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

DBRS Limited (DBRS) has confirmed the Senior Unsecured Debentures rating of H&R Real Estate Investment Trust (H&R or the Trust) at BBB (high) with a Stable trend. The rating confirmation acknowledges the Trust’s moderate deleveraging through property dispositions proceeds and the resulting improvement in financial metrics, which were in line with DBRS’s previous expectations. The confirmation also reflects DBRS’s expectation that the Trust will continue to enhance diversification and build its sizable unencumbered asset base while it reduces secured debt levels over the next few years.

DBRS expects H&R’s size and scale, portfolio diversification and long-term lease profile (averaging 9.8 years to maturity) should provide underlying stability to cash flow going forward. DBRS notes that H&R has recently made its first investments in the multi-residential property segment (two in Houston and one in Dallas, aggregating 1094 units for $97 million). DBRS views multi-residential properties as one of the more relatively stable asset classes. DBRS expects H&R to build on this platform by focusing on properties in sizable urban markets with favourable demographics, which should further enhance diversification and cash flow stability.

DBRS, however, expects investments in property acquisitions to remain relatively low compared with previous years because of the competitive pricing in the current property market. The Trust will instead focus on property development (Long Island City Project) and potential shopping centre expansion opportunities as well as selling non-core properties while integrating its recent acquisitions. As a result, DBRS expects H&R to maintain debt levels and EBITDA interest coverage (including capitalized interest) commensurate with the current rating. Although current secured debt levels remain high (77.1% of total debt) for the current rating category, DBRS expects H&R to reduce its use of secured borrowings and become a more frequent issuer of unsecured debentures. In addition, DBRS expects H&R to continue to build its sizable unencumbered asset pool (currently $1.66 billion, compared with $1.27 billion of Senior Unsecured Debentures outstanding as at YE2014). The Trust currently has 42 properties valued at approximately $1.6 billion, which are encumbered with mortgages totalling $364.5 million (representing an average loan-to-value ratio of 22.3%). DBRS anticipates that H&R will repay these mortgages over the next few years with unsecured borrowings, which should enhance financial flexibility and provide additional support to bondholders.

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 (October 2013) and Preferred Share and Hybrid Criteria for Corporate Issuers (January 2015), which can be found on our website under Methodologies.