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TORONTO,
July 30, 2013 /CNW/ - H&R Real
Estate Investment Trust ("H&R REIT", "H&R" or the
"REIT") (TSX: HR.UN; HR.DB.D; HR.DB.E and HR.DB.H) announced
today that it has entered into an agreement with H&R Property
Management Ltd., the REIT's external property manager (the
"Property Manager"), to internalize the REIT's property
management function (the "Internalization" or the
"Transaction"). Closing is expected to occur in September 2013 with economic effect from
July 1, 2013.
Upon closing of the Transaction, a subsidiary of
the REIT will acquire the Property Manager's REIT-related property
management business in return for 9.5 million limited partnership
units of that subsidiary, such units to be exchangeable on a
one-for-one basis for stapled units of the REIT and H&R Finance
Trust. The terms of the Transaction were negotiated and
unanimously recommended for approval by the independent trustees of
the REIT (the "Independent Trustees").
The Independent Trustees and the Property
Manager have been discussing the amendment, replacement or
termination of the existing property management agreement for
several months. Given H&R's recent acquisition of Primaris
Retail Real Estate Investment Trust ("Primaris") and the
inherent potential conflicts between the REIT and the Property
Manager that now exist as a result of Primaris' internal management
structure and other financial benefits as noted below, it became
clear to the Independent Trustees that internalizing the property
management business at an appropriate price was in the best
interests of H&R and its unitholders. The consideration being
paid for the Property Manager's H&R-related property management
business closely approximates the amount that would otherwise have
been payable to the Property Manager, net of the Property Manager's
costs, under the current property management agreement (based upon
certain assumptions considered by the Independent Trustees to be
reasonable) which expires in January
2020. The REIT will incur a one-time charge equal to the
value of the issued units on closing.
The Independent Trustees considered a number of
factors in recommending approval of the Internalization, including
the key reasons set forth below.
Key Reasons for Internalization:
- Results in the internalization of the existing management
contract which was negotiated at a time when the REIT was
significantly smaller and the fixed costs of management relative to
the size of the REIT's balance sheet were higher.
- Eliminates any potential management conflict resulting from the
Primaris acquisition. Currently owned Primaris properties and any
enclosed shopping centers acquired by H&R in the future would
be internally managed, while existing office and industrial
properties and those acquired in the future would have been subject
to the external property management agreement and its associated
fees.
- Eliminates exposure to acquisition fees payable to the Property
Manager at a time when the REIT has the size, breadth and balance
sheet strength to be a significant acquirer and consolidator both
in Canada and the U.S.
- Responds to the market's preference for internally managed
REITs.
- Reduces the REIT's property operating expenses and increases
the REIT's net operating income. The REIT will save fees
previously payable to the Property Manager and expects to incur
approximately $5 million annually of
additional salaries and overhead as a result of the
Internalization.
- The purchase price associated with the Internalization does not
utilize existing cash resources of the REIT and the Property
Manager has agreed to hold the exchangeable units, or stapled units
into which they are exchangeable, which it will receive for five
years, subject to limited exceptions.
Commenting on the Internalization, Independent
Trustee Mr. Ronald Rutman
stated:
"After considerable deliberation over the last
few months, the Board of Trustees has unanimously decided that it
is in the best interests of H&R and its unitholders to fully
internalize property management and remove any potential conflict
between the REIT and the Property Manager going
forward". Mr. Rutman added; "The Independent Trustees
felt strongly that this was the right window of opportunity to
eliminate the existing management contract. The consideration
being paid is fair and this transaction should positively affect
the trading price of H&R's stapled units and allow for an
increased valuation multiple."
Internal Property Management Team
Upon closing of the Transaction, the REIT's
subsidiary will hire those individuals at the Property Manager who
are currently providing the various property management services
for the REIT's properties. Certain office equipment used in
the business and an office lease will also be transferred and
assigned to the REIT's subsidiary.
The Exchangeable Limited Partnership
Units
The exchangeable limited partnership units to be
issued to the Property Manager at closing will carry an entitlement
to distributions equal to the distributions paid on H&R's
stapled units. In order to provide the Property Manager with
a voting entitlement approximately equivalent to the stapled units,
the REIT has also agreed to seek the approval of the REIT's
unitholders at the next annual meeting of unitholders to authorize
the issuance to the Property Manager of 9.5 million special voting
units of the REIT (which would be transferrable only together with
the accompanying limited partnership units). The special voting
units would entitle the Property Manager to one vote per special
voting unit at meetings of the unitholders of the REIT. The
Property Manager has agreed to hold the exchangeable limited
partnership units, or the stapled units into which they are
exchangeable, until the fifth anniversary of the Transaction,
subject to early release in the event of certain "change of
control" transactions affecting the REIT.
The Toronto Stock Exchange ("Exchange") has
conditionally approved listing of the 9.5 million stapled units
issuable upon exchange of the exchangeable limited partnership
units, subject to satisfaction of the Exchange's standard listing
requirements.
Financial Advisor and Counsel
The Independent Trustees engaged Trimaven
Capital Advisors Inc. to act as financial advisor and Osler, Hoskin & Harcourt LLP as
independent counsel in connection with the Internalization.
Blake, Cassels & Graydon LLP acts as counsel to H&R in
connection with the Internalization.
About H&R REIT
H&R REIT is an open-ended real estate
investment trust, which owns a North American portfolio of 41
office, 112 industrial and 165 retail properties comprising over 53
million square feet and 2 development projects, with a fair value
of approximately $13 billion. The
foundation of H&R REIT's success since inception in 1996 has
been a disciplined strategy that leads to consistent and profitable
growth. H&R REIT leases its properties for long terms to
creditworthy tenants and strives to match those leases with
primarily long-term, fixed-rate financing.
About H&R Finance Trust
H&R Finance Trust is an unincorporated
investment trust, which invests in notes issued by a U.S.
corporation which is a subsidiary of H&R REIT. The current note
receivable is U.S. $216.6 million. In
2008, H&R REIT completed an internal reorganization which
resulted in each issued and outstanding H&R REIT unit trading
together with a unit of H&R Finance Trust as a "Stapled Unit"
on the Toronto Stock Exchange.
Forward-looking Statements
Certain information in this news release
contains forward-looking information within the meaning of
applicable securities laws (also known as forward-looking
statements) including, among others, statements relating to the
objectives of H&R REIT, strategies to achieve those objectives,
H&R REIT's beliefs, plans, estimates, and intentions, and
similar statements concerning anticipated future events, results,
circumstances, performance or expectations that are not historical
facts. Forward-looking statements generally can be identified by
words such as "outlook", "objective", "may", "will", "expect",
"intend", "estimate", "anticipate", "believe", "should", "plans",
"project", "budget" or "continue" or similar expressions suggesting
future outcomes or events. Such forward-looking statements reflect
H&R REIT's current beliefs and are based on information
currently available to management. These statements are not
guarantees of future performance and are based on H&R REIT's
estimates and assumptions that are subject to risk and
uncertainties, including those discussed in H&R REIT's
materials filed with the Canadian securities regulatory authorities
from time to time, which could cause the actual results and
performance of H&R REIT to differ materially from the
forward-looking statements contained in this news release. Those
risks and uncertainties include, among other things, risks related
to: prices and market value of securities of H&R REIT;
availability of cash for distributions; restrictions pursuant to
the terms of indebtedness; liquidity; credit risk and tenant
concentration; interest rate and other debt related risk; tax risk;
ability to access capital markets; dilution; lease rollover risk;
construction risks; currency risk; unitholder liability;
co-ownership interest in properties; competition for real property
investments; environmental matters; reliance on one corporation for
management of substantially all H&R REIT's properties; and
changes in legislation and indebtedness of H&R REIT. Material
factors or assumptions that were applied in drawing a conclusion or
making an estimate set out in the forward-looking statements
include that the general economy is stable; local real estate
conditions are stable; interest rates are relatively stable; and
equity and debt markets continue to provide access to capital.
H&R REIT cautions that this list of factors is not exhaustive.
Although the forward-looking statements contained in this news
release are based upon what H&R REIT believes are reasonable
assumptions, there can be no assurance that actual results will be
consistent with these forward-looking statements. All
forward-looking statements in this news release are qualified by
these cautionary statements. These forward-looking statements are
made as of today, and H&R REIT, except as required by
applicable law, assumes no obligation to update or revise them to
reflect new information or the occurrence of future events or
circumstances.
SOURCE H