Starting 2022 on a High Note

Bottom Line:

Q1/22 was jam-packed with many positive developments. For investors who haven't taken a closer look at HR.UN recently, this is likely not the REIT you think you know and should warrant your attention. As H&R progresses on its strategic repositioning plan (report), we believe the market should begin to recognize the deep-value embedded in the portfolio. The remarkable Q1/22 further confirms our strong conviction, and we reiterate that HR.UN is very undervalued (-34% to BMO's NAV, -38% to IFRS). We rate HR.UN Outperform, and raise our target price to $18.00.

Key Points

What's notable/new this quarter? H&R reported many positives with Q1/22 results — see our flash for key points. Below are additional insights from the quarter.

HR.UN remains a top pick; maintain Outperform, raising target price to $18.00 (from $16.00). We are raising our NAV/unit estimate by 22% to $19.78, driven by a lower 5.30% cap rate (from 5.70% and vs. IFRS of 5.10%), a materially higher value for development assets, and the accretive impact of unit buybacks. Our $18.00 target price is a 10% discount to our updated NAV. We take a more conservative view on NAV and target price with the expectation that the gap should narrow, but not necessarily close over the near term. We believe there is additional upside over time, to the extent HR.UN continues to execute on its strategic repositioning plan.

Skyrocketing GTA industrial land prices drive development fair value gains. The fair value gain on development was +$295M ($0.97/unit), driven by an external appraisal for the Caledon, Ontario industrial-zoned lands. Management commented GTA industrial land prices have skyrocketed very recently, moving from $1.5M/acre to $3.5- $4.0M/acre over the last six months. Rising construction and land costs are expected to drive continued industrial rent growth in the GTA and other large markets.

Dispositions weighted to later this year. A major part of HR.UN’s strategic repositioning plan is to reduce allocation to retail (by $1.1B) and office (by $2.4B). No retail or office assets were sold YTD2022, but the plan remains on track, and management guided to asset sales being back-end loaded in 2022. Management commented it has seen a market shift in the past two weeks given recent volatility, but it is in no rush to sell as dispositions are a multi-year initiative. We would not be surprised to see a slowdown in disposition volume.