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investor clinic

I own units of H&R Real Estate Investment Trust (HR.UN), which fell more than 60 per cent in March and have barely recovered since. Why has H&R fared so poorly compared with other big REITs?

Even before the coronavirus pandemic, H&R’s payout ratio was elevated. In 2019, the payout ratio soared to 105 per cent of adjusted funds from operations, according to a recent note from Neil Downey, an analyst at RBC Dominion Securities.

When the pandemic hit, H&R’s enclosed malls – which account for about one-fifth of its total rent – were hit especially hard. In April, H&R collected just 40 per cent of rent from its enclosed mall tenants, falling to 30 per cent in May. H&R’s residential and industrial properties also experienced some softness, although not as severe.

Something had to give. When H&R announced quarterly results in May, it slashed its distribution by 50 per cent. H&R said the move would help it absorb rental income disruptions and deal with tenant vacancies caused by the pandemic.

Well before the coronavirus emerged, however, H&R was already in the midst of streamlining its property portfolio. This included selling about $2-billion of assets since 2018, reducing debt and reinvesting capital into higher-growth residential and industrial properties and developments in Canada and the United States.

In his note to clients, Mr. Downey said H&R’s hefty distribution cut “may pave the way to something more strategic over time.”

The distribution reduction, which will save H&R more than $200-million annually, “creates significant earnings retention, which we believe will be useful to support the business, and … may be the precursor to one or more strategic transactions,” Mr. Downey said.

These could include mergers and acquisitions, asset sales or splitting the REIT into pieces, he said. By slashing its distribution now – rather than being forced to make a cut if a future transaction puts pressure on its payout ratio – H&R could have an easier time selling a transaction to unitholders, he said.

“What we do feel that we know is that H&R has a large asset base, and … we believe the asset base is excessively diversified.”

Financial markets hate uncertainty, and right now there is a lot of uncertainty swirling around H&R. That, combined with the hefty distribution cut, is likely putting pressure on the unit price.

Financial websites such as Globeinvestor.com and Yahoo Finance provide actual share price data as well as historical prices adjusted for dividends. How are these dividend-adjusted numbers calculated and what is their purpose?

Dividend-adjusted share prices control for fluctuations that are caused by dividend payments as opposed to market forces. The best way to explain this is with an actual example.

BCE Inc. (BCE) is scheduled to pay a dividend of 83.25 cents a share on July 15. The ex-dividend date for this payment was June 12, meaning purchasers on or after this date will not receive the dividend.

In theory, if the dividend were the only factor affecting BCE’s share price, the stock should have dropped by exactly 83.25 cents on the ex-date. But stocks are subject to myriad other forces, and BCE’s price fell by just 56 cents that day.

It’s reasonable to assume, then, that if it weren’t for the stock going ex-dividend that day, BCE would have gained 27.25 cents (calculated by adding back the 83.25-cent dividend and subtracting the actual price drop of 56 cents). This is the dividend-adjusted price change, and it reflects the stock’s performance without the noise from the dividend.

Why is this number important? Well, an investor who looked at BCE’s unadjusted price decline of 56 cents might have concluded that the stock had a bad day, when the shares actually had a positive return on a dividend-adjusted basis. When a stock pays an especially large dividend, the price drop on the ex-dividend date can be upsetting for shareholders who may not understand the reason.

There’s a bit of math involved in calculating historical dividend-adjusted prices.

When a stock goes ex-dividend, financial websites typically use a “dividend multiplier” to adjust prices prior to the ex-date. The multiplier is calculated by dividing the dividend by the closing share price immediately before the ex-dividend date, and then subtracting this number from 1. In BCE’s case, the multiplier is about 0.9856 (1 minus $0.8325/$57.85). Prices before the ex-date are multiplied by this number to get the dividend-adjusted historical values.

BCE’s prices since the most recent ex-date have not been adjusted yet, which is why the actual and dividend-adjusted closing values are the same since June 12. BCE’s next ex-dividend date will likely be in September, at which time the new multiplier will be applied retroactively to BCE’s current share prices. (To see dividend-adjusted share prices on Globe Investor, pull up a stock quote, scroll down, click on “price history” and check the box labelled “dividend adjust.”)

As useful as dividend-adjusted prices can be, there’s no substitute for actual market price data. If you own individual stocks, pay attention to ex-dividend dates so you will know that a drop in the price that day may not be cause for worry.

E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.


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