H&R REIT is one of Canada’s largest fully diversified real estate mutual funds. The company has an interest in a portfolio of assets that includes office, retail, industrial and residential real estate spanning 41 million square feet in North America. As one of Canada’s largest REITs, H&R has assets of $ 13.4 billion. It’s an unregistered open trust.
H&R REIT has four types of assets: office (39% of total assets), retail (30%), residential (21%), industrial (10%). By asset type, H & R’s office segment is the largest of the four segments and has a portfolio of single and multi-tenant office properties across North America, while the retail segment has a portfolio of closed shopping malls and single- Tenant retail property features. Multi-tenant retail centers across Canada and 16 single-tenant retail properties in the United States.
By geographic region, the US accounts for 43% of the fair value of investments, followed by Ontario (31%), Alberta (17%) and other Canadian provinces (9%).
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Sales growth and market exposure
H&R REIT invests in office, retail, industrial and residential real estate and acquires real estate in both Canada and the United States. The retail real estate base consists of three different operating segments consisting of closed malls and multi-tenant retail spaces in Canada, as well as other retail real estate in Canada and the US, and H & R’s 33.6% stake in Echo Realty focused on in groceries anchored malls in the US
H & R’s residential segment operates as Lantower Residential, a wholly owned subsidiary of H & R REIT, and is focused on the acquisition and development of multi-family residential properties in the United States
The portfolio of office properties is 99.6% (as of January 2021) with an average remaining term of 12.2 years and 85.5% of sales are occupied by tenants with an investment grade rating. H & R’s Alberta office tenants are among the strongest companies in the energy sector. Similarly, H&R has a high occupancy rate of 90.3% for its retail portfolio with an average remaining term of 6.9 years.
Some of the tenants with the highest turnover are Ovintiv, Bell Canada, Hess Corporation, Riesenadler, Lowe’s, Canadian Tire, Shell, Loblaw, etc. The industrial portfolio had an occupancy rate of 97.5%. The REIT’s strategy is to acquire and develop Class A real estate in the United States with strong population and job growth opportunities.
H & R REIT’s focus on a diversified portfolio of high-quality investment properties in North America with high-quality tenants ensures stable cash flows. A long-term lease including rent escalation is concluded with creditworthy tenants, which further increases the predictability of the cash flow. The REIT is also streamlining its portfolio and recycling capital into higher-growth properties.
The retail landscape was characterized by challenging conditions that impacted the valuation over the past year. Following the pandemic, H&R reduced the fair value of its office and retail properties by $ 1.4 billion in 2020. Certain H&R properties were closed for the second quarter of 2020 during the first wave of COVID-19, and some of these properties in Ontario and Manitoba had to close for the second time in the fourth quarter of 2020 due to the second wave of COVID-19.
H&R REIT achieved 94% total rental collection in January 2021 with strong collections in its industrial and residential portfolios. Few major successes in 2020 were the advancement of the River Landing development towards completion and the significant extension of the office lease agreement with the Hess Corporation.
H&R REIT pays a monthly cash distribution and three-year dividend growth of 0.74% CAGR. It has an average annual return of 4.7% and has a high payout ratio. H&R REIT is in a good position to benefit from predictable and stable returns from long-term leases with high quality, investment grade tenants. The REIT’s efforts to simplify and streamline its portfolio should contribute to positive growth in FFO per unit and net asset value per unit in the near future.
H & R REIT’s business is well diversified in terms of real estate and geography. The size and quality of H & R’s portfolio, robust cash flow and strong balance sheet should also support future sales growth. The REIT continues its capital redistribution program through property sales, acquisitions and developments.
The promising development pipeline at attractive locations should also create significant added value and improve cash flow. H & R’s active development pipeline currently includes five housing developments in the United States
H&R REIT’s portfolio of diversified assets is its greatest competitive advantage. Office assets are characterized by long-term leases, while retail assets have shown stable performance and residential assets offer high growth opportunities.
H&R REIT is known for its conservative management of assets and for reducing risk through long-term leasing and financing of real estate. It should see attractive investment opportunities as markets move from current pandemic conditions to a post-pandemic normal.
H & R’s size, low leverage, and high quality tenant base create a deep moat around the business, allowing the REIT to pursue large-scale development opportunities that other smaller businesses do not have. Other leading REITs in the diversified segment are Slate Office REIT, Crombie REIT, Artis REIT, PRO REIT, Cominar REIT, etc.
The year 2020 was characterized by lower real estate market transactions and leasing volumes as well as lower industry activity. However, H&R continued to recycle capital, streamline and simplify its portfolio, and reinvest in higher-growth properties during the year. H&R is well positioned to capitalize on opportunity with a strong balance sheet and portfolio focused on large primary markets with growth prospects.
The REIT has a proven track record of strong performance and a long history of sourcing attractive deals. Well-located and high quality assets should continue to contribute to the total return of Shareholders through growth in net asset value and an attractive monthly return.
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