DBRS Confirms H&R Real Estate Investment Trust at BBB (high), Stable Trend

DBRS Limited (DBRS) has today confirmed H&R Real Estate Investment Trust’s (H&R or the Trust) Senior Unsecured Debentures rating at BBB (high) with a Stable trend. The rating confirmation considers DBRS’s expectation of higher debt levels as the Trust funds its growth projects in 2016; however, DBRS expects key financial metrics to remain at adequate levels for the current rating category as well as the Trust’s long-term lease profile to continue to provide underlying stability to cash flow and operating metrics. The rating continues to be based on H&R’s long-term lease profile, large commercial real estate portfolio and diversification across asset types; however, the rating remains constrained by the Trust’s high tenant concentration, high proportion of secured debt, limited organic growth opportunities and geographic concentration in the Greater Toronto Area.

The stable rating outlook incorporates DBRS’s expectation of relatively flat EBITDA growth in 2016, largely because of weaker results from the Trust’s Alberta properties and the loss of income associated with non-core property dispositions, offset by incremental income from property acquisitions and the lease-up of vacant Target Canada Co. (Target) space (approximately 709,000 square feet). As at YE2015, approximately 89% of this space was leased or in advanced negotiations.

The rating outlook also acknowledges that the Trust will continue to incur relatively high maintenance capital expenditures and leasing costs driven by the leasing of underperforming office properties and vacant Target space. These higher costs, combined with a relatively high amount of distributions, are expected to result in a negative free cash flow position in 2016. DBRS expects H&R to continue to focus investments in the multi-residential segment and to build out its presence in U.S. markets with favourable demographics. DBRS estimates property acquisitions in the range of $300 million to $350 million during the year. H&R is also expected to complete its Long Island City project, a mixed-used property consisting of 1,871 residential units and 15,000 sf of retail space, by the end of 2017. The Trust’s estimated remaining costs to complete this project amount to USD 400 million (the Trust’s share).

DBRS expects H&R to maintain its reasonable financial profile and to fund its free cash flow deficit, property acquisitions and developments with proceeds from asset dispositions and debt. Despite the anticipated increase in debt, key financial metrics are expected to remain at adequate levels for the current rating category in 2016.

A negative rating action could occur if the Trust encounters any deterioration in earnings caused by tenant departures and/or an unfavourable leasing conditions within its core markets as well as an increase in debt beyond DBRS’s expectations, resulting in EBITDA interest coverage (including capitalized interest) falling below 2.30 times on a sustained basis.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Entities in the Real Estate Industry (May 2015) and Preferred Share and Hybrid Criteria for Corporate Issuers (January 2016), which can be found on our website under Methodologies.

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