Sale of the Bow, Calgary Office Exposure
Reduced, Enhanced Strategic Flexibility
TORONTO, Aug. 3, 2021 /CNW/ - H&R REIT ("H&R" or
the "REIT") announces today that it has entered into agreements for
the transactions involving the 2.0 million sq.ft. Bow office tower
("the Bow") located in Calgary,
Alberta, and for the sale of the 1.1 million sq.ft. Bell
office campus ( the "Bell Campus") located in Mississauga, Ontario, for combined gross
proceeds of approximately $1.47
billion, including proceeds from the sale of an ownership
interest to affiliates of Oak Street Real Estate Capital ("Oak
Street") and a secured lease financing arrangement with
Deutsche Bank Credit Solutions and Direct Lending ("Deutsche")
("Deutsche Transaction" and with the sale, collectively "Bow
Transaction").
H&R will effectively retain 15% of net rent from the Ovintiv
Lease, ownership of the adjacent lands, ("South Block"), and will
retain the management contracts on the Bow and Bell Campus,
together valued at approximately $203
million. The transaction is valued at approximately
$1.67 billion ("Transaction")
inclusive of gross proceeds of approximately $1.47 billion from the sale to Oak Street, the
Deutsche Transaction, and the retained interests.
The $1.67 billion Transaction
exceeds IFRS fair values by approximately $206 million, with net proceeds of approximately
$800 million being used to pay down
debt and to facilitate further strategic initiatives.
Management will host a conference call to discuss the
Transaction on August 3rd,
2021 at 11.00 a.m. Eastern Time.
"Today's announcement is evidence of our commitment to our
strategic repositioning and is a critical step forward on our path
to achieving a more simplified structure", said Thomas Hofstedter, President & CEO of
H&R. "We appreciate the patience and support of our unitholders
as we continue to pursue opportunities to further enhance the value
of our units."
Highlights:
- Significantly reduces Calgary
office exposure from 9% to 3% on a fair value basis.
- Reduces tenant concentration to Ovintiv Inc. ("Ovintiv") from
12% to 2%.
- Provides ~$800 million of cash
proceeds, net of associated mortgage repayments and closing
costs.
- Enhances financial flexibility to facilitate the potential for
further significant strategic changes.
- H&R retains an option to repurchase 100% ownership interest
in the land and building of the Bow for $368 per sq. ft., being 60% of the total Bow
Transaction value
Transaction Overview:
Property
|
Est. 2021
NOI
|
GLA
Sq.Ft.
|
Tenant
|
Location
|
Bow
|
$98,000,000
|
2,000,000
|
Ovintiv
Inc.
|
Calgary,
AB
|
Bell
Campus
|
$31,000,000
|
1,100,000
|
Bell
Canada
|
Mississauga,
ON
|
Total
|
$129,000,000
|
3,100,000
|
|
|
|
Gross
Proceeds From
|
Retained
|
Total
|
Q1
2021
|
Value
Relative
|
Asset
|
Oak
Street
|
Deutsche
Bank
|
Value
|
Value
|
IFRS
FV
|
To IFRS
FV
|
Bow
|
$613,000,000
|
$418,000,000
|
$185,000,000
|
$1,216,000,000
|
$942,000,000
|
$274,000,000
|
Bell
Campus
|
$439,000,000
|
|
$18,000,000
|
$457,000,000
|
$525,000,000
|
($68,000,000)
|
Total
|
$1,052,000,000
|
$418,000,000
|
$203,000,000
|
$1,673,000,000
|
$1,467,000,000
|
$206,000,000
|
- Sale of 100% ownership of the land and building of the Bow,
together with a 40% interest in the net rent payable under the
Ovintiv lease to expiry in May 2038,
to Oak Street, for gross proceeds of approximately $613 million.
- Effective sale of a 45% interest in the net rent payable under
the Ovintiv lease to expiry in May
2038, to Deutsche through a secured lease financing
structure for gross proceeds of $418
million.
- Sale of 100% of the Bell Campus to Oak Street for gross
proceeds of approximately $439
million.
The total value for the Bow Transaction is
approximately $1.216 billion or $608 per sq.ft. The total value for the Bell
Campus is approximately $457 million or $415 per sq.ft. The Bow and Bell Campus
transactions combined reflect an implied capitalization rate of
approximately 7.8%.
H&R will effectively retain a 15% interest in the net rent
payable under the Ovintiv lease to the expiry of the lease in
May 2038, and will continue to manage
the Bow and earn management fees. The retained interest in
the cash flow from the Ovintiv lease and management fees total
approximately $18 million annually
with a net present value of approximately $177 million ($185
million inclusive of the South Block, ownership of which is
being retained by H&R).
H&R will also continue to act as manager of the Bell Campus
for the remainder of the term of the existing Bell leases, earning
management fees of approximately $1.6
million annually, having a net present value of
approximately $18 million.
The sale includes an option in favour of H&R to repurchase
100% ownership of the land and building of the Bow at expiry of the
Ovintiv lease in May 2038 for
approximately $735 million
($368 per sq.ft.), substantially
below the combined sale proceeds of $1.031
billion ($515 per sq.ft.) and
60% of the total Transaction of $1.216
billion ($608 per
sq.ft.). This option provides H&R the ability to
capture potential upside in the Calgary office market over an extended ~17
year time frame.
Closing costs are estimated at approximately $42 million, including a significant early
redemption penalty relating to the approximately $500 million existing Bow Centre Street mortgage
bonds. The Bell Campus is currently encumbered with mortgages
totalling approximately $130 million.
Combined net proceeds of approximately $800 million will be used to repay debt.
The sales are subject to customary closing conditions, with
closing targeted to be Q3-Q4 2021.
Accounting Implications
Due to the repurchase option in favour of H&R, and in
accordance with IFRS-15, the Bow transaction will not be treated as
a disposition for accounting purposes, and therefore the Bow will
continue to be recorded as an asset on the balance sheet. Proceeds
received from the sale will be recorded as deferred revenue and
will be amortized over the term of the lease.
Tax Implications
The Transaction announced today is expected to generate taxable
income of approximately $225 million
or $0.75 per unit of taxable income,
including both recapture income and capital gains. H&R
anticipates having to make a special distribution in order to
ensure the REIT will not be liable to pay income tax. Details
of the distribution will be made available to unitholders by year
end.
Advisors
BMO Capital Markets is acting as financial advisor with respect
to the sale to Oak Street and Moelis & Company LLC is acting as
financial advisors with respect to the Deutsche Transaction.
Conference Call
Management will host a conference call to discuss the
Transaction on August 3rd,
2021 at 11.00 a.m. Eastern Time.
Participants can join the call by dialing 1-888-510-2507 or
1-289-514-5065.
For those unable to participate in the conference call at the
scheduled time, it will be archived for replay beginning
approximately one hour following completion of the call. To
access the archived conference call by telephone, dial
1-800-770-2030 or 1-647-362-9199 and enter the passcode 7737789
followed by the pound key. The telephone replay will be available
until September 3, 2021 at
midnight.
A live audio webcast will be available through
https://www.hr-reit.com/investor-relations/#investor-events. Please
connect at least 15 minutes prior to the conference call to ensure
adequate time for any software download that may be required to
join the webcast. The webcast will be archived on H&R's website
following the call date. The investor presentation is available on
H&R's website at
https://www.hr-reit.com/investor-relations/#investorpresentation
About H&R REIT
H&R REIT is one of Canada's
largest real estate investment trusts with total assets of
approximately $13.2 billion at
March 31, 2021. H&R REIT has
ownership interests in a North American portfolio of high-quality
office, retail, industrial and residential properties comprising
over 40 million square feet.
Forward-looking Statements
Certain statements in this news release contain forward-looking
information within the meaning of applicable securities laws (also
known as forward-looking statements). These forward-looking
statements include, but are not limited to H&R's plans,
objectives, expectations and intentions, including the expected
closing date of the sale of the Bow and Creekbank, the net proceeds
of the transactions and the uses thereof, the potential for more
strategic changes, net present value of cash flows and the tax and
accounting implications for the transactions. Such forward-looking
statements reflect H&R'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's
estimates and assumptions that are subject to risks and
uncertainties, including those discussed in H&R's materials
filed with the Canadian securities regulatory authorities from time
to time, which could cause the actual results and performance of
H&R to differ materially from the forward-looking statements
contained in this news release. Although the forward-looking
statements contained in this news release are based upon what
H&R 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, 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.
Additional information regarding H&R REIT is available at
www.hr-reit.com and on www.sedar.com.
SOURCE H&R Real Estate Investment Trust