UPDATED WITH QUOTES: H&R REIT plans to undergo a massive repositioning to move from being a diversified REIT into a growth-oriented trust focused on the multiresidential and industrial sectors. It also plans to invest heavily on its extensive development pipeline.<
The initiative has three main pillars, led by the spinoff of its Primaris properties, including all of H&R’s enclosed shopping centres, into a new stand-alone, publicly traded REIT. Primaris REIT will be independent of H&R and will focus on owning and operating Canadian shopping centres.

H&R (HR-UN-T) also plans to dispose of two property groups in the coming months and years, raising an estimated $3.4 billion in equity synchronized to meet capital funding requirements:

– The trust will exit the retail sector, selling an additional $600 million of grocery-anchored and essential-service retail. It will also monetize its $470 million equity interest in U.S.-based Echo Realty LP; and

– It will continue exiting the office segment, selling an additional $2.3 billion of properties, with the remaining $1.4 billion to be held for redevelopment into class-A multiresidential and industrial assets.

Proceeds to fund H&R’s development plans

“By exiting retail and office we are streamlining our operating platform, and expanding our exposure to high-growth multiresidential and industrial properties,” said H&R president and CEO Thomas Hofstedter during a call with investors and analysts Wednesday. “Exposure to major markets will increase over time as our development pipeline completions begin to come online.

“This streamlined operating platform will allow us to focus on development and development opportunities in our existing portfolio to drive future growth.”

The REIT will reinvest proceeds from the dispositions to fund multiresidential and industrial development and acquisitions. The focus will be on Toronto, Montreal, Vancouver, and high-growth U.S. Sun Belt and gateway cities.

The announcement follows the recent sale of the Bow office tower in Calgary and Bell office campus in Mississauga, totalling $1.47 billion in gross proceeds (including a transaction involving future leasing income).

“The spinoff of the Primaris portfolio … along with the completion of the Bow and Bell office transactions, significantly strengthens our balance sheet, providing us the flexibility to execute on our growth and transformational plans,” Hofstedter said.

H&R, HOOPP and the Primaris spinoff

The Primaris spinoff plan also involves the Healthcare of Ontario Pension Plan (HOOPP). Primaris will own interests in 35 properties with an appraised value of approximately $3.2 billion, encompassing 11.4 million square feet of gross leasable area.

H&R will contribute 27 properties with an appraised value of approximately $2.4 billion and HOOPP will contribute eight properties with an appraised value of approximately $800 million.

H&R unit holders will receive units in Primaris on a one-for-one basis.

Alex Avery will become CEO and a trustee of Primaris, and will resign his current position as an officer and trustee of H&R as part of the effort to create two separate entities.

“Primaris will be extraordinarily well positioned to take advantage of market opportunities at an extraordinary moment in the evolution of Canadian retail,” Avery said during the call. “The REIT will have significant scale with a $3.2 billion national portfolio of enclosed shopping centres that are dominant in their trade areas.”

He said it will also be well capitalized, with one of the lowest leverage ratios of any Canadian peer. The debt-to-gross-book value is forecast to be 29 per cent when the spinoff closes. The new trust targets an FFO payout between 45 and 50 per cent.

It also plans an intensification program.

“Our intensification development pipeline is anchored by our flagship property Dufferin Grove, where we expect to replace surface parking with 1,300 residential units across three towers and 130,000 square feet of new retail space,” Avery said.

The spinoff will reduce H&R’s debt by $579 million, the outstanding mortgage balances on the Primaris properties. H&R has applied to the TSX for the listing of Primaris units with the ticker PMZ.UN, following the expected closing in late December 2021 or early 2022.

H&R REIT’s longer-term objectives

Then, H&R will turn to its other objectives.

“We plan to complete the balance of the transformation over the next five years, investing in high-quality distribution facilities, and upscale residential through our Lantower platform targeting the GTA in Canada and the Sun Belt and Gateway regions in the United States,” Hofstedter explained.

It plans about $1.5 billion of multires construction starts during 2022 and 2023, comprising about 3,600 units in the U.S. It also plans to begin constructing at least a million square feet of industrial.

None of the other assets H&R plans to dispose of are on the market yet, because the sales will be tied to capital requirements.

“There’s nothing for sale,” he noted. “We don’t need any cash right now, we have more than enough, so there is nothing planned right now.”

However, he said on the retail side with anchors such as Lowes and Walmart and grocers such as Sobeys and Metro, the assets it is retaining will be in demand. Its office properties have also performed well — including through the pandemic.

“Our properties are also very saleable, there’s long-term leases, they are high-quality properties and we are very confident we will be able to exceed our IFRS values or as a minimum sell them at IFRS values,” Hofstedter noted.

“The office disposition portfolio comprises 15 properties 99 per cent occupied with a weighted average lease term of nine-and-a-half years, again being a ready source of capital at very favourable pricing.”

H&R’s current investment portfolio consists of 39 per cent office, 31 per cent retail, 22 per cent multi residential and eight per cent industrial. Following this initiative, the REIT would have 45 per cent allocated to multiresidential (including 15 per cent from office redevelopment), 24 per cent office, 19 per cent retail and 12 per cent industrial.

The company currently holds about $13 billion in assets.

Its five-year plan would see the REIT holding about 80 per cent multiresidential assets and the remainder in the industrial sector. It would be split almost evenly, in thirds, between the Greater Toronto Area, the U.S. Sun Belt and U.S. gateway cities.