Last close: $23.35, unchanged
52-week trading range: $22.45 to $26.30 a unit
Annual distribution: $1.35 a unit for a yield of 5.8 per cent
There were three buys, two holds and no sells, according to Bloomberg data. Analysts at Scotia Capital, BMO Nesbitt Burns and RBC Dominion Securities all have a target price of $26 a unit, while others are restricted temporarily from making recommendations.
Units of the Toronto-based REIT have been on a roller-coaster ride, producing only a 3-per-cent return (including distribution) over the past year. The unit price hit a 52-week low in February after H&R, which owns office, industrial and retail properties, joined forces with KingSett Capital Inc. to make a $28-a-unit cash-and-stock offer for shopping mall owner Primaris Retail REIT. That price topped a friendly bid from H&R in January, and KingSett’s unsolicited offer in December. The transaction, which now has court and shareholder approval, is set to close on Thursday. Primaris investors opting to receive cash for their units will get $28 a unit for about 55 per cent of their securities and 1.166 H&R unit per Primaris unit for the balance.
H&R REIT units have been under selling pressure lately, likely from money managers that own both Primaris and H&R. Primaris investors, who can only get 55 per cent of their securities in cash under the terms of the transaction, may not want any, or as many, units of the H&R REIT when the deal closes, said Jeffrey Olin, president of Toronto-based Vision Capital. “There has been this huge overhang on the stock price because of people selling their shares. ... I think [H&R] is a bargain at this level.”
The selling has created a “trading opportunity” for a REIT with an attractive 5.8-per-cent yield, said Mr. Olin, a portfolio manager who has been buying H&R units recently as a short-term play for his Vision Opportunity funds. While H&R units could face further selling just after the deal closes, “it will be short-lived,” he suggested. “By May, you’ll start to see H&R go back to at least the $25 level. This is a short-term target – not a 12-month target.”
The growth picture for H&R is bright because Primaris has a high number of Zellers outlets converting to Target stores, which will generate mall traffic, Mr. Olin said. And because H&R has about 30 per cent of its properties in the U.S., it will benefit from an improving economy there.
In addition, H&R REIT is a smart buy because it is cheaper than its REIT peers, he said. The average net asset value (NAV) culled from estimates of seven analysts covering H&R REIT is $25.34 a unit, he noted. “While the Canadian REIT sector is trading a premium to NAV, H&R is trading roughly at an 8-per-cent discount to NAV.”
The closest comparable REIT to H&R is Canadian Real Estate Investment Trust (CREIT), and it trades at a 9-per-cent premium to its NAV, he said. H&R, which is a larger, more diversified and a more easily tradable REIT, is only trading at 15 times estimated 2014 adjusted funds from operations [AFFO] versus CREIT at 18 times, he added. “It doesn’t make sense.”
While Mr. Olin has a “long” bet on H&R, he is also shorting CREIT as part of a pairs trading strategy to create a hedge against the REIT sector and reduce risk. “If the sector gets hit, we are still benefiting because we think H&R outperforms CREIT,” he said. “But the big picture is that H&R is undervalued generally in the marketplace, and certainly relative to CREIT.” When the temporary selling pressure is over, the undervaluation will surface ... and H&R will appreciate.”