Updated thoughts on H&R REIT

Hi everybody,

I thought I would share some thoughts on H&R REIT which is a significant position for me. They will report earnings this week on August 12th and hold a conference call on August 13th. It is not unusual for the REIT to report earnings during market hours, so I would guess that it may be released in the afternoon or after hours. The last time I wrote about H&R was in June and there have been some useful things to add since that may be relevant into earnings such as comparable market transactions.

On June 12th, H&R confirmed that Blackstone was in talks with the REIT for “some” assets. Some analysts such as those at CIBC have suggested that Blackstone could be interested in the few assets that H&R disclosed were being marketed on the Q1 conference call which includes a couple land plays and a couple offices. That seems laughable and highly unlikely to me. Normally, Blackstone are portfolio buyers. Last year Blackstone and others including Crestpoint, PSP and TPG Angelo Gordon were said to be interested in taking the REIT private. I believe H&R strategically has been disposing the assets that Blackstone was not interested in over the past year since the strategic review ended in order to capitalize on a higher price as a “club deal” will no longer be necessary, or at worst, significantly dissipated given H&R’s successful asset sales in office, retail and possibly soon, development land. There have been a constant string of take privates in the REIT space for multiple asset classes so it is likely that there are numerous interested parties in H&R’s assets if they are indeed for sale.

The deal never materialized in 2025, the strategic review ended without a complete corporate sale and the REIT units pulled back meaningfully. It was at this time that I took the majority of my position and have accumulated since. After the review, CEO Tom Hofstedter stated “they know what to do” which I interpret they know which assets to sell in order to likely spin or sell residential and industrial. Since 2025, the REIT has made substantial progress in disposing office and retail assets. They sold the entire retail portfolio outside of one high-end mixed use asset in Florida known as River Landing and disposed a hearty chunk of their offices, including the 1 million square foot Hess Tower building in Houston, Texas.

As of March 31, H&R REIT was down to a meager 11% office exposure. I am certain this exposure has since fallen further as secondary reporting sources confirmed BGO purchased 26 Wellington Street from H&R in May 2026 which will likely be confirmed by the REIT this week. The Toronto office market has improved substantially and liquidity seems to have gotten much better as each sequential office sale reported seems to be better price wise then the next. That should bode well for their last major Toronto asset, 310-330 Front Street which has a trophy location. On the last conference call Tom Hofstedter noted that the two larger offices remaining, TC Energy Center in Calgary and Two Gotham in New York City, both had ‘sticky’ tenants with long leases and wanted to capitalize on renewals before punting them. The Halifax area offices are leased to government tenants in a strong market and are likely easy to sell, while the last major obsolete office in Dorval (Montreal) Quebec currently manned by Bell Canada will be demolished and rendered into townhomes.

One of the things that excited me with H&R outside of a potential privatization event involving Blackstone or others is the fact that the REIT noted they could have something firm in place to sell their major land parcels One of them is known as 459 Smith Street in Brooklyn, New York in the Gowanus neighborhood; the other are industrial land acres in H&R REIT’s Caledon industrial park in the GTA. Both these land parcels are extremely lucrative. Since the last article I have come across a couple private market comparables that could demonstrate the value of these land packages. Just over a week ago, JLL reported a sale at 55 Smith Street in Gowanus neighbourhood, for a 0.4 acre parcel with 137,000 square feet of development rights. This is located 1 mile from H&R’s 459 Smith Street parcel which holds 3 acres and up to 732,000 square feet of residential development rights. H&R purchased the property in 2024 for $76 million dollars. It may be worth much more today. On the Q1 conference call, Tom Hofstedter indicated he hopes to have something conclusive on Gowanus “this quarter” so it may be reported this coming week.

The other potential thing to look for is an update on the Caledon industrial lands. A friend of mine was able to spot a large land package beside H&R’s industrial park in Caledon being sold by AvisonYoung for $252 million dollars. The address is 12506 Heart Lake Road and it looks immediately adjacent. The listed price equates to around $2 million dollars for an undeveloped industrial acre of land. It is very clear this is a sprawling industrial park development, important for the region and the Government of Ontario along with the local municipalities. It has participation from some of the most active industrial players in the world (image below).

H&R REIT has a 153 land acres in that business park with the Ontario Government looking for a large chunk of that to guarantee access on the new Highway 413 which is being constructed. If we use a $2 million dollar per acre threshold that puts H&R’s land value likely above $300 million. It may be worth even more given the high quality tenants located in their developed industrial park which includes Amazon & Prologis, the world’s largest industrial REIT which recently signalled interest in expanding in the GTA area. Other REITs such as Dream Industrial and Choice are doing developments in the same area which makes me wonder if they are potential suitors. On the last conference call, Tom Hofstedter indicated to Scotiabank’s Mario Saric that he hopes to have something in place for Caledon as soon as Q2 so that will be a material catalyst to watch if H&R can sell that land in bulk to the government.

With somewhere in the ballpark of $500 million in assets projected to be reported by the years’ end by H&R, the majority of that will be land. If we assume somewhere around $200 million for Gowanus’ in New York, you can fairly easily back up close to the quoted assumption by putting a ~$2mm price on Caledon land acres. In my view the land sales would be extremely bullish for H&R units as they contribute no FFO and would substantially reduce debt and leverage, which is already down 2.3x turns year-over-year with the current assets sales which have been completed.

With such low leverage and meaningfully reduced debt, it is likely that H&R proceeds to buyback back units and/or increasing the distribution. My thought is they are in discussion with Blackstone and others, currently, which is why the NCIB has yet to be initiated despite substantially reduced leverage. Should a take private scenario not occur, it is possible we see special distributions, increased dividends, an NCIB or even an SIB, with the disposition proceeds which will be substantial. As H&R seems to have renounced the development game in the REIT since Matt Kingston resigned, it seems unlikely that the REIT would attempt to use proceeds for other developments. That should bode well for unitholder returns.

In closing, my thoughts are continued optimism on H&R REIT into earnings. While earnings are not do or die, it would be nice to hear concrete steps from the company instead of third party reporting sources who seem to be aware of the sales process. There are not many bulls left as retail is wary that Tom Hofstedter will “fumble” it again. Several large investors including an activist have moved into the REIT and seem content, along with NCP, by the progressive moves made by H&R in disposing the harder to sell assets at good prices over the past year. I believe the REIT will execute on either a take private or a partial spin-out of one of the two major asset classes, most likely, US residential, leaving us with a Canadian industrial REIT which has good assets. It is likely we would realize full value for the residential division as that asset classes has ample buyers with market transactions occurring around a 5-cap range. Industrial is likely a 5 to 6 cap in event of a large portfolio sale. H&R’s currently trading mid 7 cap and if you factor in the probable land sales, that will creep even higher if the unit price does not move north which would make H&R more attractive and further reduce interest rate risk as leverage will fall. It is impossible to know but easy to speculate, but in my view, the risk-reward remains extremely favourable into whichever of the two or three scenarios unfold with a final gameplan likely released by the company before the end of the year. My personal target on H&R is somewhere between $13.50-$15.00 with the current NAV, which has been dramatically watered down sitting at $15.96 as of Q1 2026.