Industry-wide Softness to Hinder Collection: H&R Real Estate Investment Trust (TSX: HR.UN) is one of the Canada’s leading REITS with total assets of CAD 14.5 billion as on December 31.  H&R REITS is engaged in owning and managing of real estate portfolio including industrial, retail, office, and residential properties across North American market.

The group reported a monthly dividend distribution of CAD 0.115 per share, in line with the previous month and is payable on May 4. In response to the COVID-19 outbreak and boost liquidity, the company secured CAD 425 million credit facility from four Canadian banks. Also, the company secured an 8.5-year CAD 100 million mortgage. The company also announced that it has collected 83% of the total rent payable on April 1. H&R also suspended some of the third-party service contracts related to the properties which are closed temporarily. H&R also postponed some of the development projects where the construction is yet to be commenced.

Financial Highlights for FY19: For the period ended December 31, 2019, HR.UN posted rentals from investment properties of CAD 1,149.5 million, down 2.3% on y-o-y, due to a decline in rental income. Property operating income stood at CAD 711 million, down 3.1% y-o-y. The company reported net income of CAD 340.29 million, improved from CAD 337.92 million in FY18, supported by lower finance costs, and lower-income taxes while higher trust expense remained a drag. Funds from operations improved 0.7% to CAD 529.1 million, while NAV per unit stood at CAD 25.79, reflecting a decline of 1.9% on y-o-y basis. The company exited the period with total assets of CAD 14,483.34 million and cash and cash equivalent of CAD 48.64 million.

Valuation Methodology (Illustrative): EV/EBITDA

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: HR.UN stock has taken a fair amount of beating in the recent past. The stock corrected ~61% in a year, and currently down about 58% on a year-to-date basis with a market capitalization of CAD 2.5 billion. H&R stock is trading near the lower band of its 52-week trading range of CAD 23.66 and CAD 7.39. Panic-driven selling following COVID-19 outbreak and expected decline in rent collection weighed on H&R stock. The company is witnessing rent deferral requests and witnessing a decline in the retail tenancies. For instance, the company reported that only 56% collection from retail tenancies. Notably, retail tenancies account for about 33% of its total rent collections. We expect uncertainty surrounding the economy and higher jobless claims is likely to hurt its rental income in the near-term. However, given the steep decline in H&R stock, we believe the negatives are priced in. H&R remains well-positioned to benefit in the long run as the economy revives. Further, H&R’s diverse cross-section of asset class makes it somewhat immune. H&R stock trades at lower valuation when compared to peers. We expect the multiple to expand in coming quarters. We have valued the stock using EV/EBITDA based relative valuation with a target multiple of 12.0x. We arrived at a target price implying a potential upside in low double digits (% terms). We recommend a ‘Buy’ on H&R stock at the closing market price of CAD 8.7 as on April 24, 2020.

HR.UN One-Year Daily Price Chart (Source: Thomson Reuters)

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