A view of office towers from Toronto’s CN Tower in 2024. H&R REIT is one of the few Canadian REITs with holdings in residential, industrial, retail and office properties.Fred Lum/The Globe and Mail
H&R Real Estate Investment Trust HR-UN-T has concluded a strategic review without finding a buyer for one of the country’s largest property owners, prompting a plunge in the price of its units and a pledge from the company to sell $2.6-billion of assets.
H&R units fell 9.8 per cent Friday to close at $9.99 on the Toronto Stock Exchange after the company announced late Thursday it had ended a nine-month sales process that attracted multiple bidders for specific properties, but failed to find a suitor for the entire REIT, which owns $9.6-billion of properties.
H&R launched the review in February after receiving an unsolicited offer from a potential buyer. In July, the REIT disclosed the process was under way and the price of its units jumped 12 per cent.
H&R REIT units climb as company reveals it held talks with potential buyers
“While the update is not completely surprising given the time elapsed since review was initiated, we think this is a disappointing outcome,” said analyst Jimmy Shan at RBC Capital Markets in a report.
He said H&R units trade at a 35-per-cent discount to the value of the company’s properties and a 15-per-cent discount to the average valuation of domestic peers.
Toronto-based H&R is one of the few domestic REITs with residential, office, industrial and retail real estate holdings. Most REITs focus on a specific sector.
H&R has been the target of activist investor campaigns, and analysts have said the REIT could eventually be taken private by its own executives, with financial backers such as a private equity fund.
“Management has received interest in select assets and is under discussion to sell 25 per cent of the portfolio,” National Bank Financial analyst Matt Kornack said in a report. “We still think it is possible that they could pursue a roll-up themselves versus giving away the upside to a consortium.”
Activist investor K2 & Associates Investment Management Inc. has been pushing for improved performance from H&R for several years.
Over the past five years, the price of H&R units dropped by 8.9 per cent, compared with a 3.4-per-cent decline in the S&P/TSX Capped REIT Index.
In July, K2 chief investment officer and chairman Shawn Kimel pushed the REIT’s board to disclose offers received during the review. “K2 would view it as a failure if the board were to fumble this unique opportunity,” he said.
Late Thursday, H&R said while the REIT is no longer negotiating sale of the entire company, it is in talks with various parties to sell up to $2.6-billion of real estate and expects to announce transactions by the end of the year.
There are “for sale” signs on 27 retail properties, including a mall in southern Edmonton, five office buildings in Canada and the 29-storey Hess Tower in Houston.
Donald Clow, chair of the H&R special committee that ran the review, said in a news release: “The extensive work completed has provided the board with a clearer view of the market and the value-maximization opportunities available to H&R.”
In July, The Globe and Mail reported that New York-based Blackstone Inc., a significant investor in Canadian apartment buildings and warehouses, was in talks to buy H&R’s residential and industrial properties.
Last year, Blackstone BX-N acquired Toronto-based rental property owner Tricon Residential Inc. for US$3.5-billon.
Several large Canadian institutional investors already own stakes in H&R and were open to partnering with new owners of the REIT, The Globe reported in July.
In 2014, H&R struck a partnership on its industrial properties with the Public Sector Pension Investment Board (PSP Investments), based in Montreal, and fund manager Crestpoint Real Estate Investments Ltd., which is headquartered in Toronto. Industrial properties make up 19 per cent of H&R’s portfolio.
PSP Investments and Crestpoint want to continue to hold their 50-per-cent stake in the company’s Canadian industrial real estate and a 49.5-per-cent holding in the REIT’s U.S. portfolio.
H&R hired CIBC Capital Markets and law firm Black, Cassels & Graydon LLP to run the now-concluded review, while the board’s special committee worked with National Bank Financial and law firm Fasken Martineau Dumoulin LLP.