Updated on October 10th, 2024 by Felix Martinez
H&R Real Estate Investment Trust (HRUFF) has three appealing investment characteristics:
#1: It is a REIT so it has a favorable tax structure and pays out the majority of its earnings as dividends.
Related: List of publicly traded REITs
#2: It is offering an above-average dividend yield of 10.9%, nearly eight times the 1.3% yield of the S&P 500.
#3: It pays dividends monthly instead of quarterly.
Related: List of monthly dividend stocks
You can download our full Excel spreadsheet of all monthly dividend stocks (along with metrics that matter, like dividend yield and payout ratio) by clicking on the link below:
H&R Real Estate Investment Trust’s trifecta of favorable tax status as a REIT, an above-average dividend yield, and a monthly dividend make it appealing to individual investors.
But there’s more to the company than just these factors. Keep reading this article to learn more about H&R Real Estate Investment Trust.
Business Overview
H&R REIT is one of the largest real estate investment trusts in Canada, with total assets of approximately $7.5 billion. It owns a portfolio of high-quality office, retail, industrial, and residential properties in North America, with a total leasable area of more than 28 million square feet.
H&R REIT is undergoing a major transformation. It is divesting its grocery-anchored and essential service retail properties and office properties to focus exclusively on residential and industrial properties.
Source: Investor Presentation
The REIT aims to become a high-growth residential and industrial platform. Management expects the asset portfolio to consist of approximately 80% residential and 20% industrial properties by the end of 2026.
H&R REIT has some attractive characteristics for prospective investors. Its management owns a significant stake in the company, and hence, its interests are aligned with those of the unitholders.
Source: Investor Presentation
In addition, the REIT is increasing its exposure to residential properties, which have promising growth prospects, while management also expects to enhance unitholder value via meaningful unit repurchases, as the stock price is currently about 45% lower than the net asset value of the REIT.
Due to the sensitivity of its industrial and office properties to the underlying economic conditions, H&R REIT proved vulnerable to the coronavirus crisis, in contrast to other REITs, which have more defensive types of properties, such as healthcare, residential and self-storage properties. In 2020, H&R REIT posted negative funds from operations (FFO) per unit of -$1.71 and thus it reported its first loss in a decade.
On the bright side, the pandemic has subsided, and hence, the REIT has recovered from this crisis. Thanks to the strong demand for its properties, it posted FFO per unit of $1.64 in 2021 and a 10-year high of $2.29 in 2022.
The company reported Q2 2024, showing an overall portfolio occupancy of 96.9%. Net operating income dropped by 5.3% year-over-year due to $776.4 million in property sales between 2023 and mid-2024. However, same-property net operating income on a cash basis increased by 1.7%, led by stronger performance in industrial (4.7%) and retail (7.9%) sectors, despite a decline in office (1.8%) occupancy. The REIT’s Funds From Operations (FFO) per unit rose slightly to $0.31, and unitholders’ equity per unit stood at $19.23 as of June 30, 2024.
H&R’s debt-to-total assets ratio remained stable at around 34%, while liquidity stood at $943 million. The REIT’s strategic plan, focused on repositioning towards residential and industrial properties, has resulted in significant sales, including the completion of property transactions totaling $429 million in 2024 alone. Major disposals include the sale of 25 Dockside Drive in Toronto and several industrial and residential land parcels. H&R continues to advance its rezoning efforts, aiming to convert office properties into residential developments.
Additionally, H&R has initiated new developments, including the creation of Lantower Residential Real Estate Development Trust (No. 1), raising U.S. $52 million in equity for residential projects in Florida. The REIT also continues to focus on leasing activity, completing lease renewals on several industrial properties across Canada. H&R remains committed to executing its long-term growth strategy, despite facing economic challenges and market volatility.
Growth Prospects
H&R REIT has exhibited a volatile performance record, partly due to the exchange rate fluctuation between the Canadian dollar and the USD. Nevertheless, the REIT has grown its FFO per unit by 7.2% per year on average over the last decade.
Moreover, the REIT has a promising pipeline of growth projects in Austin, Dallas, Miami and Tampa. These areas are characterized by superior population and economic growth when compared to the rest of the country. Given also the ample room for new properties in these markets, H&R REIT is likely to continue growing its FFO per unit significantly for many more years.
On the other hand, just like most REITs, H&R REIT is currently facing a headwind due to the adverse environment of fast-rising interest rates, which are likely to increase the burden of the interest expense on the trust.
Nevertheless, it is hard to estimate the impact of high interest rates on H&R REIT, as the trust’s interest expense has decreased sharply in recent quarters thanks to the extensive divestment of properties. In addition, investors should be cautious in their growth expectations, given the extensive divestment of properties amid the REIT’s ongoing transformation. Overall, we expect the REIT to grow its FFO per unit by about 3.0% per year on average over the next five years.
Dividend & Valuation Analysis
H&R REIT is currently offering a 10.9% dividend yield. It is thus an interesting candidate for income-oriented investors, but the latter should be aware that the dividend may fluctuate significantly over time due to the gyrations of the exchange rates between the Canadian dollar and the USD.
Notably, the REIT has a payout ratio of only 62%, which is one of the lowest payout ratios in the REIT universe. Given also its solid business model and its healthy interest coverage of 3.6, the REIT can easily cover its dividend. To cut a long story short, investors can lock in a 10.9% dividend yield and rest assured that the dividend has a wide margin of safety.
Taking into account the 3% annual FFO-per-unit growth, the 10.9% dividend and a 5.1% annualized expansion of valuation level, H&R REIT could offer an 18% average annual total return over the next five years. This is an attractive expected return, especially for the investors who expect inflation to subside swiftly to its normal levels. Nevertheless, the stock is suitable only for patient investors who are comfortable with the risk that comes from the ongoing transformation of the trust.
Final Thoughts
H&R REIT has a solid business model in place, primarily thanks to the strong demand for its properties in the markets it serves. The stock is offering an attractive dividend yield of 10.9% with an exceptionally low payout ratio of 62% and hence it is an attractive candidate for the portfolios of income-oriented investors, particularly given that the stock has an attractive expected return of 18% per year over the next five years.
On the other hand, investors should be aware of the risk that results from the somewhat weak balance sheet of the REIT and its ongoing transformation, which may cause some volatility in the results of the REIT going forward. Therefore, the stock is suitable only for patient investors, who can ignore stock price volatility and remain focused on the long run.
Moreover, H&R REIT is characterized by exceptionally low trading volume. This means that it is hard to establish or sell a large position in this stock.
Don’t miss the resources below for more monthly dividend stock investing research.
- The Monthly Dividend Stocks List
- 20 Highest Yielding Monthly Dividend Stocks
- 10 Cheapest Monthly Dividend Stocks
- 10 Safest Monthly Dividend Stocks
- 3 Top ‘Hold Forever’ Monthly Dividend Stocks
And see the resources below for more compelling investment ideas for dividend growth stocks and/or high-yield investment securities.
- Dividend Kings: 50+ years of rising dividends
- Dividend Champions: 25+ years of rising dividends
- Dividend Aristocrats: 25+ years of rising dividends and in the S&P 500
- Dividend Achievers: 10+ years of rising dividends and in the NASDAQ
- High Dividend Stocks: 4%+ dividend yields
- Blue Chip Stock: Kings, Aristocrats, and Achievers
- MLPs: List of MLPs and more
- REITs: List of REITs and more
- BDCs: List of BDCs and more