Q3/24: CLOUDIER OUTLOOK FOR DISPOSITIONS LARGELY REFLECTED IN VALUATION
THE TD COWEN INSIGHT
Q3 was quiet on dispos, and the US Sunbelt portfolio's results continued to moderate. That
said, good potential remains, as bond yields resume falling and a collapsing pace of new
Sunbelt apartment supply by 2026 paves the way for rebounding rent growth. Now trading
at an above-avg. discount of 45% vs pure-play peers, we see an attractive entry point,
though a little more patience may be required.
Impact: NEUTRAL
Dispositions Have Slowed Further. H&R has sold or agreed to sell $800mm of assets
since the start of 2023, despite volatile and peaking interest rates. However, mgmt
has seen the market stay relatively quiet since the summer, which we believe has been
exacerbated by concerns about interest rates with the US election. These have helped
increase concentration in the two core property segments (Residential and Industrial)
to 66% currently from 53% two years ago. Selling the three U.S. office properties ($1bln
fair value, primarily leased to Hess Corp. and the NYC Dept. of Health) remain a high
priority, along with the remaining Canadian office assets. There is still no clarity on the
possible acquisition of Hess Corp. by Chevron and to what degree if any it might positively
or negatively impact H&R's Hess Tower. Our forecast assumes $1bln of dispositions in
2025/2026 at an average 8% cap rate (blend of US office and retail properties, e.g. ECHO).
Retail Property Dispositions Should Be Easier. While disposing the remaining office
properties is priority, we beleive it has become easier to sell much of H&R's retail
properties, which are mostly grocery-anchored/necessity-based.
A Little More Patience May Be Required. H&R's pathway to narrowing its trading valuation
discount requires clarity on the disposal of non-core office and retail properties, CEO
succession planning, and ultimate structure of how the core portfolios will be held. While
the timing is uncertain and progress will be 'lumpy', we believe mgmt and the board
remains committed on all fronts.
NAV: We lowered our NAV/unit estimate 3% to $17.50 on the back of the VTB losses and
our reduced value for excess density.