One of Canada's most famous skyscrapers is on the verge of an ownership shuffle that is likely to result in the departure of one of its two large shareholders.
Hovering over the northeast corner of King and Bay streets in downtown Toronto, Scotia Plaza serves as Bank of Nova Scotia's headquarters, and used to be owned by the lender outright. In 2012, the bank sold the skyscraper to Dream Office Real Estate Investment Trust – then called Dundee REIT – with H&R REIT stepping up to take a one-third stake.
The acquisition was a landmark deal for Michael Cooper, who oversees the Dream portfolio of real estate companies. At a purchase price of $1.27-billion, it was the highest price ever paid for a Canadian office tower.
But in February, Dream surprised investors by announcing a strategic shuffle that involved slashing its distribution by one-third and selling at least $1.2-billion worth of properties over the next three years. Back then, Mr. Cooper said: "We own two-thirds of Scotia Plaza now and we may make some changes to that in conjunction with our partner," stoking rumours of an sale.
But in the current talks, it was H&R that kick-started the negotiation, and the REIT is likely to divest its entire position, according to a person familiar with the discussions. Over the weekend, Reuters reported private real estate company KingSett Capital is in talks to buy 50 per cent of Scotia Plaza by acquiring H&R's full stake, plus a 16.7-per-cent stake from Dream. None of the three companies returned requests for comment from The Globe and Mail.
A deal that leaves Dream as the half-owner of Scotia Plaza would fit with what Mr. Cooper has said about his fondness for the property. In January, he told The Globe and Mail it is a "great, great building" – and he wasn't simply saying so to make it seem attractive to potential buyers. When he first bid for the tower in 2012, Mr. Cooper stressed it's rare to see such a prominent asset, with a top-tier location, hit the market.
The exclusivity factor is a key reason Cadillac Fairview's 30-per-cent stake in TD Centre, Toronto-Dominion Bank's headquarters, was so highly coveted last year. (The property is on the southwest corner of the same intersection as Scotia Plaza.) Ontario Pension Board bought the position in August, 2015, and financial terms weren't disclosed, but it is widely known in the industry that the deal was done at a rich price.
Buying H&R's stake also matches recent expectations for the REIT. Although the Hofstedter family that runs it is media shy and has said little about its plans – the H&R doesn't even hold quarterly conference calls – analysts have been expecting asset sales.
Any sale by H&R is likely motivated by its need for cash to help maintain its shopping centre and to develop its large luxury rental complex currently under development in New York City. H&R bought Primaris REIT in 2013, adding 27 shopping centres to its portfolio. Retail properties are known for needing ongoing expenditures, because customers are more likely to come back when they are kept up-to-date.
"We believe H&R will continue to target the sale of partial stakes in select office and retail assets, consistent with some of the joint ventures it has completed with Montez Corporation on Primaris malls," Scotia Capital analyst Mario Saric wrote in February, referencing the malls H&R acquired through the deal three years ago.
H&R also holds a 50-per-cent share of an apartment development in Long Island City in Queens, New York City, and needs cash to help fund its $1.2-billion (U.S.) budget.