BMO analyst updateTaking a Big Step Forward on Streamlining Portfolio
Bottom Line:
H&R REIT completed a major strategic initiative with the structured sale of the Bow in Calgary and the Bell Campus in Mississauga, which unlocked nearly $1.5 billion of capital or ~12% of total asset value. The Bow transaction, in particular, was a multiyear effort to reduce the REIT’s exposure to the challenged downtown Calgary office market and weighting to tenant Ovintiv Inc. Combined with the outright sale of the Bell Campus, the transactions materially reduced the REIT’s weighting to the office asset class and improved its tenant mix and exposure.
Key Points
$1.47B sale streamlines portfolio. On October 9, H&R closed on a transformational transaction, which saw the structured sale of the 2.0 msf Bow office tower located in Calgary and the 1.1 msf Bell office campus located in Mississauga for gross proceeds of $1.47 billion (7.8% blended cap rate: 8.1% cap rate for the Bow and 6.8% cap rate for Bell Campus). The buyers of the Bow are Oak Street and Deutsche Bank, while Oak Street is the sole buyer of the Bell Campus.
We maintain our constructive outlook and Outperform rating on H&R REIT, which is predicated on its continued strategic efforts to streamline and surface value from its portfolio, the strength of its U.S. residential division, the expected contribution from its development platform, a steadily improving leverage profile, resumption of moderate growth in AFFO per unit, and attractive valuation. On balance, we believe these attributes outweigh the uncertain outlook for the enclosed mall and office portfolios.
Look for more announcements to come. Management reiterated its commitment to repositioning its portfolio and indicated publicly that it expects to make further announcements in the near future, likely by year-end. Specifically, management stated that a spin-off of certain assets is under consideration.
Raising target to $19.00. Following the close of the Bow/Bell transaction, improved leverage profile, and greater visibility to near term cash flow/unit growth, we are removing the applied discount to our NAV estimate in arriving at our target price of $19.00 (from $17.00). Combined with an annual distribution of $0.69 per unit (4.2% yield, 60% 2021E AFFO payout ratio), the implied total return is 20.4% which is among the higher total return forecasts in our coverage. While there remains heavy lifting to do in advancing management’s strategic efforts, we believe H&R is attractively valued and offers a compelling risk/reward profile.