.... now that their blackout period has ended.

Lightening Up to Start the New Year

Bottom Line:

We maintain our positive outlook and Outperform rating on H&R REIT, as management recently executed on several key transactions to lighten up the portfolio and narrow its focus on higher-growth multifamily and industrial assets. H&R starts 2022 with an immediate improvement to its balance sheet and liquidity, and possesses an extensive development pipeline which should provide growth opportunities over the longer term and is largely self-funding. While there remains much work to be done, we believe management has significantly enhanced the growth profile and reduced uncertainty in the portfolio.

Key Points

Adjusting target price. As a result of the spinoff of the Primaris retail division, H&R has shed $2.4 billion of asset value (or ~20% of total assets). To adjust, we are lowering our target price by 16% to $16.00 (from $19.00). Our updated target price is in line with our updated NAV per unit estimate of $16.39. The $16.00 target price implies a forecast total return of 29.7% (including a 4.1% distribution yield), among the strongest return expectations across our Canadian REIT coverage (average of 15.5%).

Strategic repositioning plan to transform H&R REIT. H&R continues to progress on streamlining the REIT to focus on its higher-growth multifamily and industrial asset classes. Q4/21 was an incredibly active quarter for H&R, with the closing in October of the sale of The Bow office tower in Calgary and the Bell Campus in Mississauga for $1.5 billion. A few weeks later on October 27, H&R revealed its “strategic repositioning plan”, which details its transition from a diversified commercial REIT to a narrower focus on industrial and multifamily assets located in higher-growth markets, and ultimately virtually no interests in retail or office. We are confident in management’s ability to execute on this strategic repositioning plan, though recognize that it will take much effort and many years to complete.

Spinoff of the Primaris Canadian enclosed mall division. As part of the strategic repositioning plan, H&R completed the spinoff of the Primaris enclosed mall division into a separate public entity called Primaris REIT (PMZ.UN), which began trading on January 5, 2022. To create the new entity, H&R spun-off 27 properties valued at $2.4 billion, and Healthcare of Ontario Pension Plan vended in eight properties valued at $0.8 billion, for