What You Should Know About H&R REIT’s Albertan Portfolio

How are the fundamentals of H&R Real Estate Investment Trust’s (TSX:HR.UN) Albertan portfolio? Should investors be worried? Is H&R REIT’s 6% yield safe?

| More on:
The Motley Fool

Since 2012, H&R Real Estate Investment Trust’s (TSX:HR.UN) shares have mostly traded in the range of $20-24 per unit. So, the REIT was a great buy when it was trading between $18 and $20 per unit earlier this year.

For the first quarter that ended March 31, H&R REIT earned 27% of its same-asset property operating income from Alberta. Since the WTI oil price has fallen from over US$100 in 2014 to US$50 today, investors are rightfully concerned about H&R REIT’s meaningful exposure to Alberta.

So, let’s dig deeper into H&R REIT’s Albertan portfolio.

Office portfolio

This year H&R REIT will earn 17.3% of its same-asset property operating income from its office properties in Alberta. This portfolio has an average remaining lease term of 17.5 years.

It consists of five tenants, and they all have an investment-grade S&P credit rating of at least BBB.

The top two tenants are Encana Corporation and TransCanada Pipelines Ltd., which contribute 12.6% and 3.3%, respectively, of H&R’s same-asset property operating income. Moreover, they both have long-term leases with H&R until 2031 and 2038, respectively.

Other properties in Alberta

Since H&R is a diversified REIT, it also owns and collects rent from retail and industrial properties. So, it’s not surprising that it also has these asset types in Alberta.

Specifically, its retail and industrial properties in Alberta contributed 8.8% and 1.5%, respectively, of its adjusted same-asset property operating income in the first quarter.

Impact of Target

Target Corporation was a tenant that came with the Primaris acquisition. Target exiting Canada and disclaiming its leases was a big reason why H&R REIT’s occupancy in the first quarter was 95.8%, 1.8% lower than the same quarter in 2015.

As a result, H&R REIT has had to look for tenants to fill Target’s space. Once that process completes, H&R expects to earn a base rent of $9.3 million each year from the new tenants, 111% higher than the $4.4 million lost revenue from Target’s exit.

So, although H&R will lose some rental revenue from losing Target in the short term, in the long term it should benefit the REIT because it will be able to get a higher rental revenue from the space.

Conclusion

At about $22.30 per unit, investors can buy H&R REIT at a yield of above 6%. The estimated net asset value (NAV) range of the REIT is $23-25. So, the current unit price gives a slight discount of 3-11%.

Additionally, H&R REIT’s funds from operations payout ratio is about 68%, which is on the conservative side in the REIT world. As well, its EBITDA interest coverage ratio remains strong at 2.8.

So, investors can expect to get a safe 6% yield from H&R as well as some potential capital appreciation if the REIT trades closer to its NAV.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng has no position in any stocks mentioned.

More on Dividend Stocks

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »

sale discount best price
Dividend Stocks

1 Dividend Stock Down 11 Percent to Buy Right Now

Do you want a great dividend stock down 11% that can provide years of growth potential? Here's one heavily discounted…

Read more »

Growth from coins
Dividend Stocks

1 Grade A Dividend Stock Down 11% to Buy and Hold Forever 

If you're looking for the right dividend stock at the right price, you're going to want to consider this insurance…

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

Are you looking for dividend stocks to buy right now? Here are two top picks!

Read more »

edit Taxes CRA
Dividend Stocks

Tax Time: How to Keep More of Your Money

Nearly everyone hates paying taxes, although Canadians can lessen the financial pain with the right tax strategies.

Read more »