H&R REIT
HR.UN : TSX : C$23.35
Pirate investing (Photo credit: RambergMediaImages)
BUY
Target: C$27.00
COMPANY DESCRIPTION:
H&R REIT is a diversified commercial real estate investment trust with a high quality portfolio of office properties, singletenant industrial properties, retail properties and development projects. Its strategy focuses on long-term leases with creditworthy tenants, matched with long-term fixed rate financing to provide stable and predictable income to unitholders.
H&R REIT completed the acquisition of Primaris Retail REIT on April 4, 2013, acquiring a portfolio of 27 properties (primarily enclosed shopping centres) located across Canada for $3.1 billion, equating to a going-in cap rate of 5.6%. Of note, one property acquired from Primaris is slated to be sold to RioCan REIT for $35 million. To fund the acquisition, H&R REIT issued ~62.1 million units to Primaris unitholders, assumed ~$1.4 billion of debt, and utilized cash on hand of ~$100 million. This transaction culminates several months of competing for control of Primaris.
We believe that the acquisition of a portfolio of high quality Canadian enclosed shopping mall assets is a positive development for H&R REIT,
particularly over the long term. Through the Primaris transaction, H&R has acquired a large portfolio of properties within an asset class that is highly sought after and almost impossible to duplicate; we note that Primaris owned the only sizable publicly traded portfolio of urban enclosed shopping malls in Canada.
While the integration of major acquisitions takes a significant investment of effort and time, we note that H&R is also acquiring Primaris’ operating platform, which should smooth the transition.
Maintaining BUY rating, but reducing target price to C$27.00 from C$28.00.
We are reducing the cap rate utilized to calculate our estimate of NAV for H&R REIT to account for the lower cap rate attributed to the newly acquired retail assets from Primaris; our utilized cap rate is now 6.00% (from 6.25%). Our estimate of NAV per unit declines slightly from $25.33 to $24.55, reflecting the increased unit count following the equity issued concurrent with the Primaris acquisition, as well as an increase in our adjustment for the mark-to-market of debt, as interest rates have declined since NAV was last calculated. Following the completion of the Primaris acquisition, we are reducing our target price for H&R REIT to C$27.00 (from C$28.00) to reflect the slight decline in our NAV per unit estimate.
Our target price is based on a 10% premium to our revised NAV estimate of $24.55 per unit. Combined with an annualized distribution of $1.35 per unit, our C$27.00 target price equates to a 12-month forecast total return of 21%. We continue to rate H&R REIT a BUY.
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- Stock to watch: H&R REIT selloff could bring a short-term opportunity (theglobeandmail.com)
- Canadian REITs go global (business.financialpost.com)
- Commercial property sales up 15% in first three months of the year with A-REITS returning: CBRE (thempreport.com.au)
- Primaris Retail REIT and H&R Provide Transaction Update (sys-con.com)
