From RBC
November 17, 2020H&R REITCompany descriptionH&R Real Estate Investment Trust (H&R) owns a ~$12.9 billion portfolio ofcommercial and residential rental properties (at its proportionate share,at estimated fair value). The business consists of interests in 33 officeproperties, 325 retail properties, 86 primarily single-tenant industrialproperties, 22 rental apartment properties (7,777 suites), and $1.0B ofproperties under development (principally residential rental and mixed-use). By value, 53% of the 40 million sf of owned GLA and developmentproperties are located in Canada, with the balance in the U.S. Withinthe figures above is the REIT’s 33.6% interest in ECHO Realty LP, whichowns more than 200 primarily food-store anchored retail propertiesrepresenting some 2.8 million sf of GLA, at the REIT’s share.Investment summaryOur Sector Perform rating is primarily a function of our total returnexpectations versus the peer set of diversified REITs in particular as wellas the broad REIT/REOC sector more generally. Key features of H&R REIT’sstory include:Size and diversity – H&R is an owner of a ~$13B portfolio of office,industrial, retail, and residential rental properties in Canada and the U.S.totaling ~40MM sf of GLA, at the REIT’s proportionate share and including$1.0B of properties under development.A long and gradual re-orientation of the asset base – H&R was formedinitially as an office and industrial REIT offering investors exposure to long-term net leased assets with creditworthy tenants. Over time, it diversifiedits portfolio to include malls, U.S office, industrial and retail properties,a one-third stake in a private U.S. shopping centre REIT, and U.S. rentalapartments. In late 2017, H&R commenced a strategy of simplifying,streamlining, and high-grading its portfolio while remaining a diversifiedREIT. With $2.2 of completed/pending asset sales and ~$687MM ofacquisitions since the outset of 2018, this program has already achieveda lot.50% distribution cut – In May 2020, H&R cut its distribution/unit to $0.69annualized from $1.38. This cut internalizes ~$208MM of cash flow. Thishigher retained cash flow will be very helpful in supporting some of theREIT’s lines of business (malls in particular) on the heels of what we see assome significant and lasting effects from the COVID-19 pandemic. We alsobelieve the cut may have been a pre-positioning move ahead of one ormore potentially strategic transactions that are aimed at surfacing value.Investment risksRisks to our rating and price target include but are not limited to:1) the depth/duration of job losses, GDP contraction, and consumerspending stemming from the COVID-19 pandemic; 2) changes in economicconditions; 3) changes in real estate supply/ demand; 4) access to capital;5) interest rate fluctuations; 6) cap rate expansion; and, 7) individua