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Monthly Dividend Stock In Focus: H&R Real Estate Investment Trust

Published on April 3rd, 2023 by Aristofanis Papadatos

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 4.7%, which is nearly triple the 1.6% 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 C$10.1 billion. H&R REIT has ownership interests in 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 currently in the process of a major transformation. It is divesting its grocery-anchored and essential service retail properties as well as its office properties in order 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 properties and 20% industrial properties by the end of 2026.

H&R REIT has some attractive characteristics for prospect 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. It posted FFO per unit of $1.64 in 2021 and 10-year high FFO per unit of $2.29 last year thanks to the strong demand for its properties.

In the fourth quarter of 2022, the REIT grew its same-property net operating income by 10.9% over the prior year’s quarter. Net operating income decreased 12.8% but only due to the aforementioned divestment of properties. Moreover, the trust repurchased about 8% of its units at an average price that was 40% lower than the net asset value of the REIT. Book value per unit grew 25% over the prior year’s quarter. Overall, H&R REIT enjoys positive business momentum right now.

Growth Prospects

H&R REIT has exhibited a volatile performance record, partly due to the fluctuation of the exchange rate 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 interest expense of the trust 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 ongoing transformation of the REIT. 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 4.7% 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 21%, 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 4.7% dividend yield and rest assured that the dividend has a wide margin of safety.

H&R REIT has a material debt load. Its net debt is currently standing at $4.3 billion, which is 159% of the market capitalization of the stock. Nevertheless, thanks to its healthy interest coverage ratio of 3.6 and its solid growth trajectory, the REIT is not likely to face any liquidity issues.

In reference to the valuation, H&R REIT is currently trading for only 3.9 times its FFO per unit in the last 12 months. The cheap valuation has resulted primarily from the excessive divestment of properties amid the ongoing transformation of the trust.

Given also the material debt load of the REIT, we assume a fair price-to-FFO ratio of 5.0 for the stock. Therefore, the current FFO multiple is lower than our assumed fair price-to-FFO ratio. If the stock trades at its fair valuation level in five years, it will enjoy a 5.1% annualized gain in its returns.

Taking into account the 3% annual FFO-per-unit growth, the 4.7% dividend and a 5.1% annualized expansion of valuation level, H&R REIT could offer an 11.8% 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 4.7% with an exceptionally low payout ratio of 21% 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 11.8% 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.

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