6%
47.1%
6,071,391
7,043,917
7,200,100
286,863
286,690
285,678
$21.16
$21.93
$13.29
$24.57
$25.79
$21.10
$25.20
$26.30
$20.65
Three months ended December 31
Year ended December 31
2020
2019
2020
2019
$277,509
$282,221
$1,098,680
$1,149,450
183,616
180,624
(44,697)
69,960
111,644
127,398
67,280
301,746
$0.42
$0.22
$0.17
40.8%
77.1%
3.17
184,775
189,901
36,958
(43,689)
163,402
133,687
89,394
301,573
$0.44
$0.30
$0.35
77.9%
116.6%
3.18
663,666
716,908
(16,986)
(1,195,958)
(624,559)
503,096
383,811
301,687
$1.67
$1.27
$0.92
55.2%
72.3%
3.12
710,975
750,481
31,201
(103,903)
340,289
529,118
401,594
301,487
$1.76
$1.33
$1.38
78.6%
103.6%
3.05
(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 26 for a detailed calculation of NAV per Unit.
The fair value adjustment on real estate assets is further discussed on page 7 of this MD&A. Net income (loss) is reconciled to FFO and AFFO on page 36
of this MD&A.
Page 6 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
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)(3)
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
99.6%
98.6%
99.7%
98.6%
$26.29
$26.13
$33.84
$32.15
12.2
12.4
2.7
3.4
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
Retail
Industrial
Residential
90.3%
91.5%
92.0%
91.8%
$21.30
$21.00
$19.14
$19.08
6.9
6.6
3.7
4.5
97.5%
97.2%
98.4%
97.1%
$7.21
$6.80
$4.06
$3.76
6.4
6.7
5.1
6.0
88.1%
90.7%
88.5%
91.6%
N/A
N/A
$20.09
$21.92
N/A
N/A
7.6
8.5
Total
94.0%
94.5%
95.0%
94.8%
$18.52
$18.25
$21.06
$21.86
9.5
9.6
4.9
5.7
(1) Same-Asset refers to those properties owned by H&R for the two-year period ended December 31, 2020.
(2) Excludes properties sold in their respective year.
(3) Excludes River Landing Commercial which is currently in lease-up.
BUSINESS UPDATE
H&R is pleased to report financial and operating results from 2020 that demonstrate the resilient nature of the REIT’s portfolio, and also reflect the prudent
actions taken by management in response to the extraordinary events that followed the arrival of the COVID-19 pandemic. Management believes this
resilience is a function of the REIT’s long-term strategic focus on high-quality properties, high credit quality tenants and strong balance sheet, and required
the concerted efforts of the team at H&R working collaboratively with stakeholders to protect its tenants, employees and investors.
Fair Value Adjustment on Real Estate Assets
The financial results for the year ended December 31, 2020 include significant fair value adjustments recorded in Q1 2020. These adjustments are a result
of H&R’s regular quarterly IFRS fair value process, and reflect: (i) an acceleration of challenging conditions in the retail landscape impacting the valuation
assumptions of retail properties; and (ii) energy sector volatility that may have impacted the credit quality of many companies operating in this industry and
the related impacts on office property market fundamentals in markets with significant energy industry employment.
While the strong recovery in same-store sales at the REIT's shopping centres and the improved cost and access to credit enjoyed by energy sector tenants
are encouraging, there have not been a sufficient number of transactions in the applicable property markets to warrant changes in these sectors in Q4 2020.
Fair Value Adjustment on Real Estate Assets
(in thousands of Canadian dollars)
Operating Segment:
Office
Retail
Industrial
Residential
Q1 2020
Q2 2020
Q3 2020
Q4 2020
Year ended
December 31,
2020
($668,904)
($34,210)
(656,358)
6,891
19,600
(7,882)
(4,518)
(15,671)
(62,281)
($2,666)
(7,804)
10,155
93,353
93,038
($6,049)
(15,190)
95,392
(57,402)
($711,829)
(687,234)
107,920
39,880
16,751
(1,251,263)
Fair value adjustment on real estate assets per the REIT's proportionate share
(1,298,771)
Less: equity accounted investments
(2,471)
4,605
(38)
53,209
55,305
Fair value adjustment on real estate assets per the REIT's Financial Statements
($1,301,242)
($57,676)
$93,000
$69,960
($1,195,958)
Page 7 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
Residential properties in U.S. Sun Belt cities have seen increased investment demand since the start of COVID-19 and this has resulted in a decrease in
the capitalization rates used as part of H&R’s regular quarterly IFRS fair value process in Q3 2020. In Q4 2020, H&R transferred an industrial property from
properties under development to investment properties resulting in a $44.0 million fair value gain, further discussed on page 11 of this MD&A. This fair value
adjustment and the remaining fair value adjustments to industrial properties are due to a continued rise in rental rates and an increase in investor demand
which have resulted in a decrease in the capitalization rates used for these properties as part of H&R’s regular quarterly IFRS fair value process in Q4 2020.
The total fair value adjustment for the year ended December 31, 2020 of $1.2 billion resulted in an overall NAV per Unit decrease of approximately $3.86.
Provision for expected Credit Loss and Bad Debt Expense
Bad debt expense is classified as an expense and is grouped together with other expenses in property operating costs. The following tables disclose H&R’s
provision for expected credit loss and bad debt expense including the impact of COVID-19. In determining these amounts, the REIT performed a tenant-by-
tenant assessment considering the payment history and future expectations of default based on actual and expected insolvency filings. H&R’s retail segment
was impacted more than other segments due to government mandated closures primarily affecting the REIT’s enclosed shopping centres.
Provision for expected credit loss
(in thousands of Canadian dollars)
Opening balance, beginning of year
Bad debt expense(1)
Accounts receivable write-off(1)
Closing balance, end of year
December 31
December 31
2020
$1,073
39,708
(25,646)
$15,135
2019
$749
2,143
(1,819)
$1,073
(1)
Includes $5.9 million of rent abatements granted under the Canada Emergency Commercial Rent Assistance (“CECRA”) program.
Bad Debt Expense
(in thousands of Canadian dollars)
Bad debt expense by Same-Asset operating segment:
Office
Retail
Industrial
Residential
Total Same-Asset bad debts
Transactions
Three months ended December 31
Year ended December 31
2020
2019
Change
2020
2019
Change
$723
2,543
-
562
3,828
$81
$642
300
2,243
-
-
494
68
875
2,953
$1,266
38,263
52
2,179
41,760
$200
$1,066
518
37,745
-
52
1,292
887
2,010
39,750
82
84
(2)
412
206
206
Bad debt expense per the REIT's proportionate share
3,910
959
2,951
42,172
2,216
39,956
Less: equity accounted investments
(675)
(129)
(546)
(2,464)
(73)
(2,391)
Bad debt expense per the REIT's Financial Statements
$3,235
$830
$2,405
$39,708
$2,143
$37,565
H&R has recorded a bad debt expense for the year ended December 31, 2020 of $39.7 million. The bad debt expense of $23.9 million for the six months
ended June 30, 2020 was increased by $12.6 million in Q3 2020 and by $3.2 million in Q4 2020. 2021 may bring further retailer distress, which is difficult to
predict. Management is committed to working together with its tenants to ensure the vitality of H&R’s shopping centres.
Page 8 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
Tenant Closures
Many retailers have faced very challenging conditions in 2020. Several filed for Canada Companies’ Creditors Arrangement Act (“CCAA”) creditor protection
and several have announced store closures. The REIT’s focus on maintaining affordable cost structures for its mall-based retailers has resulted in above-
average rent collections as compared to other large mall owners, and high retention of store locations by tenants planning store closures elsewhere. The
following table summarizes the tenant groups that have filed for creditor protection under the CCAA:
Tenant Group
Pier One
Aldo
Reitmans
Comark
CCAA
--------Current--------
------Expected to be Retained------
Filing Date
Square footage(1) Number of Stores
Square footage(1) Number of Stores
February 29, 2020
28,583
3
-
-
May 7, 2020
27,715
19
23,724
15
May 19, 2020
43,917
17
38,544
14
June 3, 2020
79,890
26
79,890
26
General Nutrition Centres
June 24, 2020
6,868
8
4,586
6
David's Tea
Tristan
Ascena
Laura's Group
Moores
Lilianne Lingerie
Cazza
July 8, 2020
9,158
16
-
-
July 21, 2020
2,500
1
2,500
1
July 23, 2020
19,187
7
2,199
1
August 4, 2020
9,047
3
9,047
3
August 5, 2020
5,004
1
5,004
1
August 10, 2020
524
1
524
1
August 13, 2020
4,944
3
4,944
3
Manteaux Manteaux
August 14, 2020
2,419
2
2,419
2
Dynamite
Ernest
Le Chateau
Vivah Jewellery
Total subject to CCAA
Total Retail Segment
(1)
At H&R’s ownership interest.
September 8, 2020
45,132
15
45,132
15
September 14, 2020
1,011
1
1,011
1
October 23, 2020
42,767
13
October 30, 2020
426
2
-
-
-
-
329,092
138
219,524
89
13,704,000
2,658
H&R REIT continues to work collaboratively with its tenants that have been affected by the pandemic. Retailers undergoing CCAA restructuring has been
an area of particular focus for management, where retention of stores has exceeded 64%. Management expects no closures from GAP, H&M, or L Brands
in the REIT’s portfolio, and the REIT does not have any locations with Brooks Brothers, Lucky Brands, J. Crew, Mendocino, Frank & Oak, Lole or Microsoft
Corporation, each of which has announced plans for store closures.
In relation to the REIT’s initial 2020 budget of approximately $1.1 billion of gross revenue, Primaris accounted for approximately $285 million. Of that amount,
approximately $21.2 million of gross rent was attributable to tenants undergoing restructurings or liquidations. Annualized rental revenue has been reduced
by approximately $12.3 million at the REIT’s share, as a result of both store closures and lease amendments, at the REIT’s share. Store closures, which
provide the opportunity to re-lease space to new tenants, account for $6.1 million of this amount, while temporary lease amendments to rental rates for
retained tenancies accounts for the remaining $6.2 million of this amount.
Among the 49 store closures for tenants that have filed for creditor protection under the CCAA aggregating 109,568 square feet across H&R’s 13,704,000
square foot retail portfolio, leases have been signed with replacement tenants for 23 stores for 35,672 square feet, with many having commenced
occupancy. The rental revenues from these new tenancies are expected to partially offset the annualized $6.1 million reduction in gross revenues relating
to store closures in 2021, though the magnitude of that offset depends significantly on tenant sales and percentage rent participation. Similarly, the
annualized $6.2 million of gross revenue reduction due to temporary lease amendments assumes no percentage rent is collected under the temporary lease
terms.
Page 9 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
Rent Collection
Rent collection has been a key focus during the pandemic, and one where H&R believes it has performed well while also accommodating the needs of its
tenants. As of February 5, 2021, H&R’s rent collections since the onset of COVID-19 are as follows:
Tenant Type(1)
Office
Retail:
Enclosed
Other
Total Retail
Residential
Industrial
Total(3)
Share of
Rent(2)
45%
Q2 2020
Collection(2)
99%
Q3 2020
Collection(2)
99%
Q4 2020
Collection(2)
99%
January
Collection(2)
99%
20%
13%
33%
16%
6%
100%
65%
93%
75%
97%
100%
91%
79%
96%
86%
97%
99%
95%
83%
95%
88%
97%
100%
95%
82%
93%
86%
96%
99%
94%
(1)
(2)
(3)
Retail tenants in an office property for the purpose of this table have been classified as retail.
The average share of rent and collections include monthly billings for base rent and property operating costs.
April to September collections include an aggregate amount of $11.8 million received from the Government of Canada under the CECRA program.
H&R’s high-quality, long-term leased office portfolio delivered strong rent collection consistent with the profile of the tenant base, with 85.5% of revenues
coming from investment-grade rated tenants. Rent collection was also strong in H&R’s industrial and residential portfolios, reflecting the stronger-than-
average credit profile of the REIT’s tenant base across both of these portfolios.
H&R achieved an overall rent collection of 94% in January 2021, compared to 95% in Q4 2020, 95% in Q3 2020 and 91% in Q2 2020.
The tenants that have been impacted the most by the COVID-19 pandemic have been retailers. Rent collection in H&R’s retail portfolio reflects a blend of
grocery-anchored centres, single tenant and enclosed mall properties. Non-essential stores across Canada were closed by government mandates in March.
By the end of June all properties, including most stores at enclosed shopping centres, were re-opened, which is reflected in the retail rent collections trending
upwards from 75% in Q2 2020 to 86% in Q3 2020. Q4 2020 collections from the retail portfolio of 88% is without any CECRA subsidies.
The CECRA program for small businesses implemented by the Government of Canada provided forgivable loans to qualifying landlords to cover 50% of six
monthly rent payments that were payable by eligible small business tenants who were experiencing financial hardship during April to September 2020.
Tenants were responsible for contributing 25% of the rent payments with the landlords abating the remaining 25% share.
H&R filed CECRA applications for 39 properties covering approximately $23.5 million of gross rent at H&R’s ownership interest cumulatively for the six
month period from April to September. H&R’s 25% abatement was approximately $5.9 million and the Government of Canada’s 50% received was
approximately $11.8 million.
In October 2020, the Government of Canada introduced the Canada Emergency Rent Subsidy which provides tenants with direct access (without landlord
participation) to rent support until June 2021 for qualifying organizations affected by COVID-19. The REIT expects that its tenants who qualify will participate
in this program which should cover up to 65% of such tenants’ eligible expenses.
Liquidity
Management took precautionary measures to further bolster the REIT’s liquidity as a result of the severity of the pandemic’s impact on economic conditions.
During Q2 2020, the REIT secured a new $500.0 million unsecured line of credit from a syndicate of five Canadian banks maturing April 17, 2021. The REIT
also arranged a new $100.0 million secured mortgage on a previously unencumbered property, maturing in 2029. Further, during Q2 2020, H&R issued
$400.0 million Series Q Senior Debentures maturing June 16, 2025, the proceeds of which were used to repay lines of credit. During Q4 2020, H&R issued
$250.0 million Series R Senior Debentures maturing June 2, 2026, the proceeds of which were used to repay lines of credit. Notably, all of these financing
measures were arranged following the onset of the COVID-19 economic disruption, underscoring H&R’s strong access to capital availability and cash on
hand.
As at December 31, 2020, H&R had $1.1 billion of undrawn credit facilities available under its lines of credit, $62.9 million of cash on hand and an
unencumbered asset pool of approximately $3.7 billion.
Page 10 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
Distributions
As previously announced in May 2020, in light of current operating and capital market conditions, management recommended and the Board approved a
50% reduction of monthly distributions effective May 2020, from $0.115 per Unit to $0.0575 per Unit, or $0.690 per Unit annually. For the year ended
December 31, 2020, this resulted in a distribution decrease of 33.3%. This distribution rate provides additional financial flexibility to absorb potential income
interruption related to the pandemic in the near term, and allows for significant capital reinvestment into the REIT’s developments and properties to address
tenant turnover without increasing the REIT’s financial leverage. The Board will continue to re-evaluate the distribution on a quarterly basis taking into
account a variety of relevant factors including the REIT’s taxable income.
SUMMARY OF SIGNIFICANT 2020 ACTIVITY
Developments
United States:
H&R’s active development pipeline in the United States currently comprises five residential developments with a total development budget of U.S. $354.3
million. As at December 31, 2020, U.S. $305.2 million had been spent on properties under development with U.S. $49.1 million of budgeted costs remaining
to be spent of which U.S. $45.1 million is available to be funded through secured construction facilities, in each case at the REIT’s proportionate share.
The REIT’s 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 347,000
square feet of retail space, approximately 149,000 square feet of office space and 528 residential rental units. In Q4 2020, the retail and office portion of this
project, known as “River Landing Commercial”, reached substantial completion and was transferred from properties under development to investment
properties. Retail occupancy was 65.3% as at December 31, 2020, which includes the following major tenants: Publix Super Markets Inc., Hobby Lobby,
Burlington, Ross Stores Inc., Old Navy and Planet Fitness. Committed occupancy for retail space as at December 31, 2020 was 80.3% with the remaining
retail lease-up expected to occur during 2021. The REIT is continuing negotiations with multiple parties on the office space. As at December 31, 2020, 134
residential leases have been entered into and occupancy was 21.4%, exceeding management’s expectations on leasing velocity. The residential portion of
River Landing is expected to be transferred from properties under development to investment properties in Q1 2021. The total cost of the project is expected
to be completed on budget at approximately U.S. $495.9 million of which $300.0 million was allocated to River Landing Commercial and the remaining
$195.9 million has been allocated to the residential space.
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 development of residential rental units (the “Hercules Project”). Phase 1 of the Hercules Project, known as “The Exchange at Bayfront”, consists of
172 residential rental units, including lofts and townhomes and 13,762 square feet of ground level retail space. The four-storey podium project sits on 2.2
acres over a one-level subterranean parking garage. Construction commenced in June 2018 and substantial completion was achieved in Q4 2020, resulting
in the REIT transferring this property from properties under development to investment properties. As at December 31, 2020, 120 leases had been entered
into and occupancy was 68.0%. As at December 31, 2020, The Exchange at Bayfront, at the 100% ownership level, was valued at approximately U.S. $87.8
million compared to costs of approximately U.S. $81.3 million, resulting in a fair value gain of U.S. $6.5 million since the start of the project. The annualized
unlevered yield on budgeted cost is approximately 5.4% and the project was completed on budget. Refer to page 20 of this MD&A for further information on
the Hercules Project.
In December 2020, H&R acquired 5.4 acres of land in Dallas, TX for U.S. $9.7 million, which is expected to be developed into approximately 414 residential
rental units. The site is located within close proximity to Downtown/Uptown Dallas and is also located near Dallas Love Field Airport.
Canada:
Construction continued on the first phase of a 2.7 million square foot industrial development in Caledon, ON. The first phase consists of three buildings,
which will total approximately 526,000 square feet upon completion. In January 2020, H&R completed a 10-year lease with Deutsche Post AG to occupy the
largest of the three buildings (“205 Speirs Giffen Ave.”) totalling 342,821 square feet. Deutsche Post AG commenced occupancy in November 2020 and a
fair value gain of $44.0 million was recorded as the property was transferred from properties under development to investment properties. As a result of
COVID-19, H&R has temporarily suspended construction of the second and third buildings (140 & 34 Speirs Giffen Ave.).
In July 2020, H&R acquired 15.4 acres of land in Mississauga, ON for $18.7 million which is expected to be developed into two industrial buildings totalling
approximately 329,000 square feet.
In November 2020, H&R acquired a 50% interest in 24.6 acres of land in Mississauga, ON which is expected to be developed into one industrial building
totalling approximately 500,000 square feet. The REIT’s partner contributed the land valued at approximately $36.9 million, and H&R has contributed $2.1
million with the balance of capital to be contributed as development costs are incurred.
Page 11 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
For a complete list of H&R’s current development projects, refer to pages 18 and 19 of this MD&A.
Future Intensification Opportunities
The REIT has many intensification opportunities embedded in its portfolio. The fair market value that management ascribes to these properties excludes the
value that may be unlocked as these projects progress.
In June 2020, the REIT along with its partner, submitted a re-zoning application for the east and north portions of its 3777 & 3791 Kingsway sites in Burnaby,
B.C. The proposal could add over 2,000 residential rental units in four mixed-use high density towers including retail and residential uses with approximately
1,800,000 square feet of residential area and 44,000 square feet of commercial area. The REIT expects to obtain approval for its re-zoning and site plan
applications in Q4 2021.
In November 2020, the REIT acquired 53 Yonge St. in Toronto, ON, a five-storey 11,110 square foot office property, for $11.5 million. The REIT acquired
this property as it shares its northern property line with the REIT’s 55 Yonge St. office property. The two properties encompass approximately 0.37 acres
and the REIT submitted a re-zoning application in January 2021 to replace the existing 13-storey and five-storey office buildings with a 66-storey residential
and office tower with retail uses on the first two floors. This further breaks down into approximately 12,000 square feet of retail space, 146,000 square feet
of office space and 283,000 square feet of residential space (approximately 500 residential rental units). The REIT expects to obtain approval for its re-zoning
and site plan applications in Q4 2022.
The REIT plans to submit a re-zoning application at its Front St. property in Toronto, ON for a 69-storey mixed use development including retail, residential
and office uses. The development will replace the existing eight-storey office building at 310 Front St., and will integrate into H&R’s larger office block which
incudes 320 and 330 Front St. The project will include approximately 118,000 square feet of office, 2,000 square feet of retail and 463,000 square feet of
residential space. The REIT expects to obtain approval for its re-zoning and site plan applications in Q4 2022.
In addition to these projects, the REIT continues to advance its intensification pipeline of projects within its existing portfolio. Dufferin Grove Village at Dufferin
Mall, which will include 1,135 residential rental units and 75,000 square feet of retail space and the redevelopment of 145 Wellington St., which will include
a 65-storey mixed-use tower consisting of 476 residential rental units, 157,500 square feet of office space and 1,750 square feet of retail space are both
expected to receive re-zoning and site plan approval in Q4 2021.
Office
In January 2020, the $256.0 million mortgage receivable secured by The Atrium associated with the sale of the property in June 2019 was repaid.
During Q2 2020, H&R completed an agreement with the tenant of one of H&R’s office properties located in Dallas, TX that had been significantly damaged
by a tornado and a concurrent agreement with the insurance company resulting in H&R receiving the following: (i) a lease termination payment of U.S. $2.3
million in exchange for the tenant’s lease expiring at September 30, 2020 (previously December 31, 2025); and (ii) a settlement with the insurance company
for U.S. $10.9 million. As part of this agreement, H&R repaid the associated mortgage totalling U.S. $5.3 million at an interest rate of 5.4%. The property was
transferred from investment properties to properties under development in Q4 2020 and was recorded at the land value of U.S. $0.5 million as at December
31, 2020 compared to U.S. $10.0 million for land and building as at December 31, 2019.
In November 2020, the REIT entered into a lease extension and amending agreement (“Hess Lease Amendment”) with Hess Corporation (“Hess”) for its
premises in Houston, TX, under which Hess has agreed to extend the term of its lease on approximately two-thirds of the building for an additional term of
10 years beyond its current expiry of June 30, 2026. As part of the lease renewal, Hess received a tenant inducement and H&R paid related broker
commissions which totalled $36.1 million.
Same-Asset property operating income (cash basis) from office properties decreased by 3.4% and 1.6%, respectively, for the three months and year ended
December 31, 2020 compared to the respective 2019 periods primarily due to the Hess Lease Amendment which included an initial seven month rent free
period. Included in the year ended December 31, 2020 were lease termination fees of nil compared to $5.8 million for the year ended December 31, 2019.
Excluding lease termination fees and the impact of the Hess Lease Amendment, Same-Asset property operating income (cash basis) increased by 1.0% in
both periods.
Page 12 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
Industrial
In January 2020, H&R purchased a 50% ownership interest in a 93,330 square foot single-tenanted property in Whitby, ON for approximately $6.6 million.
In February 2020, H&R purchased the remaining 49.5% interest in 7575 Brewster Ave., Philadelphia, PA for U.S. $11.6 million. As H&R owns 100% of this
property, it is now consolidated in the REIT’s Financial Statements. The property is leased to Amazon.com, Inc.
In April 2020, H&R sold a 50% ownership interest in a 363,983 square foot single-tenanted property in Boucherville, QC for approximately $17.4 million.
This property was previously classified as held for sale as at December 31, 2019.
In Q4 2020, H&R completed construction of 205 Speirs Giffen Ave., a 342,821 square foot property in Caledon, Ontario which is fully leased to Deutsche
Post AG for a 10-year term. H&R recorded a fair value gain of $44.0 million as this development was transferred to investment properties.
Same-Asset property operating income (cash basis) from industrial properties increased by 5.7% and 5.8%, respectively, for the three months and year
ended December 31, 2020 compared to the respective 2019 periods, primarily due to an increase in occupancy and increased rental rates on lease renewals.
Residential
Same-Asset property operating income (cash basis) from residential properties in U.S. dollars decreased by 20.5% for the three months ended December
31, 2020 compared to the respective 2019 period, primarily due to Jackson Park in New York which has been negatively impacted by lower than average
lease renewals and prospective tenant inquiries as a result of COVID-19. H&R believes this decline is temporary and expects operating fundamentals to
improve in the second half of 2021. Excluding Jackson Park, Same-Asset property operating income (cash basis) from residential properties in U.S. dollars
increased by 2.5% and 6.9%, respectively, for the three months and year ended December 31, 2020 compared to the respective 2019 periods, primarily
due to an increase in revenue from rental rate growth and the stabilization of various assets in the portfolio, partially offset by an increase in bad debt
expense as a result of the impact of COVID-19.
Retail
Same-Asset property operating income (cash basis) from retail properties decreased by 1.7% and 13.2%, respectively, for the three months and year ended
December 31, 2020 compared to the respective 2019 periods, primarily due to bad debt expense as a result of the impact of COVID-19. This was partially
offset by a decrease in operating expenses as a result of the impact of properties being closed or partially closed due to COVID-19.
Funds from Operations and Adjusted Funds from Operations
FFO per Unit in Q4 2020 was $0.42 compared to $0.41 in Q3 2020 and $0.44 in Q4 2019. Excluding the Q4 2020 bad debt expense of $3.9 million, Q4
2020 FFO would have been $0.44 per Unit. AFFO per Unit was $0.22 in Q4 2020 compared to $0.35 in Q3 2020 and $0.30 in Q4 2019. H&R deducts actual
capital and leasing expenditures in determining AFFO. These expenditures were elevated in Q4 2020 primarily due to leasing expenditures incurred with
respect to the Hess Lease Amendment. Distributions paid as a percentage of AFFO was 72.3% for the year ended December 31, 2020, resulting in significant
retained cash flow. Refer to the “Funds From Operations and Adjusted Funds From Operations” section of this MD&A for a reconciliation of Net income
(loss) to FFO and AFFO.
Debt Highlights
As at December 31, 2020, debt to total assets was 47.7% compared to 44.4% as at December 31, 2019. This is primarily due to the negative fair value
adjustment of certain office and retail properties (further discussed on page 7 of this MD&A) of approximately $1.2 billion. The weighted average interest
rate of H&R’s debt as at December 31, 2020 was 3.6% with an average term to maturity of 3.5 years.
Mortgages:
During the year ended December 31, 2020, H&R secured seven new mortgages totalling $214.8 million at a weighted average interest rate of 3.5% for an
average term of 7.4 years and repaid eight mortgages totalling $120.8 million at a weighted average interest rate of 4.2%.
Debentures:
In June 2020, H&R issued $400.0 million principal amount of 4.071% Series Q Senior Debentures maturing June 16, 2025. In December 2020, H&R issued
$250.0 million principal amount of 2.906% Series R Senior Debentures maturing June 2, 2026. The proceeds from both issuances were used to repay lines
of credit.
Lines of Credit:
In Q2 2020, H&R bolstered its liquidity by securing a $500.0 million unsecured line of credit from a syndicate of five Canadian banks for a one-year term.
Page 13 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
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:
December 31,
December 31,
2020
2019
$1.27 CAD
$1.30 CAD
December 31,
December 31,
2020
2019
$11,149,130
$11,988,347
449,849
683,145
11,598,979
12,671,492
955,468
219,050
519,088
62,859
1,002,773
135,673
624,764
48,640
$13,355,444
$14,483,342
$6,368,316
$6,375,860
197,796
348,755
369,186
-
7,284,053
6,071,391
323,173
409,381
281,595
49,416
7,439,425
7,043,917
$13,355,444
$14,483,342
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
Page 14 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
ASSETS
Real Estate Assets:
Change in Investment Properties
(in thousands of Canadian dollars)
Opening balance, January 1, 2020
Acquisitions, including transaction costs
Transfer of investment property from equity accounted investments
Dispositions
Transfer of investment properties to assets classified as held for sale
Transfer of investment properties to properties under development
Operating capital:
Capital expenditures
Leasing expenses and tenant inducements
Redevelopment (including capitalized interest)
Amortization of tenant inducements and straight-lining of contractual rents
Transfer of properties under development that have reached substantial completion
to investment properties
Change in right-of-use asset(2)
Fair value adjustment on real estate assets (page 34)
Change in foreign exchange
Closing balance, December 31, 2020
REIT's Financial
Statements
Plus: equity accounted
investments
REIT's proportionate
share(1)
$11,988,347
$1,921,820
$13,910,167
33,506
15,665
(22,145)
(219,050)
(665)
52,980
49,927
77,867
13,905
436,400
-
(1,195,958)
(81,649)
23,480
(15,665)
(8,075)
(11,093)
-
1,894
779
4,778
(1,236)
42,553
(2,432)
(55,305)
(42,117)
56,986
-
(30,220)
(230,143)
(665)
54,874
50,706
82,645
12,669
478,953
(2,432)
(1,251,263)
(123,766)
$11,149,130
$1,859,381
$13,008,511
(1)
(2)
The REIT’s proportionate share is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.
At December 31, 2020, the right-of-use asset in a leasehold interest of $40.1 million (included in equity accounted investments) was measured at an amount equal to the corresponding
lease liability.
2020 Acquisitions:
Property(1)
2001 Forbes St., Whitby, ON
7575 Brewster Ave., Philadelphia, PA(2)
53 Yonge St., Toronto, ON
Total
Year
Built
1986
1981
1913
Segment
Date
Acquired
Square Feet
Purchase Price
($ Millions)
Industrial
Jan 29, 2020
Industrial
Feb 14, 2020
Office
Nov 13, 2020
93,330
81,148
11,110
185,588
$6.6
15.4
11.5
$33.5
Ownership
Interest
Acquired
50%
49.5%
100.0%
(1) Square feet and purchase prices are listed at H&R’s ownership interest. U.S. acquisitions have been translated to Canadian dollars at the exchange rate as at the date acquired.
(2) H&R purchased the remaining 49.5% interest it did not previously own and now owns 100% of this property.
2019 Acquisitions:
Property(1)
3512 Grande Reserve Way, Orlando, FL
510 E. Courtland St., Morton, IL(2)
2725 Reseda Pl., Charlotte, NC
Total
Year
Built
2018
2000
2019
Segment
Date
Acquired
Number of
Residential
Rental Units
Purchase Price
($ Millions)
Ownership
Interest
Acquired
Residential
Jun 13, 2019
Industrial
Jun 28, 2019
Residential
Jul 31, 2019
314
-
322
636
$99.4
2.9
82.3
$184.6
100%
49.5%
100%
(1) Purchase price is listed at H&R’s ownership interest. U.S. acquisitions have been translated to Canadian dollars at the exchange rate as at the date acquired.
(2) H&R purchased the remaining 49.5% interest it did not previously own and now owns 100% of this property. The additional square footage acquired was 60,930.
Page 15 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
2020 Dispositions:
Property
8401 Memorial Ln., Plano, TX(2)
12601 South Green Dr., Houston, TX(2)
Canada One Outlets, Niagara Falls, ON
220 Chemin du Tremblay, Boucherville, QC(3)
111 Clarence St., Port Colborne, ON
Total
Segment
Date
Sold
Residential
Jan 9, 2020
Residential
Jan 23, 2020
Retail
Apr 1, 2020
Industrial
Apr 30, 2020
Retail
Aug 12, 2020
Square
Feet
362,785
219,948
164,365
363,983
14,849
Selling Price
($ Millions)(1)
Ownership
Interest Sold
$86.5
31.2
10.2
17.4
1.2
100%
100%
100%
50%
100%
1,125,930
$146.5
(1) U.S. dispositions have been translated to Canadian dollars at the exchange rate as at the date sold.
(2) These properties consisted of 398 and 268 residential rental units, respectively, both of which were classified as held for sale as at December 31, 2019.
(3) Classified as held for sale as at December 31, 2019. Square feet and selling price are based on the ownership interest disposed.
2019 Dispositions:
Property
2480 Rockhouse Rd., Lithia Springs, GA(2)
8754 Hwy 60, Eganville, ON
3621 Dufferin St., Toronto, ON(3)
3619 61st Ave. S.E., Calgary, AB
595 Bay St., 20 & 40 Dundas St. and 306 Yonge St., Toronto, ON
12101 Fountainbrook Blvd., Orlando, FL(4)
500 Palladium Dr., Kanata, ON(5)
9320 Hwy 93, Midland, ON
Total
Segment
Office
Retail
Office
Retail
Office
Date
Sold
Jan 15, 2019
Jan 21, 2019
Feb 4, 2019
Apr 1, 2019
Jun 6, 2019
Residential
Sep 25, 2019
Industrial
Sep 26, 2019
Retail
Nov 14, 2019
Square
Feet
79,570
25,296
-
40,480
1,059,281
379,588
139,694
40,000
Selling Price
($ 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
(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.
Page 16 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
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, 2020
REIT's Financial Statements
Equity Accounted Investments
Operating Segment
(in millions of Canadian dollars)
Investment
Properties
Properties
Under
Development
Sub
Total
Investment
Properties
Properties
Under
Development
Office
Retail
Industrial
Residential
Total
$5,125
3,083
1,200
1,741
$8
-
106
336
$5,133
$ -
$ -
3,083
1,306
2,077
840
15
1,004
$1,859
17
20
170
$207
$11,149
$450
$11,599
REIT's
Proportionate
Share(1)
$5,133
3,940
1,341
3,251
Sub
Total
$ -
857
35
1,174
$2,066
$13,665
(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, 2020
REIT's Financial Statements
Equity Accounted Investments
Investment
Properties
Properties
Under
Development
Sub
Total
Investment
Properties
Properties
Under
Development
$4,009
$106
$4,115
$ -
2,272
1,175
7,456
3,693
-
8
114
336
2,272
1,183
7,570
4,029
$11,149
$450
$11,599
-
-
-
1,859
$1,859
$20
-
-
20
187
$207
REIT's
Proportionate
Share(1)
$4,135
2,272
1,183
7,590
6,075
Sub
Total
$20
-
-
20
2,046
$2,066
$13,665
(1)
The REIT’s proportionate share is a non-GAAP measure defined in the “Non-GAAP Financial Measures” section of this MD&A.
Capitalization Rates:
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.
December 31, 2020
Canada
United States
December 31, 2019
Canada
United States
Office
6.65%
5.74%
Office
5.72%
5.22%
Retail
Industrial Residential
7.25%
6.52%
5.20%
6.69%
-
4.60%
Retail
Industrial
Residential
6.12%
7.15%
5.51%
7.52%
-
4.75%
Total
6.63%
5.37%
Total
5.84%
5.34%
In light of the COVID-19 pandemic, the REIT has updated its assumptions used in determining the fair value of investment properties. Refer to page 7 of
this MD&A for further discussion on IFRS fair value adjustments included in the Business Update.
Page 17 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
Canadian Properties under Development:
As at December 31, 2020
At H&R's Ownership Interest
(in thousands of Canadian dollars)
Current Developments:
140 Speirs Giffen Ave., Caledon, ON(1)
34 Speirs Giffen Ave., Caledon, ON(1)
Future Developments:
Industrial Lands (Remaining lands), Caledon, ON(1)
7333 Mississauga Rd. N., Mississauga, ON(2)
Slate Dr., Mississauga, ON(3)
3791 Kingsway, Burnaby, BC(4)
Total
Ownership
Interest
Number
of Acres
Total
Development
Budget
Properties
Under
Development
Costs
Remaining
to Complete
Expected
Yield
on Cost
100.0%
100.0%
100.0%
100.0%
50.0%
50.0%
4.7
4.9
9.6
117.6
15.4
24.6
0.6
$13,870
15,533
$5,409
6,017
$8,461
9,516
6.2%
7.4%
$29,403
$11,426
$17,977
-
-
-
-
73,984
20,846
19,839
7,349
-
-
-
-
167.8
$29,403
$133,444
$17,977
(1)
(2)
(3)
(4)
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. The first building, 205 Speirs Giffen Ave., was substantially completed and transferred from properties under development to investment
properties in Q4 2020. As a result of COVID-19, H&R has temporarily suspended construction of the second and third buildings. In Q4 2020, H&R increased the expected yields on cost for
both buildings due to a revision in anticipated higher rents.
Expected to be developed into two industrial buildings totalling approximately 329,000 square feet.
Expected to be developed into one industrial building totalling approximately 500,000 square feet.
Excess lands held for future-redevelopment. These lands are adjacent to the REIT’s 3777 Kingsway office tower of which it also has a 50% ownership interest.
Page 18 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
U.S. Properties under Development:
The REIT’s largest current development project in 2020 was 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
347,000 square feet of retail space, approximately 149,000 square feet of office space and 528 residential rental units. In Q4 2020, the commercial portion
of this project reached substantial completion and was transferred from properties under development to investment properties. The residential portion of
River Landing is expected to be transferred from properties under development to investment properties in Q1 2021 and is shown in the table below.
As at December 31, 2020
At H&R's Ownership Interest
(in thousands of U.S. dollars)
Current Developments:
Ownership
Interest
Number
of
Acres
Total
Development
Budget
Properties
Under
Development
Costs
Remaining
to Complete
Construction
Financing
Available
Expected
Yield
on Cost
Expected
Completion
Date
River Landing - Residential, Miami, FL
Shoreline, Long Beach, CA(1)
Hercules Project (Phase 2), Hercules, CA(2)
The Pearl, Austin, TX(3)
Esterra Park, Seattle, WA(4)
100.0%
31.2%
31.7%
33.3%
33.3%
Future Developments(5)
Total (excluding ECHO)
2.3
0.9
2.8
5.0
1.1
12.1
99.9
$195,932
$183,001
71,097
31,186
24,201
31,859
50,585
21,789
22,199
27,624
$12,931
20,512
9,397
2,002
4,235
$ -
22,959
11,674
3,098
7,370
4.4%
6.2%
6.0%
6.2%
6.0%
Q1 2021
Q3 2021
Q3 2021
Q3 2021
Q3 2021
$354,275
$305,198
$49,077
$45,101
-
93,855
-
-
112.0
$354,275
$399,053
$49,077
$45,101
(1)
(2)
(3)
(4)
(5)
35-storey residential tower consisting of 315 luxury residential rental units and 6,450 square feet of retail space.
Total project spans 38.4 acres. Construction commenced in June 2018 on Phase 1 of this project which was substantially completed and transferred to investment properties in Q4 2020.
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. Refer to page 20 of this MD&A for further information.
Residential development consisting of 383 residential rental units which is close to major technology employers including Apple, IBM, Oracle and Samsung as well as the University of Texas
at Austin and downtown Austin.
Seven-storey residential tower consisting of 263 residential rental units, which is part of a larger master planned community and is adjacent to transit, Microsoft Corporation’s headquarters,
and future light rail which is expected to be completed in 2023.
Consists of seven separate parcels of land in the United States totalling 99.9 acres. H&R has a 31.7% interest in one of the parcels amounting to U.S. $12.1 million at H&R’s ownership
interest. H&R is the sole owner of the remaining six parcels.
Equity Accounted Investments:
(in thousands of Canadian
dollars)
Jackson
Park
ECHO
One U.S.
Industrial
Property
Hercules
Project
Esterra
The Pearl
Park Shoreline
Slate
Other(1)
Total(2)
Investment properties
$968,706
$839,985
$15,393
$35,297
$ -
$ -
$ -
$ -
$ -
$1,859,381
Properties under development
Assets classified as held for sale
-
-
16,822
11,093
-
-
43,036
28,193
35,083
64,242
19,839
-
-
-
Other assets
4,563
15,098
90
213
10
32
-
234
-
-
-
-
39
Cash and cash equivalents
13,930
9,990
337
1,966
20
239
627
978
206
Debt
Lease liability
Other liabilities
December 31, 2020
December 31, 2019
(626,721)
(337,601)
-
(40,084)
-
-
-
-
-
-
(38,375)
(16,343)
(18,792)
(23,095)
-
(1,060,927)
(6,575)
(43,966)
(224)
(4,881)
(2,583)
(3,230)
(7,052)
105
(1,376)
$353,903
$471,337
$15,596
$37,256
$9,297
$13,332
$34,956
$20,922
($1,131)
$955,468
$410,087
$468,857
$37,169
$33,629
$9,517
$13,647
$30,989
-
($1,122)
$1,002,773
207,215
11,093
20,279
28,293
(40,084)
(69,782)
(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.
Page 19 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
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.
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, 2020 and November 30, 2019, respectively.
As at November 30, 2020, H&R’s interest in ECHO consists of 243 investment properties totalling approximately 2.9 million square feet and 10 properties
under development. Giant Eagle, Inc., a supermarket chain in the United States is ECHO’s largest tenant with 201 locations encompassing approximately
1.6 million square feet at H&R’s ownership interest with an average lease term to maturity of 10.6 years. Giant Eagle represents approximately 59.7% of
revenue earned by ECHO.
U.S. Industrial Properties
As at December 31, 2020, H&R owns a 50.5% interest in one industrial property through a joint venture with its partners, which is located in the United
States (December 31, 2019 - three properties located in the United States).
In February 2020, H&R purchased the remaining 49.5% interest in 7575 Brewster Ave., Philadelphia, PA for $15.4 million. As H&R now owns 100% of this
property, it is now consolidated in the REIT’s Financial Statements.
In August 2020, H&R sold its 50.5% interest in 200 Rock Run Rd., Fairless Hills, PA totalling 54,654 square feet for $4.2 million.
During the year ended December 31, 2019, H&R sold its 50.5% interest in the following properties:
Property(1)(2)
1801 Blairtown Rd., Rock Springs, WY
260 Jordan Rd., Tifton, GA
Total
Segment
Industrial
Industrial
Date
Sold
Jun 11, 2019
Jun 18, 2019
Square
Feet
114,453
341,396
455,849
Selling Price
($ 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, in 2019, 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. 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, 2020, H&R’s equity investment was approximately U.S.
$27.6 million.
Phase 1 of the Hercules Project, known as “The Exchange at Bayfront”, consists of 172 residential rental units, including lofts and townhomes and 13,762
square feet of ground level retail space. The four-storey podium project sits on 2.2 acres over a one-level subterranean parking garage. Construction
commenced in June 2018 and substantial completion was achieved in Q4 2020, resulting in the REIT transferring this property from properties under
development to investment properties. As at December 31, 2020, 120 leases had been entered into and occupancy was 68.0%. As at December 31, 2020,
The Exchange at Bayfront, at the 100% level, has been valued at approximately U.S. $87.8 million compared to costs to date of approximately U.S. $81.3
million, resulting in a fair value gain of U.S. $6.5 million since the start of the project. The annualized unlevered yield on budgeted cost is approximately 5.4%
and the project was completed on budget.
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
Page 20 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
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. As at December 31, 2020, U.S. $28.5 million has been drawn on this construction facility at the 100% level.
The remaining land parcels totalling 33.4 acres are secured against a U.S. $12.2 million land loan at the 100% level. 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.
$72.2 million and construction financing of U.S. $47.9 million was secured in October 2018, both at the 100% level. As at December 31, 2020, H&R’s equity
investment was approximately U.S. $7.3 million and U.S. $38.6 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 Corporation’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, 2020, H&R’s equity investment was approximately U.S. $10.5 million and U.S. $44.4 million had been drawn on the construction facility, at
the 100% level.
Shoreline
H&R has a 31.2% 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, 2020, H&R’s equity
investment was approximately U.S. $27.5 million and U.S. $58.3 million had been drawn on the construction facility, at the 100% level.
Slate Drive
In November 2020, H&R acquired a 50% interest in 24.6 acres of land in Mississauga, ON which is expected to be developed into one industrial building
totalling approximately 500,000 square feet. The REIT’s partner contributed the land valued at approximately $36.9 million, and H&R contributed $2.1 million
with the balance of capital to be contributed as development costs are incurred.
Assets and Liabilities Classified as Held for Sale
As at December 31, 2020, H&R had one U.S. office property and a 50% ownership interest in one industrial property with an aggregate fair value of $219.1
million 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.
Other Assets
(in thousands of Canadian dollars)
Mortgages receivable
Prepaid expenses and sundry assets
Accounts receivable - net of provision for expected credit loss of $15,135 (2019 - $1,073)
Restricted cash
Derivative instruments
December 31, 2020
December 31, 2019
$425,486
$555,030
63,058
19,618
7,732
3,194
$519,088
49,691
11,360
7,931
752
$624,764
Mortgages receivable decreased by $129.5 million to $425.5 million as at December 31, 2020, primarily due to the repayment of a mortgage receivable that
was issued as part of the sale of the Atrium in June 2019.
Page 21 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
Accounts receivable increased by $8.3 million to $19.6 million as at December 31, 2020, primarily due to retail tenants who were impacted by COVID-19.
As at December 31, 2020, accounts receivable amounted to 1.8% of annual rentals from investment properties compared to 1.0% as at December 31, 2019.
Refer to page 8 of this MD&A for further discussion on H&R’s bad debt expense.
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, 2020
December 31, 2019
47.7%
51.1%
$3,666,464
$2,470,914
1.48
3.12
3.6%
3.5
3.6%
4.0
44.4%
47.7%
$3,959,871
$2,399,902
1.65
3.05
3.8%
3.9
3.8%
4.6
(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.
Debt
H&R’s debt consists of the following items:
(in thousands of Canadian dollars)
December 31, 2020
December 31, 2019
Mortgages payable
Debentures payable
Unsecured term loans
Lines of credit
(in thousands of Canadian dollars)
Opening balance, January 1, 2020
Scheduled amortization payments
Debt repayment and redemptions
New debt
Net repayments
Effective interest rate accretion
Change in foreign exchange
Mortgages
Payable
$3,630,858
(122,857)
(70,928)
214,772
-
2,712
(30,905)
Debentures
Payable
$1,257,731
-
(337,500)
646,703
-
1,883
-
Closing balance, December 31, 2020
$3,623,652
$1,568,817
Page 22 of 54
$3,623,652
1,568,817
688,029
487,818
$3,630,858
1,257,731
692,229
795,042
$6,368,316
$6,375,860
Unsecured
Term Loans
$692,229
-
-
-
-
-
(4,200)
$688,029
Lines of
Credit
$795,042
-
-
-
(295,959)
-
(11,265)
$487,818
Total
$6,375,860
(122,857)
(408,428)
861,475
(295,959)
4,595
(46,370)
$6,368,316
H&R REIT - MD&A - DECEMBER 31, 2020
Mortgages Payable
Future Mortgage Principal Payments
Periodic
Amortized
Principal
($000’s)
Principal on
Maturity
($000’s)
Total
Principal
($000’s)
% of Total
Principal
2021
2022
2023
2024
2025
Thereafter
Financing costs and mark-to-market adjustments arising on acquisitions(1)
Total balance outstanding as at December 31, 2020
$102,808
$836,727
$939,535
65,080
57,568
51,677
43,137
543,465
392,160
42,827
104,912
608,545
449,728
94,504
148,049
1,396,602
3,636,963
(13,311)
$3,623,652
25.8
16.7
12.4
2.6
4.1
38.4
100%
Weighted
Average
Interest
Rate on
Maturity
3.9%
3.9%
3.9%
3.2%
3.9%
(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, 2020 bear interest at a weighted average rate of 4.0% (December 31, 2019 – 4.1%) and mature between
2021 and 2032 (December 31, 2019 – maturing between 2020 and 2032). The weighted average term to maturity of the REIT’s mortgages is 4.0 years
(December 31, 2019 – 4.8 years). For a further discussion of liquidity refer to the “Funding of Future Commitments” of this MD&A. For a further discussion
of interest rate risk, refer to the “Risks and Uncertainties” section of this MD&A.
Debentures Payable
(in thousands of Canadian Dollars)
Senior Debentures
Series P Senior Debentures(1)
Series F Senior Debentures(2)
Series L Senior Debentures
Series O Senior Debentures
Series N Senior Debentures
Series Q Senior Debentures
Series R Senior Debentures
Contractual
Interest
Rate
Effective
Interest
Rate
Maturity
Principal
Amount
Carrying
Value
Carrying
Value
December 31,
December 31,
2020
2019
February 13, 2020
March 2, 2020
May 6, 2022
January 23, 2023
January 30, 2024
June 16, 2025
June 2, 2026
3.67%
4.45%
2.92%
3.42%
3.37%
4.07%
2.91%
3.39%
(1)
4.58%
3.11%
3.44%
3.45%
4.19%
3.00%
$ -
-
325,000
250,000
350,000
400,000
250,000
$ -
$162,469
-
323,776
249,360
348,758
398,105
248,818
174,954
322,862
249,065
348,381
-
-
3.49%
$1,575,000
$1,568,817
$1,257,731
(1)
(2)
Denominated as $125,000 U.S. dollars and bore interest at a rate equal to the 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. In February 2020, the REIT repaid all of its Series P senior debentures upon maturity for a cash payment of U.S.
$125.0 million.
In March 2020, the REIT repaid all of its Series F senior debentures upon maturity for a cash payment of $175.0 million.
In June 2020, H&R issued $400.0 million principal amount of 4.071% Series Q Senior Debentures maturing June 16, 2025.
In December 2020, H&R issued $250.0 million principal amount of 2.906% Series R Senior Debentures maturing June 2, 2026.
Page 23 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
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,
2020
December 31,
2019
March 17, 2021
$188,029
$192,229
March 7, 2024
January 6, 2026
250,000
250,000
250,000
250,000
$688,029
$692,229
(1) The total facility as at December 31, 2020 is $200.0 million, 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. $130.0 million of the U.S. dollar denominated borrowing of this facility. The swap matures
March 17, 2021.
In November 2020, the interest rate swap was amended to fix the interest rate at 3.17% per annum and the maturity date was extended to May 7, 2030. Previously, the interest rate was fixed
at 3.33% per annum with a maturity date of March 7, 2026.
(2)
(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.
Lines of Credit
(in thousands of Canadian Dollars)
Revolving unsecured operating lines of credit:
Maturity
Date
Total
Facility
Amount
Drawn
Outstanding
Letters of Credit
Available
Balance
H&R revolving unsecured line of credit #1
April 17, 2021
$500,000
$ -
$ -
$500,000
H&R revolving unsecured line of credit #2
H&R revolving unsecured line of credit #3
H&R revolving unsecured line of credit #4
H&R revolving unsecured letter of credit facility
September 20, 2022
January 31, 2023
September 20, 2023
150,000
200,000
350,000
60,000
(144,620)
(65,230)
(4,218)
-
Sub-total
1,260,000
(214,068)
Revolving secured operating lines of credit(1)
H&R and CrestPSP revolving secured line of credit
April 30, 2021
Primaris revolving secured line of credit
December 31, 2021
Sub-total
62,500
300,000
362,500
(51,500)
(222,250)
(273,750)
-
-
(1,985)
(29,707)
(31,692)
(105)
-
(105)
5,380
134,770
343,797
30,293
1,014,240
10,895
77,750
88,645
December 31, 2020
December 31, 2019
(1) Secured by certain investment properties.
$1,622,500
$1,122,500
($487,818)
($795,042)
($31,797)
$1,102,885
($36,881)
$290,577
The lines of credit can be drawn in either Canadian or U.S. dollars and bear interest at a rate approximating the prime rate of a Canadian chartered bank.
Page 24 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
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 price 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.
The following number of exchangeable units are issued and outstanding:
As at December 31, 2020
As at December 31, 2019
Number of
Exchangeable
Units
14,883,065
15,316,239
Quoted Price
of Units
$13.29
$21.10
Amounts per the
REIT's Financial
Statements ($000’s)
$197,796
$323,173
In August 2020, 433,174 exchangeable units were exchanged for Units. As a subsidiary of the REIT previously held 433,174 Units to mirror these
exchangeable units, the number of outstanding Units did not increase as a result of this exchange.
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
23.5% in 2020 (2019 – 23.6%).
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,
2020
December 31,
2019
$73.3
0.7
2.8
76.8
303.0
122.6
425.6
$24.9
0.9
1.0
26.8
309.7
126.5
436.2
($348.8)
($409.4)
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
decreased by $60.6 million from $409.4 million as at December 31, 2019 to $348.8 million as at December 31, 2020 primarily due to certain income tax
regulations released by the Internal Revenue Service (“IRS”) in July 2020 resulting in the REIT recognizing a deferred tax recovery of $46.5 million during
the year ended December 31, 2020.
Page 25 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
Unitholders’ Equity
Unitholders’ equity decreased by $972.5 million from approximately $7.0 billion as at December 31, 2019 to approximately $6.1 billion as at December 31,
2020. The decrease is primarily due to the net loss, other comprehensive loss and distributions paid to unitholders. The total comprehensive loss to
unitholders was primarily due to the negative fair value adjustments on real estate assets discussed on page 7 of this MD&A.
Normal Course Issuer Bid (“NCIB”)
On December 10, 2019, the REIT received approval from the TSX for the renewal of its NCIB, which allowed the REIT to purchase for cancellation up to a
maximum of 15.0 million Units on the open market until December 16, 2020. During the years ended December 31, 2020 and 2019, the REIT did not
purchase and cancel any Units.
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
December 31,
December 31,
2020
2019
$6,071,391
$7,043,917
197,796
323,173
348,755
409,381
$6,617,942
$7,776,471
286,863
286,690
14,883
14,883
301,746
301,573
$21.16
$21.93
$13.29
$24.57
$25.79
$21.10
(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.
Unitholders’ equity per Unit and NAV per Unit decreased by $3.41 per Unit and $3.86 per Unit, respectively, from December 31, 2019 to December 31, 2020
primarily due to the negative fair value adjustment of certain office and retail properties of approximately $1.2 billion (further discussed on page 7 of this
MD&A). Unitholders’ equity per Unit and NAV per Unit further declined due to the weakening of the U.S. dollar which was $1.30 for each U.S. $1.00 at
December 31, 2019 compared to $1.27 for each U.S. $1.00 at December 31, 2020.
Page 26 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
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 (loss) from equity accounted investments
Finance costs - operations
Finance income
Trust (expenses) recoveries
Fair value adjustment on financial instruments
Fair value adjustment on real estate assets
Gain (loss) on sale of real estate assets
Net income (loss) before income taxes
Income tax (expense) recovery
Net income (loss)
Other comprehensive loss:
Three months ended December 31
Year ended December 31
2020
2019
2020
2019
$1.31 CAD
$1.33 CAD
$1.34 CAD
$1.33 CAD
Three months ended December 31
Year ended December 31
2020
2019
2020
2019
$277,509
$282,221
$1,098,680
$1,149,450
(93,893)
183,616
(44,697)
(56,875)
7,131
(9,940)
(44,084)
69,960
(62)
105,049
6,595
111,644
(97,446)
184,775
36,958
(61,107)
6,012
8,372
42,607
(435,014)
(438,475)
663,666
(16,986)
710,975
31,201
(228,869)
(256,496)
33,399
(14,297)
82,974
15,036
(27,293)
(19,483)
(43,689)
(1,195,958)
(103,903)
(11)
173,917
(10,515)
163,402
(2,229)
(678,300)
53,741
(624,559)
25,632
375,669
(35,380)
340,289
Items that are or may be reclassified subsequently to net income (loss)
Total comprehensive income (loss) attributable to unitholders
(146,307)
($34,663)
(43,918)
(86,662)
(125,326)
$119,484
($711,221)
$214,963
The primary reason for the decrease in rentals from investment properties is net disposition activity over the past two years. The REIT completed
approximately $1.0 billion of asset sales compared to $218.1 million of acquisitions over the past two years, substantially repositioning its portfolio and
enhancing its internal growth profile. H&R continues to actively reallocate capital through property dispositions to fund value-creating developments, expand
its residential rental platform and strengthen its balance sheet.
Property operating income also decreased for the three months and year ended December 31, 2020 compared to the respective 2019 periods due to bad
debt expense as a result of the impact of COVID-19 further discussed on page 8 of this MD&A, which predominantly impacted H&R’s retail segment.
Net income (loss) from equity accounted investments for the three months and year ended December 31, 2020 compared to the respective 2019 periods
decreased by $81.7 million and $48.2 million, respectively, primarily due to a fair value decrease to Jackson Park in Q4 2020 and a decrease in property
operating income from Jackson Park, both as a result of lower than average lease renewals and prospective tenant inquiries as a result of COVID-19.
Net income (loss) before income taxes decreased by $68.9 million for the three months ended December 31, 2020 compared to the respective 2019 period,
primarily due to a fair value adjustment on financial instruments and a decrease from equity accounted investments discussed above, partially offset by
positive fair value adjustments on real estate assets (primarily industrial properties), which is further discussed on page 7 of this MD&A.
Net income (loss) before income taxes decreased by approximately $1.1 billion for the year ended December 31, 2020 compared to the respective 2019
period primarily due to the following: (i) a decrease in fair value adjustments of real estate assets (primarily certain office and retail properties) further
discussed on page 7 of this MD&A of approximately $1.2 billion; (ii) a decrease in property operating income discussed above; (iii) the decrease in net
income (loss) from equity accounted investments discussed above. This was partially offset by fair value adjustments on financial instruments.
Page 27 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
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, 2020. It excludes acquisitions, business combinations, dispositions, transfers of properties under development to investment properties
and transfers from investment properties to properties under development during the two-year period ended December 31, 2020 (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)
2020
2019
Change
2020
2019
Change
Rentals
$277,509
$282,221
($4,712)
$1,098,680
$1,149,450
($50,770)
Property operating costs (excluding bad debt expense)
(90,658)
(96,616)
5,958
(395,306)
(436,332)
41,026
Property operating income (excluding bad debt expense)
186,851
185,605
1,246
703,374
713,118
(9,744)
Three months ended December 31
Year ended December 31
Bad debt expense
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)
(3,235)
(830)
(2,405)
(39,708)
(2,143)
(37,565)
183,616
184,775
(1,159)
663,666
710,975
(47,309)
18,376
25,099
(6,723)
84,698
93,856
(9,158)
(4,540)
(1,950)
(2,590)
(10,541)
(8,848)
(1,693)
(12,229)
(12,436)
207
-
-
-
(4,599)
(5,587)
988
(20,915)
(45,502)
24,587
Same-Asset property operating income (cash basis)(2)
$180,624
$189,901
($9,277)
$716,908
$750,481
($33,573)
(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.
Property operating income decreased by $47.3 million for the year ended December 31, 2020 compared to the respective 2019 period primarily due to the
following: (i) an increase in bad debt expense as a result of the impact of COVID-19; (ii) properties sold; and (iii) a decrease in lease termination fees. This
was partially offset by the following: (i) a decrease in operating expenses as a result of the impact of properties being closed or partially closed due to COVID-
19; (ii) an increase in revenue from rental rate growth and the stabilization of various assets in the portfolio; and (iii) an increase in property operating income
due to the strengthening of the U.S. dollar.
Refer to page 8 of this MD&A for a further breakdown of the REIT’s bad debt expense. For a list of property dispositions, refer to page 16 of this MD&A.
Property operating income from equity accounted investments for the three months and year ended December 31, 2020 compared to the respective 2019
periods decreased by $6.7 million and $9.2 million, respectively, primarily due to Jackson Park, which has been negatively impacted by lower than average
lease renewals and prospective tenant inquiries as a result of COVID-19. H&R believes Jackson Park’s decline is temporary and expects operating
fundamentals to improve in the second half of 2021. In addition, property operating income decreased for both periods noted above due to higher bad debt
expense as a result of the impact of COVID-19 on ECHO and properties sold.
Page 28 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
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). 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 Office segment consists of a portfolio of 28 properties throughout Canada and five properties in select markets in the United States, aggregating 10.7
million square feet, at H&R’s ownership interest, with an average lease term to maturity of 12.2 years as at December 31, 2020. The Office portfolio is
leased on a long-term basis to creditworthy tenants, with 85.5% 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 67 properties throughout Canada which includes enclosed shopping centres, single-tenant retail properties and
multi-tenant retail plazas as well as 16 single-tenant and one multi-tenant retail property 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 67 properties in Canada and 260 properties in the United States comprising 13.7 million square
feet, at H&R’s ownership interest, with an average lease term to maturity of 6.9 years as at December 31, 2020.
The Industrial segment consists of 84 industrial properties throughout Canada and three properties in the United States comprising 9.3 million square feet,
at H&R’s ownership interest, with an average lease term to maturity of 6.4 years as at December 31, 2020.
The Residential segment consists of 23 residential properties in select markets in the United States comprising 7,831 residential rental units, at H&R’s
ownership interest, as at December 31, 2020. 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.
Page 29 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
(in thousands of Canadian dollars)
2020
2019
% Change
2020
2019
% Change
2020
2019
Property operating income
Occupancy
Three months ended December 31
Year ended December 31
As at December 31
Operating Segment:
Office(1)
Retail
Industrial
Residential
$91,248
$91,882
64,423
15,854
30,467
65,607
14,825
37,560
(0.7%)
(1.8%)
$358,961
$377,723
(5.0%)
218,047
251,153
(13.2%)
6.9%
62,488
61,385
(18.9%)
108,868
114,570
The REIT's proportionate share
201,992
209,874
(3.8%)
748,364
804,831
Less: equity accounted investments
(18,376)
(25,099)
(26.8%)
(84,698)
(93,856)
The REIT's Financial Statements
$183,616
$184,775
(0.6%)
$663,666
$710,975
Geographic Location:
Canada(2)
United States(2)
$126,755
$126,323
0.3%
$472,720
$523,733
75,237
83,551
(10.0%)
275,644
281,098
The REIT's proportionate share
201,992
209,874
(3.8%)
748,364
804,831
Less: equity accounted investments
(18,376)
(25,099)
(26.8%)
(84,698)
(93,856)
The REIT's Financial Statements
$183,616
$184,775
(0.6%)
$663,666
$710,975
99.6%
90.3%
97.5%
88.1%
94.0%
89.6%
94.5%
95.7%
90.6%
94.0%
89.6%
94.5%
98.6%
91.5%
97.2%
90.7%
94.5%
97.2%
94.2%
94.8%
94.0%
94.5%
97.2%
94.2%
1.8%
(5.0%)
(7.0%)
(9.8%)
(6.7%)
(9.7%)
(1.9%)
(7.0%)
(9.8%)
(6.7%)
(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.
The average exchange rate for the three months ended December 31, 2020 was $1.31 for each U.S. $1.00 (Q4 2019 - $1.33). The average exchange rate
for the year ended December 31, 2020 was $1.34 for each U.S. $1.00 (December 31, 2019 - $1.33). Property operating income across all operating
segments was negatively impacted by the weakening of the U.S. dollar for the three months ended December 31, 2020 and was positively impacted by the
strengthening of the U.S. dollar for the year ended December 31, 2020 compared to the respective 2019 periods. The following explanations for changes
in property operating income are in addition to the impact of foreign exchange.
Property operating income from office properties decreased by 5.0% for the year ended December 31, 2020 compared to the respective 2019 period,
primarily due to properties sold throughout 2019 and lease termination fees of nil in 2020 compared to $5.9 million in 2019.
Property operating income from retail properties decreased by 1.8% and 13.2%, respectively, for the three months and year ended December 31, 2020
compared to the respective 2019 periods, primarily due to bad debt expense as a result of the impact of COVID-19. This was partially offset by a decrease
in operating expenses as a result of the impact of properties being closed or partially closed due to COVID-19. Refer to page 8 of this MD&A for a further
breakdown of the REIT’s bad debt expense.
Property operating income from industrial properties increased by 6.9% and 1.8%, respectively, for the three months and year ended December 31, 2020
compared to the respective 2019 periods, primarily due to an increase in Same-Asset occupancy and increased rental rates on lease renewals. The increase
in property operating income from industrial properties for the year ended December 31, 2020 compared to the respective 2019 period was partially offset
by properties sold.
Property operating income from residential properties decreased by 18.9% and 5.0% for the three months and year ended December 31, 2020 compared
to the respective 2019 periods, primarily due to Jackson Park in New York, which has been negatively impacted by lower than average lease renewals and
prospective tenant inquiries as a result of COVID-19, as well as properties sold. H&R believes Jackson Park’s decline is temporary and expects operating
fundamentals to improve in the second half of 2021. Excluding Jackson Park, property operating income from residential properties decreased by 4.4% for
the three months ended December 31, 2020 compared to the respective 2019 period, primarily due to properties sold. Excluding Jackson Park, property
operating income from residential properties increased by 0.3% for the year ended December 31, 2020 compared to the respective 2019 period, primarily
due to an increase in revenue from rental rate growth and the stabilization of various assets in the portfolio, partially offset by an increase in bad debt
expense as a result of the impact of COVID-19 as well as properties sold.
Page 30 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
The following segmented information has been presented at the REIT’s proportionate share which is a non-GAAP measure defined in the “Non-GAAP
Financial Measures” section of this MD&A:
(in thousands of Canadian dollars)
2020
2019
% Change
2020
2019
% Change
2020
2019
Same-Asset property operating income (cash basis)(1)
Occupancy (same asset)
Three months ended December 31
Year ended December 31
As at December 31
Operating Segment:
Office(2)
Retail
Industrial
Residential
$82,327
$85,200
62,403
14,318
21,576
63,475
13,542
27,684
(3.4%)
(1.7%)
$342,767
$348,327
(1.6%)
214,724
247,512
(13.2%)
5.7%
57,440
54,304
(22.1%)
101,977
100,338
5.8%
1.6%
The REIT's proportionate share (page 28)
$180,624
$189,901
(4.9%)
$716,908
$750,481
(4.5%)
Geographic Location:
Ontario(3)
Alberta
Other Canada
Total – Canada
United States(3)
$52,411
$52,178
0.4%
$203,175
$215,882
50,984
21,145
50,981
19,756
124,540
122,915
-%
189,814
200,885
7.0%
1.3%
68,165
74,641
461,154
491,408
56,084
66,986
(16.3%)
255,754
259,073
The REIT's proportionate share (page 28)
$180,624
$189,901
(4.9%)
$716,908
$750,481
United States in U.S. dollars:
Office(2)
Retail
Industrial
Residential
$14,092
$16,635
(15.3%)
$64,425
$66,693
11,815
12,507
504
407
(5.5%)
23.8%
16,546
20,815
(20.5%)
48,252
2,082
76,102
51,031
1,622
75,442
99.7%
92.0%
98.4%
88.5%
95.0%
97.3%
93.3%
96.9%
96.0%
92.7%
95.0%
(5.9%)
(5.5%)
(8.7%)
(6.2%)
(1.3%)
(4.5%)
(3.4%)
(5.4%)
100.0%
95.9%
28.4%
100.0%
0.9%
88.5%
92.7%
98.6%
91.8%
97.1%
91.6%
94.8%
95.3%
94.2%
94.9%
94.9%
94.7%
94.8%
100.0%
97.0%
100.0%
91.6%
94.7%
U.S. total in U.S. dollars
$42,957
$50,364
(14.7%)
$190,861
$194,788
(2.0%)
(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.
The average exchange rate for the three months ended December 31, 2020 was $1.31 for each U.S. $1.00 (Q4 2019 - $1.33). The average exchange rate
for the year ended December 31, 2020 was $1.34 for each U.S. $1.00 (December 31, 2019 - $1.33). Same-Asset property operating income (cash basis)
across all operating segments was negatively impacted by the weakening of the U.S. dollar for the three months ended December 31, 2020 and was
positively impacted by the strengthening of the U.S. dollar for the year ended December 31, 2020 compared to the respective 2019 periods. The following
explanations for changes in Same-Asset property operating income (cash basis) are in addition to the impact of foreign exchange.
Same-Asset property operating income (cash basis) from office properties decreased by 3.4% and 1.6%, respectively, for the three months and year ended
December 31, 2020 compared to the respective 2019 periods primarily due to the Hess Lease Amendment which included an initial seven month rent free
period. Included in the year ended December 31, 2020 were lease termination fees of nil compared to $5.8 million for the year ended December 31, 2019.
Excluding lease termination fees and the impact of the Hess Lease Amendment, Same-Asset property operating income (cash basis) increased by 1.0% in
both periods.
Same-Asset property operating income (cash basis) from retail properties decreased by 1.7% and 13.2%, respectively, for the three months and year ended
December 31, 2020 compared to the respective 2019 periods, primarily due to bad debt expense as a result of the impact of COVID-19. This was partially
offset by a decrease in operating expenses as a result of the impact of properties being closed or partially closed due to COVID-19. Refer to page 8 of this
MD&A for a further breakdown of the REIT’s bad debt expense.
Same-Asset property operating income (cash basis) from industrial properties increased by 5.7% and 5.8%, respectively, for the three months and year
ended December 31, 2020 compared to the respective 2019 periods, primarily due to an increase in occupancy and increased rental rates on lease renewals.
Page 31 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
Same-Asset property operating income (cash basis) from residential properties in U.S. dollars decreased by 20.5% for the three months ended December
31, 2020 compared to the respective 2019 period, primarily due to Jackson Park in New York which has been negatively impacted by lower than average
lease renewals and prospective tenant inquiries as a result of COVID-19. H&R believes this decline is temporary and expects operating fundamentals to
improve in the second half of 2021. Excluding Jackson Park, Same-Asset property operating income (cash basis) from residential properties in U.S. dollars
increased by 2.5% and 6.9%, respectively, for the three months and year ended December 31, 2020 compared to the respective 2019 periods, primarily
due to an increase in revenue from rental rate growth and the stabilization of various assets in the portfolio, partially offset by an increase in bad debt
expense as a result of the impact of COVID-19.
NET INCOME (LOSS), FFO AND AFFO FROM EQUITY ACCOUNTED INVESTMENTS(1)
The following table provides a breakdown of H&R’s net income (loss) from equity accounted investments which is further reconciled to FFO and AFFO
from equity accounted investments:
(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 adjustment on financial instruments
Fair value adjustment on real estate assets
Gain (loss) on sale of real estate assets
Income tax (expense) recovery
Non-controlling interest
Net income (loss) from equity accounted investments
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
Rent amortization of tenant inducements
Capital expenditures
Leasing expenses and tenant inducements
Incremental leasing costs
AFFO from equity accounted investments
Three Months Ended December 31
Year ended December 31
2020
2019
2020
2019
$25,800
$31,912
$119,802
$124,033
(6,813)
25,099
147
(35,104)
(30,177)
84,698
479
93,856
649
(10,816)
(39,447)
(39,510)
(7,424)
18,376
135
(9,585)
54
(659)
371
129
(467)
656
(53,209)
22,444
(4)
(8)
(168)
(44,697)
(1,160)
52,838
4
-
-
151
722
7,858
(243)
274
(279)
(243)
(151)
11
(6)
(239)
36,958
(1,263)
(23,100)
(11)
-
-
23
636
13,243
261
298
(1,441)
(888)
(23)
302
(3,762)
(1,458)
(55,305)
(1,815)
118
(796)
1,250
(3,417)
(6,845)
(10,941)
(2,612)
(56)
(1,173)
(16,986)
31,201
-
56,763
1,815
10
-
604
2,930
45,136
111
1,125
(1,894)
(779)
(604)
-
17,786
2,612
(164)
(415)
98
2,490
53,608
(1,687)
1,191
(4,632)
(1,484)
(98)
$7,216
$11,450
$43,095
$46,898
(1)
(2)
Each of these line items represent the REIT’s proportionate share of equity accounted investments which are reconciled to net income (loss) 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.
Page 32 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
Property operating income from equity accounted investments for the three months and year ended December 31, 2020 compared to the respective 2019
periods decreased by $6.7 million and $9.2 million, respectively, primarily due to Jackson Park in New York, which has been negatively impacted by lower
than average lease renewals and prospective tenant inquiries as a result of COVID-19. H&R believes Jackson Park’s decline is temporary and expects
operating fundamentals to improve in the second half of 2021. In addition, property operating income decreased for both periods noted above due to higher
bad debt expense as a result of the impact of COVID-19 on ECHO and properties sold.
Net income (loss) from equity accounted investments for the three months and year ended December 31, 2020 compared to the respective 2019 periods
decreased by $81.7 million and $48.2 million, respectively, primarily due to a fair value decrease to Jackson Park in Q4 2020 and a decrease in property
operating income further discussed above.
FFO from equity accounted investments for the three months and year ended December 31, 2020 compared to the respective 2019 periods decreased by
$5.4 million and $8.5 million, respectively, primarily due to the decrease in property operating income noted above.
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
Contractual interest on unsecured term loans
Bank interest and charges on lines of credit
Effective interest rate accretion
Exchangeable unit distributions
Capitalized interest
Finance income
Three months ended December 31
Year ended December 31
2020
2019
Change
2020
2019
Change
($37,014)
($39,001)
$1,987
($150,354)
($164,867)
$14,513
(12,180)
(11,034)
(1,146)
(5,688)
(2,918)
(1,365)
(2,567)
(5,861)
(4,016)
(1,129)
(5,358)
(61,732)
(66,399)
4,857
5,292
(56,875)
(61,107)
7,131
6,012
173
1,098
(236)
2,791
4,667
(435)
4,232
1,119
(41,379)
(22,851)
(16,303)
(4,625)
(13,966)
(47,312)
(21,842)
(13,951)
(4,301)
(21,872)
5,933
(1,009)
(2,352)
(324)
7,906
(249,478)
(274,145)
24,667
20,609
17,649
2,960
(228,869)
(256,496)
15,036
27,627
18,363
33,399
82,974
Fair value adjustment on financial instruments
(44,084)
42,607
(86,691)
(19,483)
102,457
($93,828)
($12,488)
($81,340)
($112,496)
($260,943)
$148,447
The decrease in contractual interest on mortgages payable of $2.0 million and $14.5 million, respectively, for the three months and year ended December
31, 2020 compared to the respective 2019 periods is primarily due to mortgages repaid upon maturity totalling $614.4 million partially offset by the issuance
of new mortgages totalling $439.4 million since January 1, 2019.
The increase in contractual interest on debentures payable of $1.1 million for the three months ended December 31, 2020 compared to the respective 2019
period is primarily due to the issuance of the $400.0 million Series Q Senior Debentures issued in June 2020 and $250.0 million Series R Senior Debentures
issued in December 2020, partially offset by the repayment of the U.S. $125.0 million Series P Senior Debentures and the $175.0 million Series F Senior
Debentures, both in Q1 2020. The decrease in contractual interest on debentures payable of $5.9 million for the year ended December 31, 2020 compared
to the respective 2019 period is primarily due to the repayment of an aggregate of $687.5 million of senior debentures since March 2019 partially offset by
the $400.0 million of Series Q Senior Debentures issued in June 2020 and $250.0 million Series R Senior Debentures issued in December 2020.
The increase in contractual interest on unsecured term loans of $1.0 million for the year ended December 31, 2020 compared to the respective 2019 period
is primarily due to H&R obtaining a $250.0 million unsecured term loan on March 7, 2019.
The decrease in bank interest and charges on lines of credit of $1.0 million for the three months ended December 31, 2020 compared to the respective 2019
period is primarily due to lower variable interest rates on borrowings and H&R repaying lines of credit with the proceeds from the $250.0 million Series R
Senior Debentures issued in December 2020. The increase in bank interest and charges on lines of credit of $2.4 million for the year ended December 31,
2020 compared to the respective 2019 period is primarily due to borrowings on the lines of credit increasing throughout 2020 compared to 2019.
Page 33 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
The decrease in exchangeable unit distributions of $2.8 million and $7.9 million, respectively, for the three months and year ended December 31, 2020
compared to the respective 2019 periods is primarily due to H&R decreasing its monthly distributions from $0.115 per Unit to $0.0575 per Unit effective May
2020.
The increase in capitalized interest of $3.0 million for the year ended December 31, 2020 compared to the respective 2019 period is primarily due to the
increase in funding for the River Landing development and industrial lands in Caledon, ON. This was partially offset by a decrease in capitalized interest
from the re-development of the former Target and Sears space.
The increase in finance income of $1.1 million and $18.4 million, respectively, for the three months and year ended December 31, 2020 compared to the
respective 2019 periods is primarily due to the REIT issuing several mortgage receivables including H&R providing a loan of U.S. $124.1 million in December
2019 secured against 12.4 acres of land in Jersey City, NJ, bearing interest at 10.0% per annum.
The fair value adjustment on financial instruments of ($44.1 million) and $83.0 million, respectively, for the three months and year ended December 31, 2020
is primarily due to the gain (loss) on fair value of exchangeable units of ($53.9 million) and $121.1 million, respectively, which are fair valued at the end of
each reporting period based on the quoted price of Units on the TSX. The loss on fair value of exchangeable units of ($53.9 million) for the three months
ended December 31, 2020 is due to H&R’s Unit price increasing from $9.67 as at September 30, 2020 to $13.29 as at December 31, 2020. The gain on fair
value of exchangeable units of $121.1 million for the year ended December 31, 2020 is due to H&R’s Unit price decreasing from $21.10 as at December 31,
2019 to $13.29 as at December 31, 2020.
Trust (Expenses) Recoveries
(in thousands of Canadian dollars)
Other expenses
Three months ended December 31
Year ended December 31
2020
2019
Change
2020
2019
Change
($5,873)
($3,654)
($2,219)
($24,638)
($17,149)
($7,489)
Unit-based compensation recovery (expense)
(4,067)
12,026
(16,093)
10,341
(10,144)
20,485
Trust (expenses) recoveries
($9,940)
$8,372
($18,312)
($14,297)
($27,293)
$12,996
Other expenses increased by $2.2 million and $7.5 million, respectively, for the three months and the year ended December 31, 2020 compared to the
respective 2019 periods, primarily due to the continued expansion of Lantower Residential and lower third-party fees earned. Other expenses further
increased for the year-ended December 31, 2020 compared to the respective 2019 period, primarily due to costs incurred for abandoned transactions and
an allowance for credit loss on mortgages receivable as a result of COVID-19 totalling $5.6 million.
Unit-based compensation consists 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 (“IFRS 2”) 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 price of Units on the TSX. The fair value adjustment to unit-based compensation was ($2.6 million) and
$13.5 million, respectively, for the three months ended December 31, 2020 and 2019, as well as $16.0 million and ($4.5 million), respectively, for the year
ended December 31, 2020 and 2019. The fair value adjustment to unit-based compensation of $16.0 million for the year ended December 31, 2020 was
due to H&R’s Unit price decreasing from $21.10 as at December 31, 2019 to $13.29 as at December 31, 2020.
Fair Value Adjustment on Real Estate Assets
Three months ended December 31
Year ended December 31
(in thousands of Canadian dollars)
2020
2019
Change
2020
2019
Change
Fair value adjustment on real estate assets
$69,960
($43,689)
$113,649
($1,195,958)
($103,903)
($1,092,055)
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, terminal capitalization rates and future cash flow projections. The impact of COVID-19 has caused
a change in assumptions used in determining the fair value of investment properties for the year ended December 31, 2020. Refer to page 7 of this MD&A
for further discussion on IFRS fair value adjustments included in the Business Update.
Gain (Loss) on Sale of Real Estate Assets
Three months ended December 31
Year ended December 31
(in thousands of Canadian dollars)
Gain (loss) on sale of real estate assets
2020
($62)
2019
($11)
Change
2020
2019
Change
($51)
($2,229)
$25,632
($27,861)
For a list of property dispositions, refer to page 16 of this MD&A.
The loss on sale of real estate assets for the year ended December 31, 2020 of $2.2 million is primarily due to the sale of two U.S. residential properties.
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.
Page 34 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
Income Tax (Expense) Recovery
Three months ended December 31
Year ended December 31
(in thousands of Canadian dollars)
2020
2019
Change
2020
2019
Change
Income tax computed at the Canadian statutory rate of nil applicable to
H&R for 2020 and 2019
Current U.S. income taxes
Deferred income taxes (expense) recoveries applicable to U.S. Holdco
$ -
(17)
6,612
$ -
$ -
$ -
$ -
$ -
36
(53)
(259)
(113)
(146)
(10,551)
17,163
54,000
(35,267)
89,267
Income tax (expense) recovery in the determination of net income (loss)
$6,595
($10,515)
$17,110
$53,741
($35,380)
$89,121
H&R is generally subject to tax in Canada under the Income Tax Act (Canada) (“Tax Act”) with respect to its taxable income each year, except to the extent
such taxable income is paid or made payable to unitholders and deducted by H&R for tax purposes. H&R’s current income tax expense is primarily due to
U.S. state taxes and a refund of previously paid alternative minimum tax.
H&R’s deferred income tax is recorded in respect of H&R REIT (U.S.) Holdings Inc. (“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 $17.2 million and $89.3
million, respectively, for the three months and year ended December 31, 2020 compared to the respective 2019 periods, primarily due to fair value
adjustments on real estate assets. Deferred income taxes further decreased for the year ended December 31, 2020 compared to the respective 2019 period
due to certain income tax regulations released by the IRS in July 2020 resulting in the REIT recognizing a deferred tax recovery of $46.5 million during the
year ended December 31, 2020.
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, 2020, H&R had net deferred tax liabilities of $348.8 million (December 31, 2019 - $409.4 million),
primarily related to taxable temporary differences between the tax and accounting bases of U.S. real estate assets.
Page 35 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
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 as a % of FFO and AFFO are non-GAAP measures defined in the “Non-GAAP Financial
Measures” section of this MD&A.
FFO AND AFFO
Three Months Ended December 31
Year ended December 31
(in thousands of Canadian dollars except per Unit amounts)
2020
2019
2020
2019
Net income (loss) per the REIT's Financial Statements
$111,644
$163,402
($624,559)
$340,289
Realty taxes in accordance with IFRIC 21
(11,069)
(11,173)
-
FFO adjustments from equity accounted investments (page 32)
52,555
(23,715)
62,122
Exchangeable unit distributions
2,567
5,358
13,966
Fair value adjustments on financial instruments and real estate assets
(25,876)
1,082
1,112,984
Fair value adjustment to unit-based compensation
(Gain) loss on sale of real estate assets
Deferred income taxes applicable to U.S. Holdco
Incremental leasing costs
FFO
Straight-lining of contractual rent
Rent amortization of tenant inducements
Capital expenditures
Leasing expenses and tenant inducements
Incremental leasing costs
2,561
(13,525)
(15,992)
62
11
2,229
(6,612)
10,551
(54,000)
1,566
1,696
6,346
$127,398
$133,687
(4,297)
(2,211)
1,175
602
(14,479)
(21,247)
(40,309)
(17,948)
$503,096
(10,652)
2,661
(52,980)
(49,927)
(1,566)
(1,696)
(6,346)
AFFO adjustments from equity accounted investments (page 32)
(642)
(1,793)
(2,041)
-
22,407
21,872
123,386
4,512
(25,632)
35,267
7,017
$529,118
(7,161)
2,354
(64,234)
(44,756)
(7,017)
(6,710)
AFFO
$67,280
$89,394
$383,811
$401,594
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)
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 as a % of FFO
Payout ratio as a % of AFFO
301,746
301,573
301,687
301,487
302,292
302,855
302,234
302,978
$0.422
$0.421
$0.223
$0.223
$0.172
40.8%
77.1%
$0.443
$0.441
$0.296
$0.295
$0.345
77.9%
116.6%
$1.668
$1.665
$1.272
$1.270
$0.920
55.2%
72.3%
$1.755
$1.746
$1.332
$1.325
$1.380
78.6%
103.6%
(1)
(2)
For both the three months and year ended December 31, 2020, included in the weighted average and diluted weighted average number of Units are exchangeable units of 14,883,065. For
both the three months and year ended December 31, 2019, included in the weighted average and diluted weighted average number of Units are exchangeable units of 15,154,073 and
15,429,537, respectively.
For the three months and year ended December 31, 2020, included in the determination of diluted FFO and AFFO with respect to H&R’s Unit Option Plan and Incentive Unit Plan are 546,306
Units. For the three months and year ended December 31, 2019, 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 1,491,567 Units, respectively.
FFO for the three months and year ended December 31, 2020 compared to the respective 2019 periods decreased by $6.3 million and $26.0 million,
respectively, primarily due to a decrease in property operating income as a result of: (i) higher bad debt expense as a result of COVID-19; (ii) Jackson Park
in New York being negatively impacted due to lower than average lease renewals and prospective tenant inquiries as a result of COVID-19; and (iii) costs
incurred for abandoned transactions and an allowance for credit loss on mortgages receivable both as a result of COVID-19. This was partially offset by
higher finance income and lower finance costs – operations.
AFFO for the three months ended December 31, 2020 compared to the respective 2019 period decreased by $22.1 million, primarily due to higher tenant
expenditures and the decrease in FFO noted above. AFFO for the year ended December 31, 2020 compared to the respective 2019 period decreased by
$17.8 million, primarily due to the decrease in FFO noted above, partially offset by lower capital and tenant expenditures. Leasing expenses and tenant
Page 36 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
inducements for the three months and year ended December 31, 2020 was higher than usual due to $36.1 million tenant inducement granted as part of the
Hess Lease Amendment.
Included in FFO at the REIT’s proportionate share are the following items which can be a source of variances between periods:
Three months ended December 31
Year ended December 31
(in thousands of Canadian dollars)
Lease termination fees
Adjustments to straight-lining of contractual rent
Bad debt expense
Costs incurred for abandoned transactions and an allowance for credit loss
on mortgages receivable as a result of COVID-19
Mortgage prepayment penalties
2020
$338
-
2019
Change
2020
2019
Change
$ -
$338
$4,672
$7,624
($2,952)
-
-
-
(3,910)
(959)
(2,951)
(42,172)
(1,485)
(2,216)
1,485
(39,956)
(165)
(86)
(21)
-
(144)
(86)
(5,785)
(86)
(21)
(449)
(5,764)
363
($3,823)
($980)
($2,843)
($43,371)
$3,453
($46,824)
Excluding the above items, FFO would have been $131.2 million for the three months ended December 31, 2020 (Q4 2019 - $134.7 million) and $0.43 per
basic Unit (Q4 2019 - $0.45 per basic Unit). For the year ended December 31, 2020, FFO would have been $546.5 million (December 31, 2019 - $525.7
million) and $1.81 per basic Unit (December 31, 2019 - $1.74 per basic Unit).
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)
2020
2019
Change
2020
2019
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
$9,238
39,314
$8,523
5,150
$715
$27,971
$21,856
34,164
45,313
22,360
$6,115
22,953
3,593
1,864
9,562
10,590
400
(626)
1,666
3,096
(5,969)
(8,726)
(1,266)
(3,722)
13,580
4,678
32,171
18,561
(18,591)
(13,883)
2,434
715
3,434
5,319
(1,000)
(4,604)
(516)
-
(9,526)
3,443
Leasing expenditures and tenant inducements
-
-
-
-
-
Total at the REIT's proportionate share
Less: equity accounted investments
55,310
41,524
13,786
105,580
115,106
(522)
(2,329)
1,807
(2,673)
(6,116)
1,527
2,937
(1,410)
10,889
11,405
Total per the REIT's Financial Statements(1)
$54,788
$39,195
$15,593
$102,907
$108,990
($6,083)
(1)
Equal to the sum of capital expenditures and leasing expenses and tenant inducements per the REIT’s Financial Statements.
The largest capital expenditure from the Office segment for the three months and year ended December 31, 2020 was a generator upgrade at a Toronto,
ON office property totalling $8.9 million (including $1.7 million spent in Q4 2020). The generator upgrade resulted in an 86% reduction in harmful emissions
and also now meets the current “Tier 4” emissions standards for diesel generators as set by the United States Environmental Protection Agency. Included
in capital expenditures from the Office segment for the year ended December 31, 2020 are two other large projects: (i) a full roof replacement at a Calgary,
AB office property totalling $1.8 million and (ii) a chiller replacement at a Calgary, AB office property totalling $1.5 million (including $1.1 million spent in Q4
2020).
Page 37 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
Tenant expenditures from the Office segment for both the three months and year ended December 31, 2020 included $36.1 million in a tenant inducement
and leasing expenditure relating to the Hess Lease Amendment. 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, AB office properties.
The largest capital expenditures from the Retail segment for the year ended December 31, 2020 included: (i) a food court renovation at a Guelph, ON retail
property totaling $7.0 million (including $2.1 million spent in Q4 2020); and (ii) a partial roof membrane replacement at a Toronto, ON retail property totaling
$2.1 million. 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 a Calgary, AB retail property totalling $10.2 million; (ii) a food court relocation at a retail property in Orleans, ON totalling
$5.1 million; and (iii) backfilling a former Safeway location with a new Marshalls store at a Winnipeg, MB retail property 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.
The largest capital expenditure from the Industrial segment for the year ended December 31, 2020 included a roof replacement at a single tenanted industrial
property in Oakville, ON totalling $1.3 million.
The largest capital expenditures from the Residential segment for the year ended December 31, 2020 included: (i) smart-technology upgrades at five
properties throughout Texas and North Carolina totalling $1.7 million and (ii) exterior painting at two Florida properties totalling $1.1 million. Smart-technology
upgrades are expected to improve operational efficiency and have a positive environmental impact through utility savings for residents and the REIT.
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 (loss)
Total distributions(1)
Excess cash provided by operations over total distributions
Excess (shortfall) of net income (loss) over total distributions
Three months ended
December 31,
2020
Year ended
December 31,
2020
Year ended
December 31,
2019
Year ended
December 31,
2018
$117,052
111,644
49,484
67,568
62,160
$426,928
(624,559)
263,572
163,356
(888,131)
$418,039
$462,123
340,289
394,181
23,858
(53,892)
337,918
395,568
66,555
(57,650)
(1) Total distributions include cash distributions to unitholders and Unit distributions issued under the Dividend Reinvestment Plan (“DRIP”). In February 2018, the REIT announced the
suspension of the DRIP until further notice, commencing with the March 2018 distribution.
Cash provided by operations exceeded total distributions for all periods noted above. Distributions exceeded net income (loss) for the year ended December
31, 2020 as well as the years ended December 31, 2019 and 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 taxes (recoveries) are deducted from or added to net income (loss) and have no impact on cash available to pay current distributions. The
net loss of $624.6 million for the year ended December 31, 2020 was primarily due to fair value adjustments which are further discussed on page 7 of this
MD&A.
Unit distributions issued under the DRIP were nil for the year ended December 31, 2020 (December 31, 2019 – nil, December 31, 2018 - $16.6 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, resulted in an increased proportion of cash distributions.
Page 38 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
Major Cash Flow Components
(in thousands of Canadian dollars)
Cash and cash equivalents, beginning of period
Cash flows from operations
Cash flows used for investing
Cash flows from (used for) financing
Cash and cash equivalents, end of period
Three months ended December 31
Year ended December 31
2020
2019
Change
2020
2019
Change
$54,436
$73,481
($19,045)
$48,640
$53,073
($4,433)
117,052
107,263
9,789
426,928
418,039
8,889
(240,906)
(311,128)
70,222
(183,244)
(5,407)
(177,837)
132,277
179,024
(46,747)
(229,465)
(417,065)
187,600
$62,859
$48,640
$14,219
$62,859
$48,640
$14,219
Cash flows from operations increased by $9.8 million for the three months ended December 31, 2020 compared to the respective 2019 period, primarily due
to an increase in non-cash working capital. Cash flows from operations increased by $8.9 million for the year ended December 31, 2020 compared to the
respective 2019 period, primarily due to an increase in non-cash working capital, lower finance costs and higher finance income. This was partially offset by
the bad debt expense and costs incurred for abandoned transactions both as a result of COVID-19.
Cash flows used for investing increased by $70.2 million for the three months ended December 31, 2020 compared to the respective 2019 period, primarily
due to a greater amount of mortgages receivables issued in Q4 2019 compared to Q4 2020. Cash flows used for investing decreased by $177.8 million for
the year ended December 31, 2020 compared to the respective 2019 period, primarily due to a decrease in net proceeds on the disposition of real estate
assets and H&R receiving a cash distribution of U.S $194.8 million as part of the Jackson Park refinancing (equity accounted investment) in Q3 2019. This
was partially offset by net repayments of mortgages receivable in 2020 compared to net issuances in 2019 and less cash spent on acquisitions, properties
under development and redevelopment.
Cash flows from (used for) financing decreased by $46.7 million for the three months ended December 31, 2020 compared to the respective 2019 period,
primarily due to an increase in debt drawn in Q4 2019 compared to Q4 2020, offset by lower Unit distributions. Cash flows from (used for) financing increased
by $187.6 million for the year ended December 31, 2020 compared to the respective 2019 period, primarily due to lower Unit distributions.
Capital Resources
As at December 31, 2020, H&R had cash on hand of $62.9 million and amounts available under its lines of credit totalling $1.1 billion. Subject to market
conditions, management expects to be able to meet all of the REIT’s ongoing contractual obligations. In addition, the REIT has $58.4 million available under
its secured construction facilities held through equity accounted investments as at December 31, 2020. As at December 31, 2020, 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, 2020, H&R had 100 unencumbered properties (including properties under development), with a fair value of approximately $3.7 billion.
Also, due to H&R’s 24-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, 2020, H&R had 40 properties valued at approximately $1.5 billion which are
encumbered with mortgages totalling $205.5 million. In this pool of assets, the average loan to value is 13.6%, the minimum loan to value is 1.3% and the
maximum loan to value is 29.0%. The weighted average remaining term to maturity of this pool of mortgages is 1.1 years. Of these 40 properties, six
properties have mortgages maturing in 2021 totalling $108.7 million with a fair value of $664.8 million.
The following is a summary of material contractual obligations including payments due as at December 31, 2020 for the next five years and thereafter:
Contractual Obligations(1)
(in thousands of Canadian dollars)
2021
2022-
2023
2024-
2025
2026 and
thereafter
Total
Mortgages payable
$939,535
$1,058,273
$242,553
$1,396,602
$3,636,963
Payments Due by Period
Senior debentures
Unsecured term loans
Lines of credit
Lease liability(2)
Property acquisition
-
575,000
188,029
273,750
1,117
11,587
-
214,068
2,293
-
750,000
250,000
-
2,385
-
250,000
250,000
-
176,914
-
1,575,000
688,029
487,818
182,709
11,587
Total contractual obligations
$1,414,018
$1,849,634
$1,244,938
$2,073,516
$6,582,106
(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.
Page 39 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
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, 2020. This is a rating achieved by only four Canadian
REITs (including H&R) as at December 31, 2020. 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.
Funding of Future Commitments
As at December 31, 2020, H&R had cash on hand of $62.9 million, cash available under its lines of credit of $1.1 billion and an unencumbered property pool
of approximately $3.7 billion.
The following summarizes the estimated loan to value ratios on properties for which mortgages mature over the next five years:
Year
2021
2022
2023
2024
2025
Number of
Properties
Mortgage Debt due
on Maturity ($000’s)
Weighted Average
Interest Rate on Maturity
Fair Value Investment
Properties ($000’s)
Loan to
Value
12
40
10
5
10
77
$836,727
543,465
392,160
42,827
104,912
$1,920,091
3.9%
3.9%
3.9%
3.2%
3.9%
3.9%
$2,335,598
1,465,824
594,159
221,327
229,567
$4,846,475
36%
37%
66%
19%
46%
40%
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, 2020, H&R has outstanding letters of credit totaling $31.8 million (December 31, 2019 - $36.9 million), including $12.5 million (December 31,
2019 - $16.6 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, 2020, such guarantees amounted to
$290.1 million expiring between 2021 and 2027 (December 31, 2019 - $199.0 million, expiring between 2021 and 2027), 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 had previously guaranteed certain debt assumed by purchasers in connection with past dispositions of properties. As at December 31, 2020, the
estimated amount of debt subject to such guarantees, and therefore the maximum exposure to credit risk is nil (December 31, 2019 - $41.3 million, which
expired in 2020). There were no defaults by the primary obligors for debts on which H&R had provided its guarantees, and as a result, no contingent loss
on these guarantees had been recognized in the REIT’s Financial Statements.
Page 40 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
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, 2020. This strategy manages risks related to foreign exchange rates on transactions that will occur in the future.
During 2019 and 2020, H&R had the following interest rate swaps outstanding:
(in thousands of Canadian dollars)
Debenture interest rate swap
Debenture interest rate swap
Term loan interest rate swap
Term loan interest rate swap
Term loan interest rate swap
Incentive units swap
Incentive units swap
Incentive units swap
Fair value asset (liability)* Net gain (loss) on derivative instruments
December 31
December 31
Year ended December 31
Maturity
March 1, 2019
February 13, 2020
March 17, 2021
May 7, 2030
January 6, 2026
2021
2022
2023
(1)
(2)
(3)
(4)
(5)
(6)
(6)
(6)
2020
$ -
-
(469)
(20,797)
(21,023)
730
701
1,763
2019
$ -
(404)
752
(2,777)
(6,171)
-
-
-
2020
$ -
404
(1,221)
(18,020)
(14,852)
730
701
1,763
2019
($592)
(73)
(4,101)
(2,777)
(3,801)
-
-
-
($39,095)
($8,600)
($30,495)
($11,344)
(1)
(2)
(3)
(4)
(5)
(6)
*
To fix the interest rate at 2.36% per annum for the Series K senior debentures which settled upon maturity.
To fix the interest rate at 3.67% per annum for the Series P senior debentures which settled upon maturity.
To fix the interest rate at 2.56% per annum for the U.S. $130.0 million term loan.
In November 2020, the interest rate swap was amended to fix the interest rate at 3.17% per annum for the $250.0 million term loan and the maturity date was extended to May
7, 2030. Previously, the interest rate was fixed at 3.33% per annum with a maturity date of March 7, 2026.
To fix the interest rate at 3.91% per annum for the $250.0 million term loan.
To fix the payout on incentive units that mature in the respective years.
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 41 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
SECTION IV
SELECTED FINANCIAL INFORMATION
Summary of Annual Information
The following tables summarize certain financial information for the years indicated below:
(in thousands of Canadian dollars except per Unit amounts)
Rentals from investment properties
Net income (loss) from equity accounted investments
Finance income
Net income (loss)
Total comprehensive income (loss)
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,
2020
Year Ended
December 31,
2019
Year Ended
December 31,
2018
$1,098,680
$1,149,450
$1,176,558
(16,986)
33,399
(624,559)
(711,221)
31,201
15,036
340,289
214,963
169,409
8,638
337,918
532,794
13,355,444
14,483,342
14,691,009
7,284,053
7,439,425
7,490,909
$0.92
$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 (loss) from equity accounted investments
Net income (loss)
Total comprehensive income (loss)
Q4
2020
Q3
2020
Q2
2020
$277,509
$271,612
$269,882
(44,697)
111,644
(34,663)
Q4
2019
$282,221
36,958
163,402
119,484
9,195
247,849
177,239
Q3
2019
$281,571
(18,414)
69,301
89,458
Q1
2020
$279,677
10,877
(1,019,821)
(783,620)
Q1
2019
7,639
35,769
(70,177)
Q2
2019
$286,972
$298,686
3,556
109,583
67,813
9,101
(1,997)
(61,792)
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.
Rentals from investment properties increased by $5.9 million in Q4 2020 compared to Q3 2020 primarily due to an increase in operating cost recoveries.
Net income (loss) from equity accounted investments decreased by $53.9 million in Q4 2020 compared to Q3 2020 primarily due to a fair value decrease to
Jackson Park in Q4 2020 as a result of lower than average lease renewals and prospective tenant inquiries as a result of COVID-19.
Net income (loss) decreased by $136.2 million in Q4 2020 compared to Q3 2020 primarily due to the following: (i) fair value adjustments on real estate
assets and financial instruments; (ii) a decrease in net income (loss) from equity accounted investments discussed above; and (iii) a higher deferred income
tax recovery in Q3 2020.
Total comprehensive income (loss) decreased by $211.9 million in Q4 2020 compared to Q3 2020 primarily due to the decrease in net income (loss) noted
above and a foreign currency loss from investment in foreign operations of $146.3 million in Q4 2020 compared to a loss of $70.6 million in Q3 2020.
Page 42 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
PORTFOLIO OVERVIEW
The geographic diversification of the portfolio of properties in which the REIT has an interest and the related square footage is disclosed at the REIT’s
proportionate share as at December 31, 2020 in the tables below:
Number of Properties(1)
Canada
Ontario
Alberta
Other
Subtotal
United States
Total
Office
Retail(2)
Industrial
Residential(3)
Total
20
36
37
-
93
4
17
19
-
40
Square Feet (in thousands)(1)
Canada
Office
Retail(2)
Industrial
Residential(3)
Total
Ontario
Alberta
5,375
3,458
4,898
-
13,731
2,607
3,954
2,030
-
8,591
4
14
28
-
46
Other
893
2,720
1,648
-
5,261
28
67
84
-
179
5
260
3
23
291
Subtotal
United States
8,875
10,132
8,576
-
27,583
1,865
3,572
700
7,209
13,346
33
327
87
23
470
Total
10,740
13,704
9,276
7,209
40,929
(1) H&R has 15 properties under development which are not included in the tables above.
(2) Retail, which includes ECHO’s equity accounted investment, has 10 properties under development which are not included in the tables above.
(3) The residential properties contain 7,831 residential rental units.
Page 43 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
LEASE MATURITY PROFILE
The following tables disclose H&R’s leases expiring in Canada and the United States at the REIT’s proportionate share, excluding the Residential segment
where leases typically expire annually.
Canadian Portfolio:
LEASE EXPIRIES
2021
2022
2023
2024
2025
Total % of each segment
U.S. Portfolio(1):
LEASE EXPIRIES
2021
2022
2023
2024
2025
Total % of each segment
(1) U.S. dollars.
Office
Retail
Industrial
Total
Rent per
sq.ft. ($)
on expiry
22.75
22.54
32.38
11.99
20.56
18.74
Rent per
sq.ft. ($)
on expiry
24.46
22.68
32.91
27.38
31.59
27.06
Rent per
sq.ft. ($)
on expiry
6.03
6.84
6.62
7.70
6.09
6.79
Sq.ft.
1,211,856
2,345,331
1,035,431
2,104,418
1,681,174
8,378,210
30.4%
Sq.ft.
264,818
1,165,704
387,518
751,129
683,639
3,252,808
37.9%
Sq.ft.
782,563
903,650
538,199
765,394
575,458
3,565,264
35.2%
Sq.ft.
164,475
275,977
109,714
587,895
422,077
1,560,138
17.6%
Office
Retail
Industrial
Total
Rent per
sq.ft. ($)
on expiry
-
57.48
5.86
24.93
15.23
17.76
Sq.ft.
-
563
85,725
172,039
92,694
351,021
18.8%
Rent per
sq.ft. ($)
on expiry
17.74
24.27
25.16
15.86
20.13
21.00
Sq.ft.
157,709
221,513
191,486
161,534
199,629
931,871
26.1%
Rent per
sq.ft. ($)
on expiry
-
-
3.00
3.75
-
Sq.ft.
157,709
222,076
689,796
456,663
292,323
3.17
1,818,567
29.6%
Sq.ft.
-
-
412,585
123,090
-
535,675
76.5%
Rent per
sq.ft. ($)
on expiry
20.20
14.79
23.01
16.06
18.45
17.64
Rent per
sq.ft. ($)
on expiry
17.74
24.35
9.51
16.01
18.58
15.13
Page 44 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
TOP TWENTY SOURCES OF REVENUE BY TENANT
The following table discloses H&R’s top twenty tenants at the REIT’s proportionate share:
Tenant
% of Rentals
from Investment
Properties(1)
Number of
Locations
H&R owned
sq.ft. (in 000’s)
Average Lease
Term to Maturity
(in years)(2)
Credit Ratings
(S&P)
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
Corus Entertainment Inc.
Lowe's Companies, Inc.(5)
Telus Communications
Shell Oil Products
Toronto-Dominion Bank
Public Works and Government Services, Canada
Loblaw Companies Limited(6)
Royal Bank of Canada
The TJX Companies Inc.(7)
Empire Company Limited(8)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18. Walmart Inc.(9)
19. Metro Inc.
20.
Canadian Imperial Bank of Commerce
Total
11.9%
8.4%
5.7%
4.0%
3.5%
3.0%
1.9%
1.9%
1.6%
1.2%
1.1%
1.1%
1.0%
1.0%
0.9%
0.9%
0.9%
0.7%
0.7%
0.7%
52.1%
1
23
1
1
201
19
1
1
13
17
14
7
5
19
5
17
14
9
12
9
389
1,997
2,536
845
660
1,636
2,681
466
472
1,346
356
182
286
321
273
247
655
492
751
420
191
17.4 BBB- Negative
13.6 BBB+ Stable
12.2 BBB- Negative
9.9 AA Stable
10.6 Not Rated
6.0 BBB Negative
10.3 BBB+ Stable
12.2 BB Negative
13.3 BBB+ Stable
5.2 BBB+ Negative
2.2 AA- Negative
6.6 AA- Stable
4.5 AAA Stable
8.4 BBB Stable
4.4 AA- Stable
5.5 A Negative
10.3 BBB- Stable
6.6 AA Stable
5.8 BBB Stable
4.3 A+ Stable
16,813
11.6
(1)
The percentage of rentals from investment properties is based on estimated annualized gross revenue excluding straight-lining of contractual rent, rent amortization of tenant
inducements and capital expenditure recoveries.
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, Sports Experts and Party City.
(5)
(6)
(7)
(8)
(9) Walmart Inc. includes Sam’s Club.
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 45 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
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
included in the fair value of real estate assets.
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 external independent appraisers or by the REIT’s internal valuation team. The valuations are based on a
number of methods and significant assumptions, such as capitalization rates, terminal capitalization rates, discount rates and estimates of future cash
flows. 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 significant 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 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, where the REIT is the lessor, are operating leases.
Income taxes
H&R is a mutual fund trust and a real estate investment trust pursuant to the Tax Act. Under current tax legislation, H&R is not liable to pay Canadian
income tax provided that its taxable income is fully distributed to unitholders each year. H&R 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"). H&R 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. H&R expects to continue to qualify as a real estate investment trust; however, should it no longer qualify, H&R would be subject
to tax on its taxable income distributed to unitholders.
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 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 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.
Page 46 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
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, 2020, 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, 2020. The REIT’s
Financial Statements and this MD&A were reviewed and approved by H&R’s Audit Committee and the Board 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, 2020 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, 2020. No changes were made to H&R’s internal control over financial reporting during the three-month period ended December 31,
2020 that have materially affected, or are reasonably likely to materially affect, the REIT’s internal controls over financial reporting.
H&R’s management, including the CEO and CFO, does not expect that the REIT’s controls and procedures will prevent or detect all misstatements due to
error or fraud. Due to the inherent limitations in all control systems, an evaluation of controls can provide only reasonable, not absolute assurance, that all
control issues and instances of fraud or error, if any, within the REIT have been detected. H&R is continually evolving and enhancing its systems of controls
and procedures.
SECTION VI
RISKS AND UNCERTAINTIES
All real estate assets are subject to a degree of risk and uncertainty. They are affected by various factors including general market conditions and local
market circumstances. An example of general market conditions would be the availability of long-term mortgage financing whereas local conditions would
relate to factors affecting specific properties such as an oversupply of space or a reduction in demand for real estate in a particular area. Management
attempts to manage these risks through geographic, type of asset and tenant diversification in H&R’s portfolio. The major risk factors including detailed
descriptions are outlined below and in H&R’s Annual Information Form.
Risks Associated with COVID-19
On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic, which has resulted in the federal and provincial governments,
as well as U.S. federal and state governments, enacting emergency measures to combat the spread of the virus, including travel bans, quarantine periods,
social distancing and significant monetary and fiscal interventions. Given the success in mitigating the initial spread of COVID-19, the governments in Canada
and in many other countries, including the U.S., eased the containment measures in late Q2 2020 and rolled out reopening of non-essential businesses on
a staged regional approach for most of Q3 2020. This led to a recovery of economic activities and the employment rate in Canada and in many parts of the
world. Following Q3 2020, the rise in the number of COVD-19 cases globally indicated the start of the second wave of the pandemic. In response, regional
and provincial governments in Canada and internationally, including the U.S., introduced, or restored, restrictive measures for certain non-essential
businesses such as theatres, gyms and sit-down restaurants. In Q4 2020, many governments began to implement more restrictive measures and some
governments imposed lockdowns, closing all businesses other those deemed “essential”. These emergency measures have resulted in additional risks and
uncertainties to the REIT’s business, operations and financial performance as discussed throughout the MD&A.
The duration and impact of the COVID-19 pandemic on H&R continues to remain unknown at this time, as is the efficacy of the government's interventions.
However, disruptions caused by COVID-19 have negatively impacted the market price for the equity securities of the REIT and may, in the short or long
term, materially adversely impact the REIT's tenants and/or the debt and equity markets, both of which could materially adversely affect the REIT's operations
and financial performance and ability to pay distributions. The REIT has experienced and continues to expect COVID-19 related delays with its current and
future development projects. The REIT expects near-term delay to ongoing projects in terms of construction spending and expected completion dates, as
well as delays to the commencement of construction for new development projects.
The extent of the effect of the ongoing COVID-19 pandemic on the REIT's operational and financial performance will depend numerous factors, including
the duration, spread and intensity of the pandemic, the actions by governments and others taken to contain the pandemic or mitigate its impact, changes in
the preferences of tenants and prospective tenants, and the direct and indirect economic effects of the pandemic and containment measures, all of which
are uncertain and difficult to predict considering that the situation continues to evolve rapidly. As a result, it is not currently possible to ascertain the long
term impact of COVID-19 on the REIT's business and operations. Certain aspects of the REIT's business and operations that have been or could potentially
Page 47 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
continue to be impacted include rental income, occupancy, tenant inducements, future demand for space and market rents, as well as increased costs
resulting from the REIT's efforts to mitigate the impact of COVID-19, longer-term stoppage of development projects, temporary or long-term labour shortages
or disruptions, temporary or long-term impacts on domestic and global supply chains, increased risks to IT systems and networks, further impairments and/or
write-downs of assets, and the deterioration of worldwide credit and financial markets that could limit the REIT's ability to access capital and financing on
acceptable terms or at all.
Even after the COVID-19 pandemic has subsided, the REIT may continue to experience material adverse impacts to its business as a result of the global
economy, including any related recession, as well as lingering effects on the REIT's employees, suppliers, third-party service providers and/or tenants.
Management continues to actively assess and respond where possible, to the effects of the COVID-19 pandemic on the REIT's employees, tenants,
suppliers, and service providers, and evaluating governmental actions being taken to curtail its spread. The REIT is continuing to review its future cash flow
projections and the valuation of its properties in light of the COVID-19 pandemic, and intends to follow health and safety guidelines as they continue to
evolve.
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, the impact of COVID-19, 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, 2020, approximately 25.6% 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.
Page 48 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
Credit Risk and Tenant Concentration
H&R is exposed to credit risk in the event that borrowers default on the repayment of the amounts owing to H&R. Management mitigates this risk by ensuring
adequate security has been provided in support of mortgages receivable.
H&R is exposed to credit risk as an owner of real estate in that tenants may become unable to pay the contracted rents. Management mitigates this risk by
carrying out appropriate credit checks and related due diligence on the significant tenants. Management has diversified H&R’s holdings so that it owns
several categories of properties (office, retail, industrial and residential) and acquires properties throughout Canada and the United States. In addition,
management ensures that no tenant or related group of tenants, other than investment grade tenants, account for a significant portion of the cash flow. The
only tenants which individually account for more than 5% of the rentals from investment properties of H&R are 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 30.2% 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. 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 including the impact of COVID-19; (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, 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, including the impact of COVID-19, 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
Page 49 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
posed to its systems. H&R's primary risks that could directly result from the occurrence of a cyber-incident include operational interruption, damage to its
reputation, damage to H&R’s business relationships with its tenants, disclosure of confidential information regarding its tenants, employees and third parties
with whom H&R interacts, and may result in negative consequences, including remediation costs, loss of revenue, additional regulatory scrutiny and litigation.
H&R has implemented processes, procedures and controls to help mitigate these risks, but these measures, as well as its increased awareness of a risk of
a cyber-incident, do not guarantee that its financial results will not be negatively impacted by such an incident.
Financing Credit Risk
H&R is also exposed to credit risk as a lender on the security of real estate in the event that a borrower is unable to make the contracted payments. Such
risk is mitigated through credit checks and related due diligence of the borrowers and through careful evaluation of the worth of the underlying assets.
Environmental and Climate Change 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 I environmental audits are completed on all properties prior to acquisition. Further investigation is
conducted if Phase I 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.
Natural disasters and severe weather such as floods, ice storms, blizzards and rising temperatures may result in damage to the Properties. The extent of
the REIT's casualty losses and loss in property operating income in connection with such events is a function of the severity of the event and the total amount
of exposure in the affected area. The REIT is also exposed to risks associated with inclement winter weather, including increased need for maintenance and
repair of the REIT's buildings. In addition, climate change, to the extent it causes changes in weather patterns, could have effects on the REIT's business
by increasing the cost to recover and repair Properties and by increasing property insurance costs to insure a Property against natural disasters and severe
weather events.
H&R has taken proactive steps to mitigate the risk of climate change on the REIT and its properties and to address the REIT’s environmental impact. See
the “ESG” section of this MD&A for additional details on the REIT’s environmental and sustainability practices and initatives.
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 the “Forward-Looking Disclaimer” in this MD&A.
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, including as a result of the impact of COVID-19 on the REIT’s business. The actual amount distributed by H&R will depend on
Page 50 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
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.
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 L, N, O, Q and R 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
Page 51 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
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 2020.
Management of H&R intends to conduct the affairs of H&R so that it qualifies for the REIT Exemption at all times. However, as the REIT Exemption includes
complex revenue and asset tests, no assurances can be provided that H&R will continue to qualify for any subsequent year.
There can be no assurance that income tax laws and the treatment of mutual fund trusts will not be changed in a manner which adversely affects holders of
Units. If H&R ceases to qualify as a “mutual fund trust” under the Tax Act and the Units thereof cease to be listed on a designated stock exchange (which
currently includes the TSX), Units will cease to be qualified investments for registered retirement savings plans, deferred profit sharing plans, registered
retirement income funds, registered education savings plans, registered disability savings plans and tax-free savings accounts.
Pursuant to rules in the Tax Act, if H&R experiences a “loss restriction event” (i) it will be deemed to have a year-end for tax purposes (which would result
in an unscheduled distribution of undistributed net income and net realized capital gains, if any, at such time to Unitholders to the extent necessary 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 and 2020, 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 H&R Finance Trust (“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% (50% for the 2019 and 2020 taxable years) 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
Page 52 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
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.
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.
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 4, 2021, there were 286,863,083 Units issued and outstanding and 9,500,000 special voting
units outstanding.
As at December 31, 2020, the maximum number of options to purchase Units authorized to be issued under H&R’s Unit Option Plan was 17,723,110. Of
this amount, 10,543,362 options to purchase Units have been granted and are outstanding and 7,179,748 options have not yet been granted. As at February
4, 2021, there were 10,400,029 options to purchase Units outstanding and fully vested.
As at December 31, 2020, 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 1,093,375 incentive units which remain outstanding, 184,299 have been settled for Units and 3,722,326 incentive units remain available for granting.
As at February 4, 2021, there were 1,098,148 incentive units outstanding.
As at December 31, 2020 there were 14,883,065 exchangeable units outstanding of which 9,500,000 exchangeable units are accompanied by special voting
units. As at February 4, 2021, there were 14,883,065 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.
Page 53 of 54
H&R REIT - MD&A - DECEMBER 31, 2020
SUBSEQUENT EVENTS
(a) In January 2021, the REIT sold one U.S. office property which was classified as held for sale as at December 31, 2020, for gross proceeds of U.S.
$165.0 million and repaid the mortgage payable of approximately U.S. $13.0 million bearing interest at 5.7% per annum.
(b) In January 2021, the REIT acquired 12.4 acres of vacant land in Jersey City, NJ for a purchase price of U.S. $162.0 million. The REIT’s outstanding
mortgage receivable of approximately U.S. $146.2 million, secured by this land and bearing interest at 10% per annum, was applied toward the purchase
price.
Page 54 of 54
Consolidated Financial Statements of
H&R REAL ESTATE INVESTMENT TRUST
Years ended December 31, 2020 and 2019
KPMG LLP
Bay Adelaide Centre
333 Bay Street, Suite 4600
Toronto, ON M5H 2S5
Canada
Tel 416-777-8500
Fax 416-777-8818
INDEPENDENT AUDITORS’ REPORT
To the Unitholders of H&R Real Estate Investment Trust
Opinion
We have audited the consolidated financial statements of H&R Real Estate Investment
Trust (“the Entity”), which comprise:
the consolidated statement of financial position as at December 31, 2020 and December
31, 2019;
the consolidated statement of comprehensive income (loss) for the years then ended;
the consolidated statements of changes in unitholders’ 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, 2020 and December 31,
2019, 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.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most
significance in our audit of the financial statements for the year ended December 31, 2020.
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated
with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG LLP.
H&R Real Estate Investment Trust
February 11, 2021
These matters were addressed in the context of our audit of the financial statements as a
whole, and in forming our opinion thereon, and we do not provide a separate opinion on
these matters.
We have determined the matters described below to be the key audit matters to be
communicated in our auditors’ report.
Evaluation of the fair value of investment properties
Description of the matter
We draw attention to Note 1 (d)(ii), Note 2 (b) and Note 4 of the financial statements. The
Entity has recorded investment properties at fair value for an amount of $11,149,130
thousand. The Entity also has equity accounted investments of $955,468 thousand
representing the Entity’s share of net assets of associates and joint ventures. These
associates and joint ventures have recorded investment properties at fair value for an
amount of $4,556,125 thousand. The investment properties are measured at fair value
using valuations prepared by either the Entity’s internal valuation team or external
independent appraisers. The valuations are based on a number of methods and significant
assumptions, such as capitalization rates, terminal capitalization rates and discount rates
and estimates of future cash flows.
Why the matter is a key audit matter
We identified the evaluation of the fair value of investment properties as a key audit matter.
This matter represented an area of significant risk of material misstatement given the
magnitude of investment properties and the high degree of estimation uncertainty in
determining the fair value of investment properties. In addition, significant auditor judgment
and specialized skills and knowledge were required in performing, and evaluating the results
of, our audit procedures due to the sensitivity of the fair value of investment properties to
minor changes in certain significant assumptions.
How the matter was addressed in the audit
The primary procedures we performed to address this key audit matter included the following:
For a selection of investment properties, we assessed the Entity’s ability to accurately
forecast by comparing the Enti ty’s future cash flows to be generated by the investment
properties used in the prior year’s estimate of the fair value of investment properties to actual
results.
For a selection of investment properties, we compared the future cash flows used by Entity’s
internal valuation team and external independent appraisers to the actual historical cash
flows. We took into account the changes in conditions and events affecting the investment
properties to assess the adjustments, or lack of adjustments, made by the Entity’s internal
valuation team and external independent appraisers in arriving at those future cash flows.
We involved valuations professionals with specialized skills and knowledge, who assisted in
evaluating, for the overall portfolio, the appropriateness of the capitalization rates, terminal
capitalization rates and discount rates used by Entity’s internal valuation team and external
independent appraisers. These rates were evaluated by comparing them to published
reports of real estate industry commentators and where available, recent sales of similar
properties while considering the features of the specific investment properties.
2
H&R Real Estate Investment Trust
February 11, 2021
We evaluated the competence, capabilities and objectivity of the external independent
appraisers by:
Inspecting evidence that the appraisers are in good standing with the Appraisal Institute
Considering whether the appraisers have appropriate knowledge in relation to the
specific type of investment properties
Reading the reports of the external independent appraisers which refers to their
independence
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 “2020 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 “2020 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.
3
H&R Real Estate Investment Trust
February 11, 2021
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements
as a whole are free from material misstatement, whether due to fraud or error, and to issue
an auditors’ report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with Canadian generally accepted auditing standards will always
detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the economic decisions of
users taken on the basis of the financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we
exercise professional judgment and maintain professional skepticism throughout the audit.
We also:
Identify and assess the risks of material misstatement of the financial statements,
whether due to fraud or error, design and perform audit procedures responsive to those
risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for
our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for
one resulting from error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control;
Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Entity’s internal control;
Evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by management;
Conclude on the appropriateness of management's use of the going concern basis of
accounting and, based on the audit evidence obtained, whether a material uncertainty
exists related to events or conditions that may cast significant doubt on the Entity’s ability
to continue as a going concern. If we conclude that a material uncertainty exists, we are
required to draw attention in our auditors’ report to the related disclosures in the financial
statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions
are based on the audit evidence obtained up to the date of our auditors’ report. However,
future events or conditions may cause the Entity to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the financial statements,
including the disclosures, and whether the financial statements represent the underlying
transactions and events in a manner that achieves fair presentation.
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.
4
H&R Real Estate Investment Trust
February 11, 2021
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.
Determine, from the matters communicated with those charged with governance, those
matters that were of most significance in the audit of the financial statements of the
current period and are therefore the key audit matters. We describe these matters in our
auditors report unless law or regulation precludes public disclosure about the matter or
when, in extremely rare circumstances, we determine that a matter should not be
communicated in our auditors; report because the adverse consequences of doing so
would reasonably be expected to outweigh the public interest benefits of such
communication.
Chartered Professional Accountants, Licensed Public Accountants
The engagement partner on the audit resulting in this auditors’ report is Larry Toste.
Toronto, Canada
February 11, 2021
5
Note
December 31
2020
December 31
2019
3
3
4
5
6
7
8
9
21
10
5
22
24
$ 11,149,130
449,849
11,598,979
$ 11,988,347
683,145
12,671,492
955,468
219,050
519,088
62,859
1,002,773
135,673
624,764
48,640
$ 13,355,444
$ 14,483,342
$ 6,368,316
197,796
348,755
369,186
-
$ 6,375,860
323,173
409,381
281,595
49,416
7,284,053
7,439,425
6,071,391
7,043,917
$ 13,355,444
$ 14,483,342
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:
“Ronald Rutman”
“Thomas J. Hofstedter”
Trustee
Trustee
1
H&R REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Comprehensive Income (Loss)
(In thousands of Canadian dollars)
Years ended December 31, 2020 and 2019
Property operating income:
Rentals from investment properties
Property operating costs
Net income (loss) 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
Net income (loss) before income taxes
Income tax (expense) recovery
Net income (loss)
Note
2020
2019
14
4
15
15
15
3
3
21
$ 1,098,680
(435,014)
663,666
$ 1,149,450
(438,475)
710,975
(16,986)
(228,869)
33,399
(14,297)
82,974
(1,195,958)
(2,229)
(678,300)
53,741
(624,559)
31,201
(256,496)
15,036
(27,293)
(19,483)
(103,903)
25,632
375,669
(35,380)
340,289
Other comprehensive loss:
Items that are or may be reclassified subsequently to net income (loss)
13
(86,662)
(125,326)
Total comprehensive income (loss) attributable to unitholders
$ (711,221)
$ 214,963
See accompanying notes to the consolidated financial statements.
2
H&R REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Changes in Unitholders' Equity
(In thousands of Canadian dollars)
Years ended December 31, 2020 and 2019
UNITHOLDERS' EQUITY
Note
Unitholders' equity, January 1, 2019
Proceeds from issuance of Units
Net income
Distributions to unitholders
Other comprehensive loss
Unitholders' equity, December 31, 2019
Proceeds from issuance of Units
Net loss
Distributions to unitholders
Other comprehensive loss
13
13
Value of
Units
Accumulated
net income
Accumulated
distributions
$ 5,366,464
23,035
-
-
-
5,389,499
$ 5,558,062
-
340,289
-
-
5,898,351
$ (4,096,250)
-
-
(394,181)
-
(4,490,431)
2,267
-
-
-
-
(624,559)
-
-
-
-
(263,572)
-
Accumulated
other
comprehensive
income
$ 371,824
-
-
-
(125,326)
246,498
-
-
-
(86,662)
Total
$ 7,200,100
23,035
340,289
(394,181)
(125,326)
7,043,917
2,267
(624,559)
(263,572)
(86,662)
Unitholders' equity, December 31, 2020
$ 5,391,766
$ 5,273,792
$ (4,754,003)
$ 159,836
$ 6,071,391
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, 2020 and 2019
Cash provided by (used in):
Operations:
Net income (loss)
Finance cost - operations
Interest paid
Items not affecting cash:
Net (income) loss from equity accounted investments
Rent amortization of tenant inducements
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 (recovery)
Deferred income taxes (recovery)
Change in other non-cash operating items
Investing:
Properties under development:
Acquisitions
Additions
Investment properties:
Net proceeds on disposition of real estate assets
Acquisitions
Redevelopment
Capital expenditures
Leasing expenses and tenant inducements
Equity accounted investments, net
Mortgages receivable, 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
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
2020
2019
$ (624,559)
228,869
(247,723)
$ 340,289
256,496
(273,701)
16,986
2,661
1,195,958
2,229
(82,974)
(10,341)
(54,000)
(178)
426,928
(34,710)
(166,179)
95,904
(33,506)
(73,955)
(52,980)
(49,927)
8,200
123,710
199
(183,244)
-
(295,959)
214,772
(193,785)
(337,500)
646,703
(124)
(263,572)
(229,465)
14,219
48,640
$ 62,859
(31,201)
2,354
103,903
(25,632)
19,483
10,144
35,267
(19,363)
418,039
(14,595)
(233,638)
612,510
(188,454)
(125,060)
(64,234)
(44,756)
253,941
(204,294)
3,173
(5,407)
250,000
463,878
224,631
(617,689)
(350,000)
-
6,296
(394,181)
(417,065)
(4,433)
53,073
$ 48,640
15
4
14
3
3
15
12(b)
21
16
3
3, 16
3
3, 16
3
3
6
8(d)
8(d)
8(a)
8(a)
8(b)
8(b)
7
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, 2020 and 2019
H&R Real Estate Investment Trust (the “REIT”) is an unincorporated open-ended 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.
Countries around the world have been affected by the COVID-19 virus, which was declared a pandemic by The World Health Organization on March 11,
2020. The outbreak of COVID-19 has resulted in the federal and provincial governments enacting emergency measures to combat the spread of the virus.
These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused material disruption
to businesses globally resulting in an economic slowdown. The governments have reacted with significant monetary and fiscal interventions designed to
stabilize economic conditions.
The duration and full impact of the COVID-19 pandemic on the REIT is unknown at this time, as is the efficacy of the government’s interventions. The
extent of the effect of COVID-19 on the REIT’s operational and financial performance will depend on numerous factors including the duration, spread, time
frame and effectiveness of vaccination roll-out, all of which are uncertain and difficult to predict. As a result, it is not currently possible to ascertain the long
term impact of COVID-19 on the REIT’s business and operations. Certain aspects of the REIT’s business and operations that have been and will continue
to be impacted include rental income, occupancy, tenant inducements and future demand for space. In the preparation of the consolidated financial
statements, the REIT has incorporated the potential impact of COVID-19 into its estimates and assumptions that affect the carrying amounts of its assets.
The REIT has updated its future cash flows assumptions and its capitalization rates, terminal capitalization rates, and discount rates applied to these cash
flows as well as updated its assumptions around the valuation of its accounts receivable and mortgages receivable.
1. Basis of preparation:
(a) Statement of compliance
These consolidated financial statements have been prepared in accordance with IFRS as published by the International Accounting Standards
Board and using accounting policies described herein.
The consolidated financial statements were approved by the Board of Trustees of the REIT on February 11, 2021.
(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 Canadian dollar.
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) Certain mortgages receivable;
(iv) Derivative instruments;
(v) Liabilities for cash-settled unit-based compensation; and
(vi) 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, 2020 and 2019
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 fair value of real estate assets
(note 3).
(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 external independent appraisers or by the REIT’s internal valuation team. The
valuations are based on a number of methods and significant assumptions, such as capitalization rates, terminal capitalization rates,
discount rates and estimates of future cash flows. 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 significant 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, 2020 and 2019
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 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)
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, investment properties are measured at fair value, under IAS 40, Investment Property (“IAS 40”) using valuations prepared by
either the REIT’s internal valuation team or external independent appraisers.
The REIT performs an assessment of each investment property acquired to determine whether the acquisition is to be accounted for as an asset
acquisition or a business combination. A transaction is considered to be a business combination if the acquired property meets the definition of
a business under IFRS 3, as set out in note 1(d)(ii). The REIT expenses transaction costs on business combinations and capitalizes transaction
costs on asset acquisitions.
Upon acquisition, investment properties are initially recorded at cost. Subsequent to initial recognition, the REIT uses the fair value model to
account for investment properties. Under the fair value model, investment properties are recorded at fair value, determined based on available
market evidence at each reporting date. The related gain or loss in fair value is recognized in net income in the year in which it arises.
Subsequent capital expenditures are capitalized to investment properties only when it is probable that future economic benefits of the expenditure
will flow to the REIT and the cost can be measured reliably. All other repairs and maintenance costs are expensed when incurred. Leasing costs,
such as commissions incurred in negotiating tenant leases, are included in investment properties.
Gains or losses from the disposal of investment properties are determined as the difference between the net disposal proceeds and the carrying
amount of the investment property and are recognized in net income in the year of disposal.
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, 2020 and 2019
2. Significant accounting policies (continued):
(c) 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.
(d) 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.
(e)
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.
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, 2020 and 2019
2. Significant accounting policies (continued):
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
2020 and the 2019 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.
(f) 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 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.
(g) 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.
(h) 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.
(i) Foreign currency translation:
The REIT accounts for its investment in H&R REIT (U.S.) Holdings Inc. (“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.
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, 2020 and 2019
2. Significant accounting policies (continued):
(j) 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.
(k) Finance costs:
Finance costs are comprised of interest expense on borrowings, distributions on exchangeable units classified as liabilities, gain (loss) on change
in fair value of 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.
(l)
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 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.
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.
(m) 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.
(n) 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.
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, 2020 and 2019
2. Significant accounting policies (continued):
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.
(o) 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.
(p) 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.
(q) 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.
(r) Leases:
The REIT, as a lessee, recognizes assets and liabilities for all leases with a term of more than twelve months, unless the underlying asset is of
low value and 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.
(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.
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, 2020 and 2019
2. Significant accounting policies (continued):
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. A provision for ECL is recognized at each
balance sheet date for all financial assets measured at amortized cost.
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.
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, 2020 and 2019
3. Real estate assets:
Opening balance, beginning of year
Acquisitions, including transaction costs
Transfer of investment property from equity accounted investments
16
Dispositions
Transfer of investment properties to assets classified as held for sale
Transfer of investment properties to properties under development
Operating capital:
Capital expenditures
Leasing expenses and tenant inducements
Development capital:
Redevelopment (including capitalized interest)
Transfer of properties under development that have reached substantial
completion to investment properties
Change in right-of-use asset(1)
Fair value adjustment on real estate assets
Change in foreign exchange
Closing balance, end of year
December 31, 2020
December 31, 2019
Note
Investment
Properties
Properties
Under
Development
Investment
Properties
Properties
Under
Development
$ 11,988,347
$ 683,145
$ 12,683,709
$ 404,814
33,506
15,665
(22,145)
(219,050)
(665)
52,980
49,927
77,867
34,710
188,454
14,595
-
-
-
665
-
-
-
-
(749,830)
(116,805)
-
64,234
44,756
130,409
-
-
-
-
-
-
-
436,400
(436,400)
-
(1,195,958)
(927)
-
(81,649)
(14,220)
-
-
(103,903)
(157,484)
$ 11,149,130
$ 449,849
$ 11,988,347
$ 683,145
-
-
32,002
-
(14,204)
Additions to properties under development (including capitalized interest)
-
182,876
-
245,938
Amortization of tenant inducements and straight-lining of contractual rents
13,905
-
4,807
(1) As at December 31, 2020, the right-of-use asset in a leasehold interest of $30,336 (2019 - $32,002) was measured at an amount equal to the corresponding lease liability
(note 10).
Asset acquisitions:
During the year ended December 31, 2020, the REIT acquired:
(a)
two industrial properties and one office property (year ended December 31, 2019 - two residential properties and one industrial property); and
(b) one industrial property under development and one residential property under development (year ended December 31, 2019 - one industrial
property under development and one residential property 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 inclusive of transaction costs of the assets as at the respective dates of acquisition:
Assets
Investment properties
Properties under development
December 31
2020
December 31
2019
$ 33,477
34,710
$ 188,375
14,595
$ 68,187
$ 202,970
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, 2020 and 2019
3. Real estate assets (continued):
During the year ended December 31, 2020, the REIT incurred additional costs of $29 (year ended December 31, 2019 - $79) in respect of prior year
acquisitions which are not included in the above table.
Asset dispositions:
During the year ended December 31, 2020, the REIT sold two residential properties, two retail properties and a 50% ownership interest in one industrial
property and recognized, in aggregate, a loss on sale of real estate assets of $2,229.
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, in aggregate, a gain on sale of real estate assets of
$25,632.
Fair value disclosure:
The estimated fair values of the REIT’s real estate assets are based on the following methods and significant assumptions:
(i)
Discounted cash flow analyses which are based upon, among other things, future cash inflows in respect of rental income from current leases
and assumptions about rental income from future leases reflecting market conditions at the 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
minimum term of 10 years; and
(ii)
The direct capitalization method which calculates fair value by applying a capitalization rate to future cash flows based on stabilized net operating
income.
During the year ended December 31, 2020, certain properties were valued by professional external independent appraisers. When an external
independent appraisal is obtained, the REIT's internal valuation team assesses the significant assumptions used in the independent appraisal and
holds discussions with the external independent appraiser on the reasonableness of their assumptions. External independent appraisals received
throughout the year represent 13.4% of the fair value of investment properties as at December 31, 2020 (year ended December 31, 2019 - 37.1%).
The REIT utilizes external industry sources to determine a range of 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:
December 31, 2020
December 31, 2019
* Excludes the residential segment.
Capitalization Rates
Discount Rates*
Terminal Capitalization Rates*
Canada
6.63%
5.84%
United
States
5.39%
5.34%
Total
Canada
6.22%
5.69%
7.54%
6.70%
United
States
6.63%
6.63%
Total
Canada
7.35%
6.69%
6.94%
6.08%
United
States
6.03%
5.93%
Total
6.75%
6.06%
In light of the COVID-19 pandemic, the REIT has updated its assumptions used in determining the fair value of investment properties. The oil and gas
industry has experienced significant declines in commodity prices as a result of the continued shift to renewable energy. The REIT applied higher
discount and capitalization rates to its office properties leased to oil and gas tenants due to increased vacancy rates causing lower market rents in
Calgary, AB and Houston, TX. The retail industry (mainly the REIT’s enclosed shopping centres) has also experienced significant hardship with all non-
essential stores being closed for a significant period of time. The REIT applied higher discount and capitalization rates as well as revised leasing
assumptions to its retail properties in enclosed shopping centres.
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, 2020 and 2019
3. Real estate assets (continued):
Fair value sensitivity:
The REIT’s investment properties are classified as level 3 under the fair value hierarchy, as the inputs in the valuations of these investment properties
are not based on observable market data. The following table provides a sensitivity analysis for the weighted average capitalization rate which is
representative of the discount rate and terminal capitalization rate applied as at December 31, 2020:
Capitalization Rate
Sensitivity
Increase (Decrease)
(0.75%)
(0.50%)
(0.25%)
December 31, 2020
0.25%
0.50%
0.75%
Capitalization Rate
Fair Value of
Investment Properties
5.47%
5.72%
5.97%
6.22%
6.47%
6.72%
6.97%
$ 12,677,804
$ 12,123,704
$ 11,616,011
$ 11,149,130
$ 10,718,329
$ 10,319,582
$ 9,949,439
Fair Value
Variance
$ 1,528,674
$ 974,574
$ 466,881
$ -
$ (430,801)
$ (829,548)
$ (1,199,691)
% Change
13.71%
8.74%
4.19%
0.00%
(3.86%)
(7.44%)
(10.76%)
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, 2020, the REIT: (i) disposed of one industrial property; (ii) purchased one industrial property under development;
and (iii) purchased the remaining 49.5% ownership interest in one industrial property previously held in a joint venture. As the REIT now owns 100% of
the property that was previously held in a joint venture, it is consolidated in these consolidated financial statements.
During the year ended December 31, 2019, the REIT: (i) transferred LIC Operator Co., L.P. (“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%.
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, 2020 and 2019
4. Equity accounted investments (continued):
Investments in joint ventures:(1)
Slate Drive
One industrial property (2019 - three)
Hercules Project
The Pearl
Esterra Park
Shoreline
Investments in associates:(2)
ECHO Realty LP ("ECHO")
Jackson Park
Location
Operating segment
2020
2019
Ownership interest
December 31
December 31
Canada
United States
United States
United States
United States
United States
United States
United States
Industrial
Industrial
Residential
Residential
Residential
Residential
Retail
Residential
50.0%
-
50.5%
31.7%
33.3%
33.3%
31.2%
33.6%
50.0%
50.5%
31.7%
33.3%
33.3%
31.2%
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:
Equity accounted investments in:
----Associates----
Joint Ventures
----Associates----
Joint Ventures
December 31, 2020
December 31, 2019
ECHO Jackson Park
(1)
Total
ECHO Jackson Park
(1)
Total
Investment properties(2)
$ 2,477,430
$ 1,936,750
$ 141,945
$ 4,556,125
$ 2,493,118 $ 2,080,000
$ 71,500 $ 4,644,618
Properties under development
Assets classified as held for sale
Other assets
Cash and cash equivalents
50,071
33,020
44,939
29,736
-
-
9,126
27,860
569,669
619,740
-
1,824
12,237
33,020
55,889
69,833
67,898
38,316
60,753
28,778
-
-
12,471
45,515
385,070
452,968
-
459
11,777
38,316
73,683
86,070
Debt
(1,004,874)
(1,253,443)
(300,681)
(2,558,998)
(1,049,882)
(1,281,120)
(83,606)
(2,414,608)
Accounts payable and accrued liabilities
(62,132)
(13,149)
(59,121)
(134,402)
(66,168)
(37,364)
(39,593)
(143,125)
Lease liability(2)
Non-controlling interest
Net assets
(119,310)
(67,948)
-
-
-
-
(119,310)
(129,538)
(67,948)
(70,144)
-
-
-
-
(129,538)
(70,144)
1,380,932
707,144
365,873
2,453,949
1,373,131
819,502
345,607
2,538,240
REIT's share of net assets
$ 471,337
$ 353,903
$ 130,228
$ 955,468
$ 468,857
$ 410,087
$ 123,829 $ 1,002,773
(1)
The REIT’s investments in joint ventures are comprised of:
(a) one U.S. industrial property (2019 - three) and one U.S. residential property (2019 - nil); and
(b)
four U.S. residential properties under development (2019 - four) and one Canadian industrial property under development (2019 - nil).
(2) As at December 31, 2020, the total fair value of investment properties, within equity accounted investments, net of the lease liability is $4,436,815 (December 31, 2019 -
$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, 2020 and November 30, 2019, 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, 2020 and 2019
4. Equity accounted investments (continued):
Net income (loss) from equity
----Associates----
Joint Ventures
----Associates----
Joint Ventures
accounted investments in:
ECHO
Jackson Park
(1)
Total
ECHO
Jackson Park
(1)
Total
Rentals from investment properties
Property operating costs
$ 215,970
(51,552)
$ 89,825
(35,040)
$ 4,791
$ 310,586
$ 214,633
$ 95,658
$ 8,119
$ 318,410
(626)
(87,218)
(45,971)
(28,910)
(384)
(75,265)
December 31, 2020
December 31, 2019
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
Loss on sale of real estate assets
Income tax (expense) recovery
Net income (loss)
1,425
625
(48,393)
(11,068)
(4,340)
(15,497)
(4,022)
(120)
83,028
Net income attributable to non-controlling interest
(2,369)
-
-
(46,266)
-
-
-
276
(176)
(85)
-
1,425
901
(94,835)
(11,153)
(4,340)
1,930
1,086
-
1,547
(53,445)
(42,173)
(9,961)
(7,571)
(104,423)
7,433
(112,487)
(22,556)
-
(19)
(95,923)
-
(928)
333
11,018
-
(4,950)
194
(1,877)
(2,369)
(4,246)
(513)
(161)
77,471
(3,489)
73,982
-
253
(932)
(139)
1,930
2,886
(96,550)
(10,100)
-
(16,175)
11,756
(29,401)
(4,803)
(5,316)
65
(163)
90,256
(3,489)
86,767
-
(8,604)
(18,601)
-
(67)
(1,150)
13,935
-
-
(1,150)
13,935
Net income (loss) attributable to owners
80,659
(95,923)
11,018
REIT's share of net income (loss) attributable to
unitholders
$ 27,099
$ (47,961)
$ 3,876
$ (16,986)
$ 24,853
$ (575)
$ 6,923
$ 31,201
(1) The REIT’s share of net income from joint ventures was earned from its investments in one U.S. industrial property (2019 - three) and one U.S. residential property (2019- nil).
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, 2019 to November 30, 2020 and December 1, 2018 to November 30, 2019, respectively.
5. Assets and liabilities classified as held for sale:
As at December 31, 2020, the REIT had one U.S. office property and a 50% interest in one industrial property (December 31, 2019 - two U.S. residential
properties 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
2020
2019
$ 219,050
$ 133,905
-
1,768
$ 219,050
$ 135,673
$ -
$ 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, 2020 and 2019
6. Other assets:
Current:
Mortgages receivable(1)
Prepaid expenses and sundry assets
Accounts receivable(2) - net of provision for expected credit loss of $15,135 (2019 - $1,073)
Restricted cash
Derivative instruments
Non-current:
Mortgages receivable(1)
Derivative instruments
December 31
December 31
Note
2020
2019
$ 270,643
$ 260,333
63,058
19,618
7,732
730
154,843
2,464
49,691
11,360
7,931
752
294,697
-
$ 519,088
$ 624,764
11
11
(1) Mortgages receivable include $240,716 classified as FVTPL and $184,770 classified as amortized cost (December 31, 2019 - $227,332 and $327,698, respectively). As
at December 31, 2020, mortgages receivable bear interest at effective rates between 4.40% and 14.32% per annum (December 31, 2019 - between 3.25% and 14.32%
per annum) with a weighted average effective rate of 9.78% per annum (December 31, 2019 - 7.06%), and mature between 2021 and 2029 (December 31, 2019 - mature
between 2020 and 2029).
Future repayments of mortgages receivable are as follows:
Years ending December 31:
2021
2022
2023
2024
2025
Thereafter
December 31
2020
$ 270,643
37,132
82,146
-
-
35,565
$ 425,486
(2)
In determining the expected credit loss, the REIT performed a tenant-by-tenant assessment considering the payment history and future expectations of default based on
actual and expected insolvency filings. The following is a summary of the changes in the provision for expected credit loss impacted by COVID-19:
Opening balance, beginning of year
Bad debt expense*
Accounts receivable write-off*
Closing balance, end of year
* Includes $5,855 of rent abatements granted under the Canada Emergency Commercial Rent Assistance (CECRA) program.
December 31
December 31
2020
2019
$ 1,073
$ 749
39,708
(25,646)
2,143
(1,819)
$ 15,135
$ 1,073
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, 2020 and 2019
7. Cash and cash equivalents:
Cash and cash equivalents at December 31, 2020 includes cash on hand of $62,587 (December 31, 2019 - $48,370) and bank term deposits of $272
(December 31, 2019 - $270) bearing interest at a rate of 0.09% (December 31, 2019 - 1.61%).
Included in cash and cash equivalents at December 31, 2020 are U.S. dollar denominated amounts of U.S. $27,127 (December 31, 2019 - U.S.
$21,620). The Canadian equivalent of these amounts is $34,451 (December 31, 2019 - $28,106).
8. Debt:
The REIT’s debt consists of the following items:
Mortgages payable
Debentures payable
Unsecured term loans
Lines of credit
(a) Mortgages payable:
Note
8(a)
8(b)
8(c)
8(d)
December 31
December 31
2020
2019
$ 3,623,652
$ 3,630,858
1,568,817
1,257,731
688,029
487,818
692,229
795,042
$ 6,368,316
$ 6,375,860
The mortgages payable are secured by 111 real estate assets with an aggregate fair value of $7,779,942, bear interest at fixed rates with a
contractual weighted average rate of 4.01% (December 31, 2019 - 4.08%) per annum and mature between 2021 and 2032 (December 31,
2019 - maturing between 2020 and 2032). Included in mortgages payable at December 31, 2020 are U.S. dollar denominated mortgages of
U.S. $1,053,304 (December 31, 2019 - U.S. $1,045,921). The Canadian equivalent of these amounts is $1,337,696 (December 31, 2019 -
$1,359,697).
Mortgages payable related to certain properties are held by separate legal entities, where the rent received from each property is first used to
satisfy the related debt obligations with any balance then available to satisfy the cash flow requirements of the REIT.
Future principal mortgage payments are as follows:
Years ending December 31:
2021
2022
2023
2024
2025
Thereafter
Financing costs and mark-to-market adjustment arising on acquisitions
19
December 31
2020
$ 939,535
608,545
449,728
94,504
148,049
1,396,602
3,636,963
(13,311)
$ 3,623,652
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, 2020 and 2019
8. Debt (continued):
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
(b) Debentures payable:
December 31
December 31
Note
2020
2019
$ 3,630,858
$ 4,150,459
5
(122,857)
(70,928)
214,772
-
2,712
(30,905)
(123,651)
(494,038)
224,631
(49,416)
2,552
(79,679)
$ 3,623,652
$ 3,630,858
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 P Senior Debentures(1)
Series F Senior Debentures(2)
Series L Senior Debentures
Series O Senior Debentures
Series N Senior Debentures
Series Q Senior Debentures
Series R Senior Debentures
December 31 December 31
2020
2019
Contractual
interest
rate
Effective
interest
rate
Maturity
Principal
amount
Carrying
value
Carrying
value
February 13, 2020
March 2, 2020
May 6, 2022
January 23, 2023
January 30, 2024
June 16, 2025
June 2, 2026
3.67%
4.45%
2.92%
3.42%
3.37%
4.07%
2.91%
3.39%
(1)
$ -
$ -
$ 162,469
4.58%
3.11%
3.44%
3.45%
4.19%
3.00%
3.49%
-
325,000
250,000
350,000
400,000
250,000
-
323,776
249,360
348,758
398,105
248,818
174,954
322,862
249,065
348,381
-
-
$ 1,575,000
$ 1,568,817
$ 1,257,731
(1) Denominated as $125,000 U.S. dollars and bore interest at a rate equal to the 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). In February 2020, the REIT repaid all of its Series P
senior debentures upon maturity for a cash payment of U.S. $125,000.
(2)
In March 2020, the REIT repaid all of its Series F senior debentures upon maturity for a cash payment of $175,000.
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, 2020 and 2019
8. Debt (continued):
At its option, the REIT may redeem any of the fixed rate Senior Debentures, in whole at any time, or in part from time to time (i) in the case of the
Series O, N, Q and R senior debentures, prior to the specified par call date and (ii) in the case of any Series L senior debentures, prior to maturity
on payment of a redemption price equal to the greater of (a) the Canada Yield Price as defined in the relevant supplemental trust indenture and
(b) 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 10 days (for Series Q and Series R senior debentures) or 30 days (for Series L, Series N and Series O senior debentures) but not more
than 60 days before the date fixed for redemption, which redemption (in the case of Series Q and Series R senior debentures) may be upon such
conditions as may be specified in such notice. 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 L, O, N, Q and R unsecured senior debentures (collectively, the “Senior Debentures”) pay interest semi-annually as noted below:
Senior Debentures
Series L
Series O
Series N
Series Q
Series R
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 P Senior Debentures
Redemption - Series F Senior Debentures
Issuance - Series Q Senior Debentures
Issuance - Series R Senior Debentures
Change in foreign exchange
Accretion adjustment
Carrying value, end of year
Interest Payment Dates
May 6 and November 6
January 23 and July 23
January 30 and July 30
June 16 and December 16
June 2 and December 2
December 31
December 31
2020
2019
$ 1,257,731
$ 1,613,040
-
-
(150,000)
(200,000)
(162,500)
(175,000)
397,900
248,803
-
1,883
-
-
-
-
(7,500)
2,191
$ 1,568,817
$ 1,257,731
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, 2020 and 2019
8. Debt (continued):
(c) Unsecured term loans:
The REIT has the following unsecured term loans:
H&R REIT unsecured term loan #1(1)
H&R REIT unsecured term loan #2(2)
H&R REIT unsecured term loan #3(3)
December 31
December 31
Maturity Date
2020
2019
March 17, 2021
$ 188,029
$ 192,229
March 7, 2024
January 6, 2026
250,000
250,000
250,000
250,000
$ 688,029
$ 692,229
(1)
(2)
(3)
The total facility as at December 31, 2020 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).
In November 2020, the interest rate swap was amended to fix the interest rate at 3.17% per annum and the maturity date was extended to May 7, 2030. Previously,
the interest rate was fixed at 3.33% per annum with a maturity date of March 7, 2026 (note 11).
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, 2020, are U.S. denominated amounts of $140,000 (December 31, 2019 - U.S. $140,000). The
Canadian equivalent of these amounts is $177,800 (December 31, 2019 - $182,000).
(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
April 17, 2021
$ 500,000
$ -
$ -
$ 500,000
H&R REIT revolving unsecured line of credit #2
H&R REIT revolving unsecured line of credit #3
H&R REIT revolving unsecured line of credit #4
H&R REIT revolving unsecured letter of credit facility
September 20, 2022
January 31, 2023
September 20, 2023
Sub-total
150,000
200,000
350,000
60,000
(144,620)
(65,230)
(4,218)
-
1,260,000
(214,068)
-
-
(1,985)
(29,707)
(31,692)
5,380
134,770
343,797
30,293
1,014,240
Revolving secured operating lines of credit(1):
H&R REIT and CrestPSP revolving secured line of credit
April 30, 2021
Primaris revolving secured line of credit
December 31, 2021
Sub-total
62,500
300,000
362,500
(51,500)
(222,250)
(273,750)
(105)
-
(105)
10,895
77,750
88,645
December 31, 2020
December 31, 2019
(1) Secured by certain investment properties.
22
$ 1,622,500
$ (487,818)
$ (31,797)
$ 1,102,885
$ 1,122,500
$ (795,042)
$ (36,881)
$ 290,577
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, 2020 and 2019
8. Debt (continued):
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, 2020 are U.S. dollar denominated amounts of U.S. $330,000 (December 31, 2019 - U.S. $375,500).
The Canadian equivalent of these amounts is $419,100 (December 31, 2019 - $488,150).
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
9. Exchangeable units:
December 31, 2020
December 31, 2019
Unsecured
Term Loans
Lines of
Credit
Unsecured
Term Loans
Lines of
Credit
$ 692,229
$ 795,042
$ 450,629
$ 331,944
-
(4,200)
(295,959)
(11,265)
250,000
(8,400)
463,878
(780)
$ 688,029
$ 487,818
$ 692,229
$ 795,042
Certain of the REIT’s subsidiaries have in aggregate 14,883,065 (December 31, 2019 - 15,316,239) exchangeable units outstanding which are puttable
instruments where, upon redemption, the REIT has a contractual obligation to issue Units. In August 2020, 433,174 exchangeable units were
exchanged for Units. As a subsidiary of the REIT previously held 433,174 Units to mirror these exchangeable units, the number of outstanding Units
did not increase as a result of this exchange. 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. At the end of each reporting period, the fair value is determined by using the quoted price 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, 2020 was $13.29
(December 31, 2019 - $21.10) per Unit.
A summary of the carrying value of exchangeable units and the changes during the respective years are 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
2020
2019
$ 323,173
$ 329,482
(4,228)
(121,149)
(14,448)
8,139
$ 197,796
$ 323,173
The REIT has entered into various exchange agreements that provide, among other things, the mechanics whereby exchangeable units may be
exchanged for Units.
23
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2020 and 2019
10. Accounts payable and accrued liabilities:
Current:
Other accounts payable and accrued liabilities
Distributions payable
Debt interest payable
Prepaid rent
Derivative instruments
Unit-based compensation payable:
Options
Incentive units
Non-current:
Lease liability(1)
Security deposits
Unit-based compensation payable:
Incentive units
(1) Corresponds to a right-of-use asset in a leasehold interest (note 3).
11. Derivative instruments:
Debenture interest rate swap
Debenture interest rate swap
Term loan interest rate swap
Term loan interest rate swap
Term loan interest rate swap
Incentive units swap
Incentive units swap
Incentive units swap
Maturity
March 1, 2019
February 13, 2020
March 17, 2021
May 7, 2030
January 6, 2026
2021
2022
2023
(1)
(2)
(3)
(4)
(5)
(6)
(6)
(6)
The REIT entered into interest rate swaps as follows:
December 31
December 31
Note
2020
2019
$ 205,572
$ 145,985
11
12(b)
12(b)
17,350
21,852
35,355
42,289
789
3,807
30,336
6,709
-
23,282
41,564
9,352
12,016
4,576
32,002
5,890
12(b)
5,127
6,928
$ 369,186
$ 281,595
Fair value asset (liability)*
Net gain (loss) on derivative instruments
December 31
December 31
December 31
December 31
2020
2019
2020
2019
$ -
$ -
$ -
$ (592)
-
(469)
(20,797)
(21,023)
730
701
1,763
(404)
752
(2,777)
(6,171)
-
-
-
404
(1,221)
(18,020)
(14,852)
730
701
1,763
(73)
(4,101)
(2,777)
(3,801)
-
-
-
$ (39,095)
$ (8,600)
$ (30,495)
$ (11,344)
(1)
(2)
(3)
(4)
(5)
(6)
*
To fix the interest rate at 2.36% per annum for the Series K senior debentures which settled upon maturity.
To fix the interest rate at 3.67% per annum for the Series P senior debentures which settled upon maturity.
To fix the interest rate at 2.56% per annum for the U.S. $130,000 term loan.
In November 2020, the interest rate swap was amended to fix the interest rate at 3.17% per annum for the $250,000 term loan and the maturity date was extended to May
7, 2030. Previously, the interest rate was fixed at 3.33% per annum with a maturity date of March 7, 2026.
To fix the interest rate at 3.91% per annum for the $250,000 term loan.
To fix the payout on incentive units that mature in the respective years.
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).
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, 2020 and 2019
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, 2020,
9,500,000 (December 31, 2019 - 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) an in specie distribution of notes of H&R Portfolio LP Trust (a subsidiary of the REIT).
A summary of the issued and outstanding number of Units and the changes during the respective years are as follows:
Balance, beginning of year
Issuance of Units:
Options exercised
Incentive units settled in Units
Exchangeable units exchanged into Units
Balance, end of year
December 31
December 31
2020
2019
286,690,236
285,677,811
-
172,847
-
368,306
4,817
639,302
286,863,083
286,690,236
The weighted average number of basic Units for the year ended December 31, 2020 is 286,804,156 (December 31, 2019 - 286,057,254).
(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, 2020, a maximum of 17,723,110 (December 31, 2019 - 17,723,110) options to purchase Units were authorized to
be issued; 10,543,362 (December 31, 2019 - 10,647,642) options have been granted and are outstanding and 7,179,748 (December 31,
2019 - 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.
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, 2020 and 2019
12. Unitholders’ equity (continued):
A summary of the status of the unit option plan and the changes during the respective years are as follows:
Outstanding, beginning of year
Granted
Exercised
Expired
Outstanding and vested, end of year
December 31, 2020
December 31, 2019
Options
10,647,642
-
-
(104,280)
10,543,362
Weighted average
exercise price
Options
Weighted average
exercise price
$ 20.57
11,263,579
$ 20.51
-
-
23.10
-
(615,937)
-
-
(19.38)
-
$ 20.55
10,647,642
$ 20.57
The outstanding and vested options at December 31, 2020 are exercisable at varying prices ranging from $18.98 to $23.18 (December
31, 2019 - $18.98 to $23.18) with a weighted average remaining life of 3.8 years (December 31, 2019 - 4.8 years).
(ii)
Incentive unit plan:
As at December 31, 2020, a maximum of 5,000,000 (December 31, 2019 - 5,000,000) incentive units exchangeable into Units were
authorized to be issued. The REIT has granted 1,093,375 (December 31, 2019 - 1,018,896) incentive units which remain outstanding,
184,299 (December 31, 2019 - 11,452) incentive units have been settled for Units and 3,722,326 (December 31, 2019 - 3,969,652)
incentive units remain available for granting.
Incentive units are recognized based on the grant date fair value and re-measured at each reporting date. 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, 2020, 64.58% of the restricted units granted vest on
the third anniversary and 35.42% 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. In March 2020, the first grant of performance
units awarded in 2017 vested at 59% of target.
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
26
December 31
December 31
2020
2019
Incentive units
Incentive units
1,018,896
332,509
(223,368)
(34,662)
1,093,375
561,242
556,961
(85,521)
(13,786)
1,018,896
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, 2020 and 2019
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
2020
$ 789
8,934
$ 9,723
2019
$ 12,016
11,504
$ 23,520
2020
$ (11,227)
886
$ (10,341)
2019
$ 3,319
6,825
$ 10,144
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 in a calendar year 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, 2020, the REIT declared distributions per Unit of $0.92 (December 31, 2019 - $1.38).
(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”) which allowed the
REIT to purchase for cancellation up to a maximum of 15,000,000 Units on the open market until December 16, 2020. During the years ended
December 31, 2020 and 2019, the REIT did not purchase and cancel any Units.
13. Accumulated other comprehensive income:
Items that are or may be reclassified subsequently to net income (loss):
Opening balance, beginning of year
Note
December 31, 2020
December 31
2019
Cash flow
hedges
Foreign
operations
Total
Total
$ (223)
$ 246,721
$ 246,498
$ 371,824
Transfer of realized loss on cash flow hedges to net income (loss)
Unrealized loss on translation of U.S. denominated foreign operations
Net loss on hedges of net investments in foreign operations
8
30
-
-
30
-
30
29
(71,227)
(15,465)
(86,692)
(71,227)
(15,465)
(86,662)
(108,675)
(16,680)
(125,326)
Closing balance, end of year
$ (193)
$ 160,029
$ 159,836
$ 246,498
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, 2020 and 2019
14. Rentals from investment properties:
Rental income
Revenue from services
Straight-lining of contractual rent
Rent amortization of tenant inducements
Operating leases:
2020
2019
$ 892,403
$ 922,108
198,286
10,652
(2,661)
222,535
7,161
(2,354)
$ 1,098,680
$ 1,149,450
The REIT leases its investment properties under operating leases. The future minimum lease payments under non-cancellable leases are as follows:
2020
2019
$ 669,662
$ 666,425
2,113,392
3,524,791
2,116,371
3,477,225
$ 6,307,845
$ 6,260,021
2020
2019
$ 150,354
$ 164,867
41,379
22,851
16,303
4,625
13,966
249,478
(20,609)
228,869
(33,399)
(82,974)
47,312
21,842
13,951
4,301
21,872
274,145
(17,649)
256,496
(15,036)
19,483
$ 112,496
$ 260,943
Less than 1 year
Between 1 and 5 years
More than 5 years
15. Finance costs:
Finance cost - operations
Contractual interest on mortgages payable
Contractual interest on debentures payable
Contractual interest on unsecured term loans
Bank interest and charges on lines of credit
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 3.60% (December 31, 2019 - 3.90%).
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, 2020 and 2019
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
2020
2019
$ (16,565)
$ (12,700)
(9,125)
(8,258)
33,770
(25,000)
1,041
17,296
$ (178)
$ (19,363)
The following amounts have been excluded from operating, investing and financing activities in the consolidated statements of cash flows:
Non-cash items:
Non-cash adjustment to proceeds from issuance of Units
Mortgages receivable from the sale of investment properties
Non-cash assumption of mortgage payable on disposition of asset held for sale
Restricted cash assumption on disposition of asset held for sale
Transfer of investment property from equity accounted investments
Exchangeable units exchanged for Units
Other items:
Change in accounts payable on lease liability and right-of-use asset
Change in accounts payable included in finance cost - operations
Capitalized interest on redevelopment
Capitalized interest on properties under development
17. Capital risk management:
The REIT’s primary objectives when managing capital are:
Note
2020
2019
$ 2,391
$ 2,291
-
256,000
(49,796)
1,782
15,665
-
-
-
-
14,448
927
1,430
(3,912)
(16,697)
32,002
3,857
(5,349)
(12,300)
3
3
15
15
(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
December 31
2020
2019
$ 6,368,316
197,796
6,071,391
$ 6,375,860
323,173
7,043,917
$ 12,637,503
$ 13,742,950
29
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2020 and 2019
17. Capital risk management (continued):
As long as the REIT complies with its investment and debt restrictions set out in its Declaration of Trust, it is free to determine the appropriate level
of capital in context with its cash flow requirements, overall business risks and potential business opportunities. As a result of this, the REIT will make
adjustments to its capital based on its investment strategies and changes in economic conditions.
The REIT’s level of indebtedness is subject to the limitations set out in its Declaration of Trust. The REIT is limited to a total indebtedness to total
assets ratio of 65%. As at December 31, 2020, this ratio was 47.7% (December 31, 2019 - 44.4%). Management uses this ratio as a key indicator
in managing the REIT’s capital.
In addition to the above key ratio, the REIT’s debt has various covenants calculated as defined within these agreements. The REIT monitors these
covenants and was in compliance as at December 31, 2020 and December 31, 2019.
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 has a public debt rating that is rated with at least a BBB- Stable
rating by a recognized rating agency.
The carrying amount of receivables represents the maximum credit exposure, therefore the REIT’s exposure to credit risk on receivables is as
follows:
Mortgages receivable
Accounts receivable
Note
6
6
December 31
December 31
2020
2019
$ 425,486
$ 555,030
19,618
11,360
$ 445,104
$ 566,390
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, 2020 and 2019
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.
Management took precautionary measures to further bolster the REIT’s liquidity as a result of the severity of the pandemic’s impact on economic
conditions.
The REIT manages liquidity risk by:
Ensuring appropriate unsecured term loans and lines of credit available are available. As at December 31, 2020, the consolidated amount
available under its lines of credit was $1,102,885 (note 8(d));
Maintaining a large unencumbered asset pool. As at December 31, 2020, there were 100 unencumbered properties with a fair value of
$3,666,464; 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
2021
$ 1,401,314
326,225
Thereafter
$ 4,986,496
42,172
Total
$ 6,387,810
368,397
$ 1,727,539
$ 5,028,668
$ 6,756,207
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 $470,000
(2019 - U.S. $640,500) consisting of the U.S. unsecured term loans and U.S. lines of credit (2019 - 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. $1,650,000
(2019 - U.S. $1,621,000).
A $0.10 weakening of the U.S. dollar against the average Canadian dollar exchange rate of $1.34 for the year ended December 31, 2020
(December 31, 2019 - $1.33) as well as the Canadian dollar exchange rate as at December 31, 2020 of $1.27 (December 31, 2019 -
$1.30) would have decreased other comprehensive income (loss) by approximately $212,000 (December 31, 2019 - $226,000) and
decreased net income by approximately $9,100 (December 31, 2019 - $18,500). 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, 2020 and 2019
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, 2020, the percentage of fixed rate debt to total debt was 92.0% (December 31, 2019 - 87.3%). 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, 2020, lines of credit of $487,818 and an unsecured term loan of $22,929 are subject to variable interest rates. An
increase in interest rates of 100 basis points for the year ended December 31, 2020 would have decreased net income by approximately
$5,100 (December 31, 2019 - $8,200). This analysis assumes that all other variables, in particular foreign exchange rates, remain
constant.
As at December 31, 2020, there were no mortgages payable or debentures 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, 2020 and 2019
18. Risk management (continued):
December 31, 2020
Assets measured at fair value
Investment properties
Properties under development
Assets classified as held for sale
Mortgages receivable
Derivative instruments
Cash and cash equivalents
Assets for which fair values are disclosed
Mortgages receivable
Liabilities measured at fair value
Exchangeable units
Derivative instruments
Liabilities for which fair values are disclosed
Mortgages payable
Debentures payable
Unsecured term loans
Lines of credit
3
3
5
6
6
7
6
9
10
8(a)
8(b)
8(c)
8(d)
$ -
-
-
-
-
62,859
-
62,859
(197,796)
-
Note
Level 1
Level 2
Level 3
Total
fair value
Carrying
value
$ -
-
-
-
3,194
-
$ 11,149,130
449,849
219,050
240,716
-
-
$ 11,149,130
449,849
219,050
240,716
3,194
62,859
$ 11,149,130
449,849
219,050
240,716
3,194
62,859
186,458
189,652
-
(42,289)
-
186,458
184,770
12,058,745
12,311,256
12,309,568
-
-
-
-
-
-
-
(197,796)
(42,289)
(197,796)
(42,289)
(3,793,966)
(1,651,492)
(688,733)
(488,319)
(3,623,652)
(1,568,817)
(688,029)
(487,818)
(6,862,595)
(6,608,401)
-
-
-
-
(3,793,966)
(1,651,492)
(688,733)
(488,319)
(197,796)
(6,664,799)
$ (134,937)
$ (6,475,147)
$ 12,058,745
$ 5,448,661
$ 5,701,167
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, 2020 and 2019
18. Risk management (continued):
December 31, 2019
Assets measured at fair value
Investment properties
Properties under development
Assets classified as held for sale
Mortgages receivable
Derivative instruments
Cash and cash equivalents
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
7
6
9
10
5
8(a)
8(b)
8(c)
8(d)
$ -
-
-
-
-
48,640
$ -
-
-
-
752
-
-
48,640
(323,173)
-
-
-
-
-
-
(323,173)
327,761
328,513
-
(9,352)
-
(3,725,176)
(1,291,301)
(693,924)
(796,994)
(6,516,747)
$ 11,988,347
683,145
135,673
227,332
-
$ 11,988,347
683,145
135,673
227,332
752
$ 11,988,347
683,145
135,673
227,332
752
-
-
48,640
48,640
327,761
327,698
13,034,497
13,411,650
13,411,587
-
-
(49,416)
-
-
-
-
(49,416)
(323,173)
(9,352)
(49,416)
(3,725,176)
(1,291,301)
(693,924)
(796,994)
(6,889,336)
(323,173)
(9,352)
(49,416)
(3,630,858)
(1,257,731)
(692,229)
(795,042)
(6,757,801)
$ (274,533)
$ (6,188,234)
$ 12,985,081
$ 6,522,314
$ 6,653,786
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
2020
2019
$ 6,359
(9,518)
$ 6,696
8,260
$ (3,159)
$ 14,956
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, 2020 and 2019
20. Segmented disclosures:
The REIT has four reportable operating segments (Office, Retail, Industrial and Residential), in two geographical locations (Canada and the United
States). The operating segments derive their revenue primarily from rental income from leases. The segments are reported in a manner consistent
with the internal reporting provided to the chief operating decision maker, determined to be the Chief Executive Officer (“CEO”) of the REIT. The CEO
measures and evaluates the performance of the REIT based on property operating income on a proportionately consolidated basis for the REIT’s
equity accounted investments. The accounting policies of the segments presented here are consistent with the REIT’s accounting policies as
described in note 2.
(i) Operating segments:
Real estate assets by reportable segment as at December 31, 2020 and December 31, 2019 are as follows:
December 31, 2020
Number of investment properties
Real estate assets:
Investment properties
Properties under development
Office
33
Retail
Industrial
Residential
327
87
23
Total
470
$ 5,334,288
$ 3,934,305
$ 1,225,366
$ 2,744,695
$ 13,238,654
7,984
16,822
126,095
506,163
657,064
5,342,272
3,951,127
1,351,461
3,250,858
13,895,718
Less: assets classified as held for sale
(209,550)
-
(9,500)
-
(219,050)
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
-
-
(856,807)
(35,231)
(1,174,558)
(2,066,596)
(11,093)
-
-
(11,093)
$ 5,132,722
$ 3,083,227
$ 1,306,730
$ 2,076,300
$ 11,598,979
December 31, 2019
Number of investment properties
Real estate assets:
Investment properties
Properties under development
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
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
-
-
-
-
(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
35
H&R REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
(In thousands of Canadian dollars, except Unit and per Unit amounts)
Years ended December 31, 2020 and 2019
20. Segmented disclosures (continued):
Property operating income by reportable segment for the years ended December 31, 2020 and December 31, 2019 is as follows:
December 31, 2020
Office
Retail
Industrial
Residential
Sub-total
Less: Equity
Accounted
Investments
Total
Rentals from investment properties
$ 535,361
$ 398,579
$ 84,400
$ 200,142
$ 1,218,482
$ (119,802)
$ 1,098,680
Property operating costs
Property operating income
(176,400)
(180,532)
(21,912)
(91,274)
(470,118)
35,104
(435,014)
$ 358,961
$ 218,047
$ 62,488
$ 108,868
$ 748,364
$ (84,698)
$ 663,666
December 31, 2019
Office
Retail
Industrial
Residential
Sub-total
Less: Equity
Accounted
Investments
Total
Rentals from investment properties
$ 571,609
$ 406,218
$ 86,046
$ 209,610
$ 1,273,483
$ (124,033)
$ 1,149,450
Property operating costs
Property operating income
(193,886)
(155,065)
(24,661)
(95,040)
(468,652)
30,177
(438,475)
$ 377,723
$ 251,153
$ 61,385
$ 114,570
$ 804,831
$ (93,856)
$ 710,975
(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 relating to
equity accounted investments
Less: REIT's proportionate share of assets classified as held for sale
relating to equity accounted investments
Rentals from investment properties:
Canada
United States
Less: REIT's proportionate share of rentals relating to equity
accounted investments
36
December 31
December 31
2020
2019
$ 7,599,011
$ 8,546,186
6,296,707
6,340,141
13,895,718
14,886,327
(219,050)
(133,905)
(2,066,596)
(2,068,058)
(11,093)
(12,872)
$ 11,598,979
$ 12,671,492
2020
2019
$ 798,614
419,868
1,218,482
$ 845,371
428,112
1,273,483
(119,802)
(124,033)
$ 1,098,680
$ 1,149,450
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, 2020 and 2019
21. Income tax expense (recovery):
Income tax computed at the Canadian statutory rate of nil applicable to the
REIT for 2020 and 2019
Current U.S. income taxes
Deferred income taxes (recoveries) applicable to U.S. Holdco
Income tax expense (recovery) in the determination of net income (loss)
2020
2019
$ -
$ -
259
(54,000)
113
35,267
$ (53,741)
$ 35,380
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 23.5% (2019 - 23.6%). 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
Deferred tax liability
December 31
December 31
2020
2019
$ 73,346
$ 24,947
691
2,779
76,816
302,993
122,578
425,571
880
980
26,807
309,730
126,458
436,188
$ (348,755)
$ (409,381)
The change in deferred tax liability is the result of deferred income taxes (recoveries) of ($54,000) (2019 - $35,267) and a foreign currency translation
gain of $6,626 (2019 - $18,100) recognized in other comprehensive loss.
As at December 31, 2020, U.S. Holdco had accumulated net operating losses available for carryforward for U.S. income tax purposes of $312,579
(December 31, 2019 - $105,744). During the year ended December 31, 2020, the Internal Revenue Service released certain income tax regulations.
Accordingly, the REIT recognized a deferred tax recovery of $46,500 pertaining to net operating losses. 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.
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, 2020 and 2019
22. Commitments and contingencies:
(a)
In the normal course of operations, the REIT has issued letters of credit in connection with developments, financings, operations and acquisitions.
As at December 31, 2020, the REIT has outstanding letters of credit totalling $31,797 (December 31, 2019 - $36,881), including $12,470
(December 31, 2019 - $16,575) which has been pledged as security for certain mortgages payable. The letters of credit are secured by certain
investment properties.
(b) The REIT provides guarantees on behalf of third parties, including co-owners. As at December 31, 2020, the REIT issued guarantees amounting
to $290,148 (December 31, 2019 - $199,009), which expire between 2021 and 2027 (December 31, 2019 - expire between 2021 and 2027),
relating to the co-owner’s share of mortgage liability.
The REIT had previously guaranteed certain debt assumed by purchasers in connection with past dispositions of properties. At December 31,
2020, the estimated amount of debt subject to such guarantees, and therefore the maximum exposure to credit risk, is nil (December 31, 2019 -
$41,259). There were no defaults by the primary obligor for debts on which the REIT had provided its guarantees, and as a result, no contingent
loss on these guarantees had 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
24. Subsequent events:
Place of Business
Canada
Canada
Canada
United States
Canada
Canada
Ownership interest
December 31
December 31
2020
100%
100%
100%
100%
100%
100%
2019
100%
100%
100%
100%
100%
100%
(a)
(b)
In January 2021, the REIT sold one U.S. office property which was classified as held for sale as at December 31, 2020, for gross proceeds of
U.S. $165,000 and repaid the mortgage payable of approximately U.S. $13,000 bearing interest at 5.68% per annum.
In January 2021, the REIT acquired 12.4 acres of vacant land in Jersey City, NJ for a purchase price of U.S. $162,000. The REIT’s outstanding
mortgage receivable of approximately U.S. $146,200 secured by this land and bearing interest at 10% per annum was applied toward the
purchase price.
38
Corporate Information
H&R REIT Board of Trustees
Thomas J. Hofstedter (1), President and Chief Executive Officer, H&R REIT
Alex Avery (1), Executive Vice-President, Asset Management & Strategic Initiatives, H&R REIT
Robert Dickson (2,3), Strategic financial consultant, marketing communications industry
Laurence A. Lebovic (1), Chief Executive Officer, Runnymede Development Corporation Ltd.
Ronald C. Rutman (1,2,3), Partner, Zeifman & Company, Chartered Accountants
Juli Morrow, Partner, Goodmans LLP
Brenna Haysom (3), Chief Executive Officer, Rally Labs
Marvin Rubner (2), Manager & Founder, YAD Investments Limited
(1) Investment Committee
(2) Audit Committee
(3) Compensation, Governance and Nominating Committee
Executive Officers
Thomas J. Hofstedter, President and Chief Executive Officer
Larry Froom, Chief Financial Officer
Alex Avery, Executive Vice-President, Asset Management & Strategic Initiatives
Robyn Kestenberg, Executive Vice-President, Corporate Development
Philippe Lapointe, Chief Operating Officer (Lantower Residential)
Pat Sullivan, Chief Operating Officer (Primaris)
Cheryl Fried, Executive Vice-President, Finance (H&R REIT)
Brenda Huggins, Senior Vice-President, Human Resources (Primaris)
Colleen Grahn, Executive Vice-President, Property Management (Lantower Residential)
Auditors: KPMG LLP
Legal Counsel: Blake, Cassels & Graydon LLP
Taxability of Distributions:
18.4% of 2020 distributions will be designated as taxable capital gains. For taxable Canadian unitholders, 18.4% (2019 - 22.3%)
of the distributions will not be subject to current income taxes.
Plan Eligibility: RRSP, RRIF, DPSP, RESP, RDSP, TFSA
Stock Exchange Listing: Units and debentures of H&R are listed on the Toronto Stock Exchange under the trading symbols
HR.UN.
Registrar and Transfer Agent: AST Trust Company (Canada), P.O. Box 4229, Station A, Toronto, Ontario, Canada,
M5W 0G 1, Telephone: 1-800-387-0825 (or for callers outside North America 416-682-3860), Fax: 1 - 8 8 8 - 4 8 8 - 1 4 1 6 ,
E-mail: inquiries@canstockta.com, Website: www.canstockta.com.
Contact Information: Investors, investment analysts and others seeking financial information should go to our website at
www.hr-reit.com, or e-mail info@hr-reit.com, or call 416-635-7520 and ask for Larry Froom, Chief Financial Officer, or 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