Intrinsic value of H&R Real Estate Investment Trust - HR-UN

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$23.02

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$23.02

 
Intrinsic value

$7.54

 
Up/down potential

-67%

 
Rating

str. sell

 
Value-price divergence* premium content

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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of HR-UN stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 6.6

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  0.67
  3.40
  3.56
  3.70
  3.83
  3.95
  4.06
  4.15
  4.23
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.63
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.82
  4.84
  4.86
  4.87
  4.89
  4.90
  4.91
  4.92
  4.92
Revenue, $m
  1,196
  1,237
  1,281
  1,328
  1,379
  1,434
  1,492
  1,554
  1,619
  1,689
  1,763
  1,841
  1,924
  2,012
  2,104
  2,202
  2,305
  2,413
  2,527
  2,647
  2,774
  2,907
  3,048
  3,195
  3,350
  3,514
  3,685
  3,866
  4,056
  4,255
  4,464
Variable operating expenses, $m
 
  582
  603
  626
  650
  675
  703
  732
  763
  796
  830
  867
  906
  948
  991
  1,037
  1,085
  1,136
  1,190
  1,247
  1,307
  1,369
  1,435
  1,505
  1,578
  1,655
  1,736
  1,821
  1,910
  2,004
  2,103
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  358
  582
  603
  626
  650
  675
  703
  732
  763
  796
  830
  867
  906
  948
  991
  1,037
  1,085
  1,136
  1,190
  1,247
  1,307
  1,369
  1,435
  1,505
  1,578
  1,655
  1,736
  1,821
  1,910
  2,004
  2,103
Operating income, $m
  838
  654
  677
  703
  730
  758
  789
  822
  857
  894
  933
  974
  1,018
  1,064
  1,113
  1,165
  1,219
  1,276
  1,337
  1,400
  1,467
  1,538
  1,612
  1,690
  1,772
  1,859
  1,950
  2,045
  2,145
  2,251
  2,362
EBITDA, $m
  838
  654
  677
  703
  730
  758
  789
  822
  857
  894
  933
  974
  1,018
  1,064
  1,113
  1,165
  1,219
  1,276
  1,337
  1,400
  1,467
  1,538
  1,612
  1,690
  1,772
  1,859
  1,950
  2,045
  2,145
  2,251
  2,362
Interest expense (income), $m
  300
  292
  303
  316
  330
  344
  360
  377
  395
  414
  434
  455
  477
  501
  527
  553
  581
  611
  642
  675
  710
  746
  784
  825
  867
  912
  959
  1,009
  1,061
  1,115
  1,173
Earnings before tax, $m
  590
  362
  374
  387
  400
  414
  429
  445
  462
  480
  499
  519
  540
  563
  587
  612
  638
  666
  695
  726
  758
  792
  828
  865
  905
  947
  990
  1,036
  1,085
  1,136
  1,189
Tax expense, $m
  201
  98
  101
  104
  108
  112
  116
  120
  125
  130
  135
  140
  146
  152
  158
  165
  172
  180
  188
  196
  205
  214
  223
  234
  244
  256
  267
  280
  293
  307
  321
Net income, $m
  389
  264
  273
  282
  292
  302
  313
  325
  337
  350
  364
  379
  395
  411
  428
  446
  466
  486
  507
  530
  553
  578
  604
  632
  661
  691
  723
  757
  792
  829
  868

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  48
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  14,155
  14,549
  15,067
  15,625
  16,224
  16,865
  17,549
  18,277
  19,051
  19,872
  20,743
  21,664
  22,639
  23,668
  24,755
  25,903
  27,112
  28,388
  29,731
  31,146
  32,636
  34,205
  35,855
  37,591
  39,418
  41,338
  43,358
  45,481
  47,712
  50,058
  52,523
Adjusted assets (=assets-cash), $m
  14,107
  14,549
  15,067
  15,625
  16,224
  16,865
  17,549
  18,277
  19,051
  19,872
  20,743
  21,664
  22,639
  23,668
  24,755
  25,903
  27,112
  28,388
  29,731
  31,146
  32,636
  34,205
  35,855
  37,591
  39,418
  41,338
  43,358
  45,481
  47,712
  50,058
  52,523
Revenue / Adjusted assets
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
  0.085
Average production assets, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Working capital, $m
  0
  618
  640
  664
  690
  717
  746
  777
  810
  845
  882
  921
  962
  1,006
  1,052
  1,101
  1,152
  1,206
  1,264
  1,324
  1,387
  1,454
  1,524
  1,598
  1,675
  1,757
  1,843
  1,933
  2,028
  2,127
  2,232
Total debt, $m
  6,141
  6,319
  6,583
  6,868
  7,173
  7,500
  7,849
  8,220
  8,615
  9,034
  9,478
  9,948
  10,445
  10,970
  11,524
  12,109
  12,726
  13,377
  14,062
  14,784
  15,544
  16,343
  17,185
  18,071
  19,002
  19,981
  21,011
  22,094
  23,232
  24,429
  25,686
Total liabilities, $m
  7,242
  7,420
  7,684
  7,969
  8,274
  8,601
  8,950
  9,321
  9,716
  10,135
  10,579
  11,049
  11,546
  12,071
  12,625
  13,210
  13,827
  14,478
  15,163
  15,885
  16,645
  17,444
  18,286
  19,172
  20,103
  21,082
  22,112
  23,195
  24,333
  25,530
  26,787
Total equity, $m
  6,913
  7,129
  7,383
  7,656
  7,950
  8,264
  8,599
  8,956
  9,335
  9,737
  10,164
  10,615
  11,093
  11,597
  12,130
  12,692
  13,285
  13,910
  14,568
  15,262
  15,992
  16,760
  17,569
  18,420
  19,315
  20,256
  21,245
  22,286
  23,379
  24,528
  25,736
Total liabilities and equity, $m
  14,155
  14,549
  15,067
  15,625
  16,224
  16,865
  17,549
  18,277
  19,051
  19,872
  20,743
  21,664
  22,639
  23,668
  24,755
  25,902
  27,112
  28,388
  29,731
  31,147
  32,637
  34,204
  35,855
  37,592
  39,418
  41,338
  43,357
  45,481
  47,712
  50,058
  52,523
Debt-to-equity ratio
  0.888
  0.890
  0.890
  0.900
  0.900
  0.910
  0.910
  0.920
  0.920
  0.930
  0.930
  0.940
  0.940
  0.950
  0.950
  0.950
  0.960
  0.960
  0.970
  0.970
  0.970
  0.980
  0.980
  0.980
  0.980
  0.990
  0.990
  0.990
  0.990
  1.000
  1.000
Adjusted equity ratio
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490
  0.490

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  389
  264
  273
  282
  292
  302
  313
  325
  337
  350
  364
  379
  395
  411
  428
  446
  466
  486
  507
  530
  553
  578
  604
  632
  661
  691
  723
  757
  792
  829
  868
Depreciation, amort., depletion, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Funds from operations, $m
  84
  264
  273
  282
  292
  302
  313
  325
  337
  350
  364
  379
  395
  411
  428
  446
  466
  486
  507
  530
  553
  578
  604
  632
  661
  691
  723
  757
  792
  829
  868
Change in working capital, $m
  -340
  20
  22
  24
  25
  27
  29
  31
  33
  35
  37
  39
  41
  44
  46
  49
  51
  54
  57
  60
  63
  67
  70
  74
  78
  82
  86
  90
  95
  100
  105
Cash from operations, $m
  424
  244
  251
  258
  266
  275
  284
  294
  304
  316
  327
  340
  353
  367
  382
  398
  414
  432
  450
  469
  490
  511
  534
  558
  583
  609
  637
  666
  697
  729
  763
Maintenance CAPEX, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
New CAPEX, $m
  -404
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from investing activities, $m
  -1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Free cash flow, $m
  423
  244
  251
  258
  266
  275
  284
  294
  304
  316
  327
  340
  353
  367
  382
  398
  414
  432
  450
  469
  490
  511
  534
  558
  583
  609
  637
  666
  697
  729
  763
Issuance/(repayment) of debt, $m
  -137
  226
  264
  285
  305
  327
  349
  371
  395
  419
  444
  470
  497
  525
  554
  585
  617
  650
  685
  722
  760
  800
  842
  885
  931
  979
  1,030
  1,083
  1,138
  1,196
  1,257
Issuance/(repurchase) of shares, $m
  1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -139
  226
  264
  285
  305
  327
  349
  371
  395
  419
  444
  470
  497
  525
  554
  585
  617
  650
  685
  722
  760
  800
  842
  885
  931
  979
  1,030
  1,083
  1,138
  1,196
  1,257
Total cash flow (excl. dividends), $m
  284
  470
  515
  543
  572
  602
  633
  665
  699
  734
  771
  810
  850
  892
  936
  983
  1,031
  1,082
  1,135
  1,191
  1,250
  1,311
  1,376
  1,443
  1,514
  1,589
  1,667
  1,749
  1,835
  1,926
  2,021
Retained Cash Flow (-), $m
  -88
  -216
  -254
  -273
  -294
  -314
  -335
  -357
  -379
  -402
  -427
  -451
  -477
  -505
  -533
  -562
  -593
  -625
  -658
  -693
  -730
  -768
  -809
  -851
  -895
  -941
  -990
  -1,040
  -1,094
  -1,149
  -1,208
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  254
  261
  270
  278
  288
  298
  309
  320
  332
  345
  358
  373
  388
  404
  421
  438
  457
  477
  498
  520
  543
  567
  593
  620
  648
  678
  709
  742
  776
  813
Discount rate, %
 
  8.30
  8.72
  9.15
  9.61
  10.09
  10.59
  11.12
  11.68
  12.26
  12.88
  13.52
  14.20
  14.91
  15.65
  16.43
  17.26
  18.12
  19.02
  19.97
  20.97
  22.02
  23.12
  24.28
  25.49
  26.77
  28.11
  29.51
  30.99
  32.54
  34.16
PV of cash for distribution, $m
 
  234
  221
  207
  193
  178
  163
  147
  132
  117
  103
  89
  76
  64
  53
  43
  34
  27
  21
  16
  12
  8
  6
  4
  3
  2
  1
  1
  0
  0
  0
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

H&R Real Estate Investment Trust operates as an unincorporated open-ended real estate investment trust. It owns and manages a portfolio of office, industrial, and retail properties in North America. As of February 25, 2010, it owned a portfolio of 34 office, 118 industrial, and 117 retail properties comprising an area of approximately 38 million square feet. The company was founded in 1996 and is headquartered in Toronto, Canada.

FINANCIAL RATIOS  of  H&R Real Estate Investment Trust (HR-UN)

Valuation Ratios
P/E Ratio 16.9
Price to Sales 5.5
Price to Book 0.9
Price to Tangible Book
Price to Cash Flow 15.5
Price to Free Cash Flow 328.4
Growth Rates
Sales Growth Rate 0.7%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 16.8%
Cap. Spend. - 3 Yr. Gr. Rate 8.9%
Financial Strength
Quick Ratio 0
Current Ratio NaN
LT Debt to Equity 79.5%
Total Debt to Equity 88.8%
Interest Coverage 3
Management Effectiveness
Return On Assets 4.2%
Ret/ On Assets - 3 Yr. Avg. 4.6%
Return On Total Capital 3%
Ret/ On T. Cap. - 3 Yr. Avg. 3%
Return On Equity 5.7%
Return On Equity - 3 Yr. Avg. 5.8%
Asset Turnover 0.1
Profitability Ratios
Gross Margin 64%
Gross Margin - 3 Yr. Avg. 64.8%
EBITDA Margin 74.4%
EBITDA Margin - 3 Yr. Avg. 64.2%
Operating Margin 70.1%
Oper. Margin - 3 Yr. Avg. 61.5%
Pre-Tax Margin 49.3%
Pre-Tax Margin - 3 Yr. Avg. 39.7%
Net Profit Margin 32.5%
Net Profit Margin - 3 Yr. Avg. 31.9%
Effective Tax Rate 34.1%
Eff/ Tax Rate - 3 Yr. Avg. 17.6%
Payout Ratio 70.4%

HR-UN stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the HR-UN stock intrinsic value calculation we used $1196 million for the last fiscal year's total revenue generated by H&R Real Estate Investment Trust. The default revenue input number comes from 2016 income statement of H&R Real Estate Investment Trust. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our HR-UN stock valuation model: a) initial revenue growth rate of 3.4% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 8.3%, whose default value for HR-UN is calculated based on our internal credit rating of H&R Real Estate Investment Trust, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of H&R Real Estate Investment Trust.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of HR-UN stock the variable cost ratio is equal to 47.1%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for HR-UN stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 4.8% for H&R Real Estate Investment Trust.

Corporate tax rate of 27% is the nominal tax rate for H&R Real Estate Investment Trust. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the HR-UN stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for HR-UN are equal to 0%.

Life of production assets of 10 years is the average useful life of capital assets used in H&R Real Estate Investment Trust operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for HR-UN is equal to 50%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $6913 million for H&R Real Estate Investment Trust - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 285.838 million for H&R Real Estate Investment Trust is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of H&R Real Estate Investment Trust at the current share price and the inputted number of shares is $6.6 billion.


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Stock chart of HR-UN Financial statements of HR-UN
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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