H&R REIT owns office, industrial and retail properties in the U.S. and Canada.
H&R Real Estate Investment Trust might need to add a new ampersand to its name. The company has decided the best way to grow value in its expanding real estate business is by bringing in partners, yielding additional revenues along the way.
Consider its $731-million deal announced Wednesday. H&R REIT is selling 50 per cent of a portfolio of Canadian industrial properties, and 49.5 per cent in a grouping of U.S. industrial properties, to federal government pension giant Public Sector Pension Investment Board and Crestpoint Real Estate Investments Ltd., a part of asset manager Connor, Clark & Lunn Financial Group.
The portfolio is comprised of buildings including a brand new Unilever distribution centre, auto manufacturing sites, dealerships and storage facilities. The $731-million ($390-million net of mortgages) price, which includes 101 properties with about 19.5 million square feet of industrial space, translates into a 7 per cent capitalization rate, a widely-used real estate industry metric. Of the proceeds to H&R REIT, $325-million will go to pay down debt, reducing its ratio of debt-to-total assets to 45.7 per cent from 47.8 per cent.
This is the kind of deal we can expect more of out of H&R– selling partial stakes in real estate to institutional investors, then earning a slew of fees from managing the portfolio on behalf of the group. With partners, H&R has, through its Primaris arm, established a platform to expand its footprint in shopping centres and offices. It also owns one-third of another outfit called Echo Realty, which focused on supermarket-anchored shopping centres, and is looking to expand its holdings in the residential real estate market, starting with recent property purchases in Texas.
The fees for managing the portfolio include standard property management revenues – typically 1 to 2 per cent for industrial properties – but also proceeds for mortgage financing, for finding prospective future acquisitions , for leasing the portfolio and for construction and structural repairs on the properties. Industry sources estimate H&R can realize an 8 to 9 per cent bump in values from its properties with the added fee streams.
"It's a strategy that is formulating," says H&R CEO Tom Hofstedter. The plan is to further diversify the portfolio – now comprised of $14-billion in assets under management – leveraging the investment of partners to invest more in properties and developments. Mr. Hofstedter sees this as an opportunity to "brand" the company under each of its specialized divisions. The company only has only put $1.8-billion of its assets into these partnership deals, suggesting there are a lot more joint venture agreements to be struck, but the company isn't saying how much of its current portfolio will end up partially sold to partners.
As for Crestpoint, founder Kevin Leon said the deal improves his comapny's access to new opportunities. "What we've announced today is a platform. In Canada we would expect, between three organizations and this relationship, that any industrial real estate transaction in the country we would get an opportunity to look at. In some cases we'd get the only look."
Before the deal, Crestpoint had about $730-million in assets under management. After it closes, that figure will about double to $1.5-billion.
Rumours that this deal could be pulled together had been circulating for a couple of months, and Mr. Leon said the long negotiations were caused by extensive due diligence , as well as working out co-ownership agreements. That process was particularly lengthy regarding assets in the U.S., where Crestpoint is making its first investment through this deal.
The biggest risk of investing in industrial properties, as opposed to multi-unit residential or office buildings, is that they are mostly occupied by a sole tenant, which is viewed as less stable. But Mr. Leon said most of H&R's portfolio is made up of investment-grade tenants, limiting the credit risk for the investors.
Another big-picture attraction of the deal for Crestpoint was increased exposure to the Canadian manufacturing sector. "With the Canadian dollar where it is, that was another part of the strategic thinking in investing in industrial real estate," he said.
The deal comes amid a recent rebound in valuations of Canadian REITs, which suffered last year from volatile bond markets.
CIBC World Markets acted as financial advisor for the buyers.
Sean Silcoff