January 20, 2019

H&R Real Estate Investment Trust (HR)

The H&R Real Estate Investment Trust (HR) is known for having one of the largest American exposures of any Canadian REIT.  Their portfolio includes 133 retail properties, 117 industrial, and 38 office.  Altogether, these holdings represent 42 million square feet of leasable space, and a net book value of over $5.4 billion.  H&R was created in 1996, and has seen steady growth since that point.  It has returned an average of 15% to investors since its creation.  The REIT has consistently kept its payout ratio in the low 60s, which is very conservative when compared to competitors.  H&R (HR) is fairly well diversified within North America, with 47% of their assets in Ontario, 16% in Alberta, 7% in Quebec, 22% in the USA, and 8% other.  Some of their most notable tenants include: Bell Canada Inc., TCPL, Bell Mobility, Telus Communications, Royal Bank of Canada, Public Works of Canada, Nestle, Americredit, Telemedia, Sony Pictures Entertainment, CIBC, Ontario Realty Corporation, Canadian Tire, Versacold Logistics Canada Inc., Purolator Courier Limited, Nestle USA, Finning International Inc., Sysco Food Services of Canada, Rona Inc., Lowe’s, Shell Oil Products, Home Depot, Wal-Mart, Marsh Supermarkets Inc, Nike, Canadian Tire, Famous Players, Walgreens, Sobey’s, and Shoppers Drug Mart.

 

The crown jewel in the H&R holdings is, “The Bow,” in Calgary, Alberta.  It is a massive 2 million square foot office complex that is completely pre-leased (mostly to Encana Corporation).  The expected first year rent alone will be nearly $100 million.  Together with the Telus Tower and the TransCanada tower, this gives H&R (HR) a dominating presence in one of Canada’s fasting growing cities.  The REIT calls it a “strategic cluster.”

 

The most recent large announcement for H&R (HR) was the completion of their huge American acquisition in New York.  This office tower in Long Island City, New York is known as “Two Gotham Center.”  It is 22 stories tall, and includes 661,000 leasable square feet.  It cost the REIT just over $415 million, and is 100% pre-leased to the City of New York.  The Globe and Mail reports that Two Gotham Center, “Presents a beautifully curving, 325-foot façade of gleaming glass, with efficient and generous floor plates of 34,500 square feet. The property’s cutting edge green technology will significantly reduce operating costs and is anticipated to earn a prestigious LEED Silver certification. One of the defining features of this property is its awe inspiring views of the East River and the Midtown Manhattan.”  The property is ideally located to take advantage of New York’s public transportation grid, and represents a unique investment opportunity for a Canadian investor looking to get exposure to the New York real estate market.

 

There is little doubt that H&R (HR) is one of flashier REITs on the Canadian market.  It has an extensive portfolio of unique buildings, and a large market capitalization of well over $3.3 billion.  Its enviable track record and conservative payout ratio bode well for investors going forward.  The American exposure H&R is experienced with may allow them to make substantial gains during this real estate downturn in the USA.  That being said, I think the market has overpriced this REIT for the moment at over $21-per unit.  At this price, H&R has a middling dividend yield of 4.9%, and I think there are likely several lower-profile REITs out there that represent better investing opportunities; although, I would definitely keep an eye on the REIT going forward and would not hesitate to take a large position if that dividend yield crept up into the 6.5-7% range.