Wednesday, May 23, 2012
Scotia Plaza deal no ‘game changer’ for buyers
H&R Real Estate Investment Trust and Dundee REIT announced Tuesday they paid $1.27-billion for the bank’s head office complex with Dundee taking two-thirds and H&R one third.
“Pricing appears slightly better than we anticipated,” said Scotiabank analyst Mr. Saric, in a note to clients on H&R REIT. The analyst had been expecting a cap rate in the 4% to 5% range but estimates the deal implies a 5.2% rate.
Scotia has agreed to take on a lease as the anchor tenant of the main tower with an average term of 13.5 years which Mr. Saric says “adds complexity” to just looking at the going-in cap rate.
He said the deal is not a “game changer” for H&R and that its $422.2 million investment equals about 3% to 5% of its existing portfolio in terms of net operating income once The Bow, its huge new office complex in Calgary, is completed.
“Assuming normalized 5% leverage, we estimate the transaction is neither accretive or dilutive to H&R,” said Mr. Saric, who thinks the REIT will need to raise $150 million to $200 million for the deal.
“Long-term we believe this transaction is positive for H&R, possibly leading to a slight bump in valuation multiple. Near term, uncertain equity needs may see H&R trade sideways.”
RBC Capital Markets analyst Neil Downey didn’t raise his target price or rating on H&R but said the deal will add “quality” to the REIT’s portfolio.
“We believe the purchase is consistent with some of H&R’s highest portfolio components,” said Mr. Downey in a note to clients.
He said the weighted average lease term of 10.6 years for all leases and the 13.5 years makes the deal work for Scotiabank and added H&R has a “big balance sheet with sufficient equity and liquidity to absorb this transaction.”
Mr. Downey doesn’t think H&R will need to go to the equity markets to finance the deal.
Favourable debt financing for $650-million at 3.45% for seven years enable the 5.2% cap rate to be neutral for H&R’s adjusted funds from operations.