Monday, July 14, 2014

Check-Up H&R REIT (TSX:HR.UN)


As a dividend growth investor, I get a little frustrated when a company I add to my portfolio does not increase their distributions at regular intervals. I can appreciate that sometimes companies have challenging years, and aren’t able to increase their dividends as they have in the past. That said, even though I consider myself quite patient, when a company goes 18-months without increasing their payout, my initial reaction is to sell the investment and move onto a company that rewards its shareholders regularly.  

I’ve held shares of H&R REIT (“H&R”) in my non-registered account (not the smartest decision for tax purposes) for the last three years. I bought shares when the company was regularly increasing their distributions (about every six months) as they acquired new properties that allowed them to grow their funds from operations (“FFO”).  H&R acquired Primaris in December 2012, allowing them to become Canada’s second largest REIT. Ever since that acquisition, their distributions have been stuck at $1.35/unit. After tolerating a stagnant distribution for 18-months, I took a deeper dive to determine if this investment was worth keeping in my portfolio.

While reviewing their quarterly filings, press releases, and news for the past six months, I came across two pertinent pieces of information.
-          Despite the fact that they have kept the distribution static, H&R’s FFO per unit was up nicely from $0.44 / share in Q113 to $0.47 in Q114. This tells me the company can afford to increase its payout since their payout ratio as a percentage of FFO dropped from 75.6% to 72.3% over the same period.
-          H&R got approval in April for their plan (announced in February) to repurchase up to 25 million shares of their units. The 25 million shares represents about 9% of their outstanding shares. I’m not normally a fan of share buybacks, as I’m not looking to tender my shares. However, if management actually buys back 9% of outstanding shares over the next year, and H&R continues to operate as efficiently as they have in the past, the value of my units could rise substantially.

I’ve decided that I’ll hold on to H&R to see how the share buyback impacts the value of my shares. With a current distribution yield around 5.8%, the P/E about 20X, and management running the company efficiently, I’m curious to see how things shape up in the next six months.  If the company’s shares are undervalued (as I assume management thinks given their 25 million share buyback plan), the value of my holdings should increase, making up for the lack of distribution raise.

(Full Disclosure: Long HR.UN)

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