UPDATED WITH SALE CLOSING, NEW DETAILS: H&R REIT (HR-UN-T) has closed on the sale of one of its premiere remaining office properties, the million-square-foot downtown ONE60 Elgin complex in Ottawa, to Montreal-based Groupe Mach and Sarees Investments.
H&R originally made the announcement of the transaction in its 2022 year-end financial report, listing the sale price as $277 million.
While the trust says that is “in line” with ONE60 Elgin's IFRS value at the end of 2022, president Philippe Lapointe said H&R took a $25-million writedown on the asset as part of a $194-million writedown on its office portfolio during Q4. He made the comment in response to an analyst question during H&R's Q4 2022 conference call with analysts and investors.
"Given the considerable headwinds in the public and private real estate markets, we are very pleased to have executed this transaction," said Tom Hofstedter, H&R's executive chairman and CEO, in Thursday's announcement of the closing of the transaction. "This office sale furthers our strategic repositioning plan and moves H&R REIT closer to achieving our portfolio simplification strategy goals."
"We are well on our way to creating a simplified, growth-oriented business that will create sustainable value for our unitholders," Lapointe said in the same release. "Initial proceeds of $67 million from this sale will be put to good use repaying debt and repurchasing H&R units at a significant discount to the REIT's net asset value per unit."
H&R noted a number of key highlights in Thursday's release, including:
- $67 million in cash proceeds received on closing.
- $180 million to be received within 90 days of closing.
- Net proceeds from the sale to be used to repay debt and repurchase H&R units under the REIT's normal course issuer bid.
- On a square-footage basis, 160 Elgin represented 19 per cent of the REIT's Canadian office portfolio.
- The transaction reduces the REIT's current office exposure from 30 per cent to 28 per cent on a fair-value basis.
- The REIT's proforma office weighted average lease term remains at 7.5 years.
Groupe Mach buying office properties
The acquisition is the latest in a series of office purchases for Mach, both in Ottawa and other Canadian centres.
"The acquisition of ONE60 Elgin is a perfect fit with our pan-Canadian expansion plan," Vincent Chiara, President of MACH, said in a separate release. "Over the past two years, we have deployed a major acquisition strategy to strengthen MACH's presence in the Ontario market, both in Ottawa and the Greater Toronto Area.
"These markets offer exceptional acquisition opportunities, such as ONE60 Elgin, a strategically located high-value asset with quality tenants and long-term leases.
"ONE60 is our 16th acquisition in the region in less than two years, positioning us amongst the largest real estate owners in Ottawa. But most importantly, we are proud to have built a strong local team that understands the nuances of the market and ensures a high standard of service for our tenants."
Mach also acquired two of the largest office buildings in Halifax earlier this year for just over $70 million, the 22-storey 1801 Hollis tower and the 17-storey Metropolitan Place at 99 Wyse Rd. In total, Mach has made nine acquisitions so far in 2022.
Its partner Sarees Investments is a Montreal-based family office investor which focuses on the real estate sector. Its portfolio is located mainly in Quebec and Ontario.
The transaction is the latest divestment for H&R as it transforms from a diversified REIT to specialize mainly in industrial and multiresidential properties.
It spun off Primaris REIT as a stand-alone retail entity in January 2021 and has made a series of major office divestments.
“Since announcing our strategic plan, H&R has sold off or spun off over $4.2 billion worth of office and retail including the Primaris spinoff, and over $1.8 billion excluding the spinoff,” Lapointe said during the Q4 call.
The ONE60Elgin office property
ONE60 Elgin is the third-largest office property in Ottawa and is LEED Gold EB certified for its operations and maintenance. The 27-storey office tower features a large footprint and floor plates of about 40,000 square feet.
It was constructed in 1971 and extensively renovated around 2018, including the addition of a striking, curved glass wall which surrounds the main entrance into the building. The wall stands 39x115 feet and floods the entryway with light.
The location is just across Elgin Street from Ottawa City Hall and a few blocks south of Parliament Hill. It has been occupied mainly by government and public sector tenants, though the current occupancy level was not immediately clear.
It also contains ground-level retail.
H&R's repositioning activity
H&R's ongoing repositioning includes several other major transactions, including the sales of the iconic Bow Tower in Calgary and the Bell office campus in Mississauga in Q3 2021 (which fetched $1.67 billion).
In August 2022, the REIT reported a series of transactions for office and retail properties valued at $167.8 million, including 100 Wynford Dr. In Toronto. That office property was transacted for $120.7 million.
H&R's office portfolio is broken down into three segments by management: about $750 million worth of properties which are undergoing or slated for rezoning to renovate or redevelop as multiresidential assets; a portfolio composed mainly of two large assets in New York and Houston; and the remaining $1 billion of properties in Canada which are "not subject to rezoning" and will all likely be sold.
There is also some retail remaining in the H&R portfolio to be sold.
“There is no urgency," Hofstedter said during the Q4 call. "If we pull through on the office, we have a little bit of retail that we expect to sell. It will be slow and steady. There is no reason to sell pre-emptively at this point in time. We will do so as we require funds.”
Q4 2022 financial highlights
While H&R's overall 2022 financials were impacted by the spinoff of Primaris REIT (which included 27 retail properties), management lauded the success of what Hofstedter calls its "simplification strategy." As of Dec. 31, the REIT held 11.4 billion in assets
Activities during 2022 enabled H&R to lower its debt-to-total-assets (at the REIT's proportionate share) to about 44 per cent, down from 46.6 per cent as of Dec. 31, 2021.
The divestments are also helping to buy back H&R stock and fund its development projects in both Canada and the U.S.
Net income rose from $597.9 million in 2021 to $844.8 million in 2022. It absorbed $224.5 million in fair value write-downs during Q4, but for the year its values rose $546.1 million.
NAV per unit rose to $21.80 from $17.70 at the end of 2021. Funds from operations dipped to $0.310 per unit from $0.347 on the quarter, and to $1.173 from $1.529 for the year.
EDITOR'S NOTE: This article, first published in February when the pending transaction was revealed in H&R's Q4 2022 financial report, was updated with extensive new details upon the closing of the sale on April 20.