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OUR TAKE: Slight Positive. We think H&R should be outperforming more today. H&R announced (new) dispositions of ~$180M, incl. $82.5M of CAD Office and ~$100M of CAD/U.S. Industrial. The $180M = ~1.5% of gross assets (and no re-purchase options noted). Including the 25 Dockside Sale in Toronto for $232.5M (see link), total 2024 announced dispositions = $412M vs. the $293M disclosed as HFS as of Q4/23. Bottom line, H&R should look more interesting as 2025 approaches. We think the two key catalysts = improved U.S. Sunbelt residential sentiment on peak supply (Lantower valued at an implied 7.5% cap rate, assuming other stuff at 15% NAV discount; Exhibit 1) and the sale big Toronto Office buildings with residential upside with FFOPU-accretion (i.e., retiring higher-cost debt, NCIB). Every 25bp on Lantower cap rate = ~3.5% to unit price (Exhibit 2). While H&R hasn’t seen the benefit of the doubt historically (we think due to its anemic FFOPU growth; Exhibit 3), for investors that prefer to be “early, rather than late”, we’re quite comfortable buying H&R at ~$9.00/un, which should provide a safe 6.5% holding return (i.e., distribution yield at 2024E AFFO payout ratio of 60%) ahead of noted emerging catalysts.
KEY POINTS
Office disposition adds ~$0.10 to our NAVPU, all else equal (~1% of current unit price). No cap rate info was disclosed on the Industrial/Automotive (avg. 5.6% cap rate in our NAVPU), but the implied 4.5% on the $82.5M sale of a 50% interest in 3777/3991 Kingsway to co-owner Crespoint (i.e., formerly 90%+ occupied by Telus in Burnaby, B.C.) is 275bp below our 7.25% Canadian Office cap rate and reflects the power of selling office properties with alternative use upside, in our view. The dispo price was a disclosed 1.3% higher than Q4/23A IFRS FV, although we estimate it also represents a negligible ~1% CAGR appreciation from the $68M purchase price over 20 years ago (2003), ex. any incremental interim capex. As a reminder, H&R has $0.7B of identified rezoning properties comprising an expected 5,000+ suites (based on Q4/23A IFRS NAVPU), representing 8% of GAV (incl. Burnaby, which = 24% of envisioned suites at its 50% share). We think the sale some of the Toronto buildings = a key unit price catalyst
We estimate ~ ½ turn decline in leverage. The completion of the $412M of dispositions would lower debt/IFRS GBV by ~200bp to 42% (vs. 45% sector average) if all proceeds put towards debt reduction, while reducing disclosed debt/EBITDA by ~0.4x to ~8.1x. The 42% and 8.1x compare with 45% and 9.2x sector average. As a reminder, our 2023A-2025E AFFOPU CAGR of -1.1% assumes $680M of dispositions in 2024 and $450M in 2025 at a blended 5.25% cap rate (would be 2.2% ex. dispositions vs. 4.4% sector avg.).