H&R Real Estate Investment Trust (TSX:HR.UN) owns a diversified portfolio of retail, office, industrial, and residential assets. Like other real estate investment trusts (REITs), it pays a monthly distribution, which is convenient for helping to pay the bills.
For the first quarter that ended March 31, H&R REIT earned 27% of its same-asset property operating income from Alberta, but the REIT’s Alberta and Target-exit impact aren’t as bad as what some investors think.
At $21.85 per unit, H&R REIT yields 6.2%, which is an attractive yield.
Here’s some useful information from my research and a discussion with the H&R REIT VP of Finance, Jason Birken.
A stronger REIT
H&R REIT has come a long way. It’s celebrating its 20th anniversary this year, and Birken said, “[the] journey has resulted in a 21.9% compound annual growth rate (CAGR), based on asset value and 22.4% CAGR, based on distributable income and funds from operations (FFO).”
Over the past few years, H&R REIT has strengthened itself in multiple ways. For example, in 2013 the REIT internalized its management and made strategic acquisitions such as Primaris and a joint venture with ECHO Realty LP.
Primaris was a $3.1 billion acquisition that added 27 shopping centres to H&R REIT’s portfolio. H&R REIT has a 33.6% interest in ECHO, which has 207 retail properties in the U.S.
Birken said, “H&R also has divested non-core properties to share risk and use proceeds to strengthen its balance sheet, which has allowed us to bolster financial capacity to promptly capitalize on diversification (such as our entrance into the residential sector in late 2014) and growth opportunities. We also have a very dedicated and experienced management team who maintain and promote a disciplined strategy.”
As an example of a growth opportunity, H&R REIT has a 50% interest in a US$1.2 billion luxury residential development project in Long Island City, New York, which is expected to start generating rental income at the end of 2017.
Furthermore, Birken said, “[H&R’s] balance sheet is stronger than ever before. The debt-to-assets ratio is 46.4%, there’s $465 million in available credit, and there is $2 billion of unencumbered assets as at March 31, 2016.”
“We have made some significant improvements to our governance including expanding the size of our board, board term limits, and enhancing unitholder rights. We also announced we will be having semi-annually conference calls, which will allow investors to stay more in tune as to what’s happening at H&R,” Birken stated.
Is H&R’s 6.2% yield safe?
Investors may notice that the REIT cut its distribution during the financial crisis as in the midst of building The Bow, the two-million-square-foot landmark building in downtown Calgary.
To continue the multi-year project and to preserve the strength of the balance sheet, H&R REIT had no choice but to cut its distribution at the time.
H&R’s distribution is safer today. The REIT’s first-quarter FFO payout ratio was 68%, which is conservative compared to many other REITs.
One of H&R REIT’s primary goals is “to provide unitholders with stable and growing cash distributions,” as quoted from its first-quarter 2016 report.
Since 2013, the REIT’s monthly distribution has remained steady at $0.1125 per unit, and Birken commented on this:
“We had been reluctant to increase distributions in the last few years as we have been doing a lot of asset recycling.
In 2014 and 2015, we sold non-core assets totaling $1.4 million while only acquiring $623 million of new assets. We did not want to increase distributions while our asset base was shrinking as this would have increased our payout ratio due to our FFO and adjusted FFO decreasing from our asset sales.
Fortunately, the repayment of debt and the rising U.S. dollar have helped offset these asset sales. In Q1 2016, we were still able to increase our FFO per unit by 4% compared to Q1 2015.
Once we are comfortable that we will not have any more large asset sales and that we can still maintain a conservative payout ratio, we will look to increase our distributions.”
Conclusion
H&R REIT has an internalized management team that employs a disciplined strategy that targets a conservative payout ratio and makes strategic investments.
So, the REIT offers a safe yield of 6.2% today and the potential to grow that distribution in the future as FFO grows.
