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

DBRS Limited (DBRS) confirmed its rating on H&R Real Estate Investment Trust’s (H&R or the Trust) Senior Unsecured Debentures at BBB (high) with a Stable trend. The rating continues to be supported by the Trust’s high-quality real estate, its large and diversified portfolio, and the quality of its top tenants with long-term leases. The rating is constrained by H&R’s leverage as measured by total debt-to-EBITDA, which was 9.4 times (x) at March 31, 2019, on a last 12 months basis; the relatively limited market position of a diversified real estate operator lacking scale in any particular market or niche; concentration risks in terms of tenant exposure (top ten tenants represent 39.9% of annualized rental revenue at March 31, 2019); and exposure to volatile energy markets (e.g., Calgary and Houston office).

The Stable trend considers H&R’s improving diversification through continued execution of its development pipeline, notably the Jackson Park multifamily development project in New York City. It also considers recent transactions such as the June 6, 2019, sale of The Atrium, a downtown Toronto office building, for $640 million (the Atrium Transaction). Sales proceeds from the Atrium Transaction are earmarked for repayment of H&R’s Series M Senior Unsecured Debentures maturing July 23, 2019 ($150 million), and for paying down revolving credit facilities ($230 million). The balance of $256 million will fund a vendor take-back mortgage maturing on January 2, 2020. Another significant transaction includes the May 14, 2018, sale of the majority of H&R’s U.S. retail portfolio for USD 633 million. Additionally, the Stable trend reflects DBRS’s expectation that H&R’s total debt-to-EBITDA will improve modestly through the remainder of the year to the low 9x range partly as a consequence of the Atrium Transaction and stabilization of the Jackson Park project, notwithstanding additional incremental development spend and the remaining full-year impact of the U.S. retail portfolio sale, partially offset by acquisitions occurring in the latter part of 2018.

DBRS would consider a negative rating action should one or more of the following factors occur on a sustained basis: (1) Total debt-to-EBITDA remains above 9.3x or (2) the operating environment deteriorates, leading to higher vacancy and material declines in EBITDA and operating cash flows. Given the above-noted constraints, a positive rating action is unlikely at this time.

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

The principal methodologies are Rating Entities in the Real Estate Industry (April 2019) and DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (November 2018), which can be found on dbrs.com under Methodologies & Criteria.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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