Date of Release: 2008-11-18

H&R Real Estate Investment Trust

DBRS Places H&R Real Estate Investment Trust Under Review with Negative Implications

DBRS has today placed the BBB Issuer Rating and STA-3 (high) stability rating of H&R Real Estate Investment Trust (H&R or the Trust) Under Review with Negative Implications.

The rating action reflects DBRS concern that H&R could face difficulty in securing adequate financing for its development commitments in light of the recent challenging credit markets and overall reduction in available sources of capital.

These development commitments relate to the following development projects that currently do not have financing arrangements in place, including:

(1) The Bow, a two million square foot (sq. ft.) office building located in Calgary, Alberta and fully pre-leased to EnCana Corporation under a 25-year term.

(2) Bell Phase III, a 348,000 sq. ft. office complex located in Mississauga, Ontario.

DBRS estimates that capital requirements for these projects total approximately $390 million over the next 12 months and $1.1 billion over the next four years, a majority of which is associated with the Bow.

H&R has indicated that it has the following alternatives to fund these commitments:

(1) Cash on hand and unused bank lines, totaling $232 million, which should support projected capital requirements for the next six to 12 months.
(2) The sale of properties within the Trust’s portfolio, including Bell Phase III and an interest in the Bow.
(3) Secure financing on the Bow, permanent financing on Bell Phase III and refinancing other assets.

DBRS believes H&R is committed in seeing the Bow through to completion and had expected H&R to secure non-recourse construction financing on this development, given that the project is 100% pre-leased to a high quality tenant (EnCana rated A (low) by DBRS).

However, DBRS is now concerned that the current credit environment could adversely affect the nature and cost of capital available to H&R. For example, H&R may resort to funding methods outside of DBRS’s original expectations to cover capital shortfalls, including asset sales, decreasing the level of cash distributions to unitholders, and securing higher cost debt and/or significant debt with recourse to the Trust.

As a result, H&R’s credit metrics and/or stability of distributions may come under increasing pressure to levels that are no longer consistent with the current rating categories. DBRS expects to assess the implications of H&R’s final financing arrangements for these development commitments in the next 90 days.

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

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