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H&R Real Estate Investment Trust is undoing its business strategy from the better part of the past decade, with plans to spin out its enclosed mall portfolio in order to focus on residential buildings and industrial properties.

The transformation has been months in the making and has already included selling the Bow, Calgary’s signature office tower, to decrease H&R’s exposure to the city’s troubled office market and to also slash the REIT’s debt burden.

On Wednesday, H&R announced it will also hive off its enclosed mall portfolio into a separately traded entity, Primaris REIT. H&R bought Primaris REIT in 2013 after a tense bidding war against some of Canada’s largest real estate owners. At the time, Primaris was seen as a prized asset because a number of its shopping centres were expected to benefit when Target Corp. arrived in Canada

Eight years and a pandemic later, H&R is hiving off the portfolio in order to de-diversify and shake H&R’s units out of their slumber. The REIT is currently trading at a heavy discount to its net-asset value, and closing that discount was a key reason for the transformation, chief executive Tom Hofstedter said on a conference call Wednesday.

In its second go as a standalone company, Primaris REIT will be run by Alex Avery, who is currently an H&R exec and used to be a Bay Street REIT analyst. As part of the spin out, Primaris is teaming up the Healthcare of Ontario Pension Plan (HOOPP), which is folding in eight of its own properties and will own 26 per cent of the new REIT’s units once they start trading.

H&R investors are set to receive one Primaris unit for each H&R unit owned, and if the restructuring is approved with the necessary two-thirds support of unitholders, Primaris will own interests in 35 properties that have an appraised value of roughly $3.2-billion. Many of the REIT’s retail properties will be redeveloped over time, with residential units added to the existing footprints. A major redevelopment is already under way at Dufferin Mall in Toronto.

To complete H&R’s pivot to residential units and industrial properties, which are by far the two hottest real estate classes of late, management is also looking to sell its remaining grocery-anchored retail assets worth an estimated $600-million, as well as its stake in Echo Realty LP, which is valued at about $470-million.

H&R will also unload roughly $2.3-billion worth of office towers that it says are 99 per cent occupied, and that have a weighted-average lease term of 9.5 years. However, Mr. Hofstedter said H&R is in no rush to complete these sales because it has ample liquidity for the time being.

The third leg of H&R’s repositioning will see the REIT attempt to rezone its remaining office properties, predominantly in downtown Toronto, to intensify their footprint and build residential units.

H&R’s transformation follows hard pivots from a number of its publicly traded real estate peers. RioCan REIT, which used to be known for its strip malls, launched a rental apartment division a number of years ago, and Dream Office REIT has dramatically reshaped its portfolio to reduce its exposure to the Calgary office market, where it once was a major property owner.

Private real estate owners have also had to rethink their strategies in recent years, including a number of Canadian pension funds that were once praised for their investing prowess. In 2020, OMERS, the Ontario Municipal Employees’ Retirement System, reported a 2.7-per-cent loss on its investments, partly thanks to its shopping-mall holdings.

Ivanhoé Cambridge, which is the Caisse de dépôt et placement du Québec’s real estate arm, also posted a 2.7-per-cent loss in 2019, partly owing to its mall holdings.

H&R’s units closed up 3.2 cent at $16.98 a piece on the Toronto Stock Exchange on Wednesday.

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