H&R REIT, another US-residential opportunity in our portfolio (TSX: HR.UN)
H&R REIT is another compelling opportunity that we have been adding to for the past few months and is one of our top three largest holdings currently. With an 8.5~ implied cap rate despite being 46% high quality US residential (65% residential/industrial) the name trades more like a low quality office REIT. H&R is currently trading at around a ~50% NAV discount and that is after cap rate expansion which expanded further in Q2 as the REIT decided to move cap rates significantly on their US office and retail properties which led to fair market write downs. I am of the view this is one of the more misunderstood opportunities on the market. While it’s true that diversified REITs tend to trade poorly at others, the game plan of H&R to spin off the remaining retail and office assets should be warmly embraced and those who buy here may be rewarded in the future as the name gets a re-rate as it transcends into more of a pureplay US residential opportunity where a 5-6% cap rate is far more likely than the current 8% at cyclical troughs.
H&R REIT has made significant pathways just over the past year on the residential front, having upped their positioning from 25% to 46% with no re-rate as of yet. In the Q2 call, the CEO noted that H&R had the ability to spin off the remaining retail assets pretty much at any moment as the market is incredibly liquid but prefers to wait it out and receive a lower cap rate as interest rates come down and the transaction market picks up, increasing liquidity as the buyers pools expands. At a 6.3% yield, a near historic discount to IFRS NAV (after cyclical write downs), a clear-cut plan to spin off remaining office/retail assets and focus on US residential, I find H&R one of the most compelling investment opportunities at the moment and a safe way to play the US residential theme at the end of a supply wave and the beginning of a deficit which likely leads to future years of steady pricing gains in the rental market.