A Toronto-based hedge fund is pushing for a refresh of H&R Real Estate Investment Trust’s HR-UN-T board of directors, igniting an activist fight at another of Canada’s largest publicly traded real estate companies.
K2 & Associates Investment Management Inc. is looking to nominate four directors to H&R’s board at its annual meeting in June, replicating the playbook used to push for board renewal at First Capital REIT FCR-UN-T earlier this year, which ended with a board refresh.
H&R is vulnerable to activism because its units have struggled since the pandemic erupted, down 24 per cent since the start of 2020. The units also trade at roughly a 35-per-cent discount to the REIT’s net asset value.
K2 did not disclose how long it has held its shares, and the fund did not immediately return a request for comment when asked how long it intends to hold its position if its nominees are appointed.
The hedge fund was founded in 1998 by Shawn Kimel, whose family is a major real estate owner, and has long operated out of Toronto’s Yorkville neighbourhood. The firm operates two funds – the K2 Principal Fund and the K2 Principal Trust – and made a splash by becoming one of Canada’s leading institutional investors in the cannabis market.
In 2018, K2 and two of its top employees, including Mr. Kimel, were fined a total of $1-million by the Ontario Securities Commission for “manipulative trading.” Mr. Kimel was also prohibited from trading any securities or derivatives for nine months.
Not long ago, H&R was a giant in the REIT sector. As a diversified trust, it owned everything from industrial properties to apartment buildings – but had a heavy weighting toward office towers, such as the Bow in Calgary – and enclosed malls. The REIT has been run by chief executive officer Tom Hofstedter since it was created in 1996, and he was paid an average of $3.7-million in each of the past three fiscal years.
However, H&R’s units suffered badly during the first year of the pandemic, and in early 2021 the company announced that it was considering a wholesale change to narrow its focus and pivot away from some of its asset classes. At the time, office and retail comprised 48 per cent and 29 per cent of the REIT’s net operating income.
A few months later, in October, 2021, H&R committed to undoing its business strategy from the better part of the previous decade, which included spinning out its enclosed mall portfolio in order to focus on residential buildings and industrial properties. H&R bought Primaris REIT, a major mall owner, in 2013 after a tense bidding war, and at the time Primaris was seen as a prized asset because a number of its shopping centres were expected to benefit when Target Corp. arrived in Canada.
H&R now wants 75 per cent of its real estate portfolio geared toward multifamily properties in the United States, largely in the Sun Belt, and the remaining 25 per cent in Canadian industrial properties near Toronto, Montreal and Vancouver. Multifamily properties have performed well of late because of strong rent growth, and industrial properties in Canada are some of the hottest real estate to own anywhere in the world because there isn’t enough supply to keep up with the demand for them.
In a public statement, K2 said that it approached H&R on March 1 and told the REIT that it supports the current strategy, but wants to see faster movement. H&R has sold roughly $1.1-billion worth of assets since the new strategy was laid out, and has $3.7-billion more to sell, according to RBC Dominion Securities.
A few weeks after K2′s approach, H&R announced that Donald Clow, the recently retired CEO of Crombie REIT, would serve as its new lead independent director. K2 said it was not informed ahead of time.
“While K2 views Donald Clow’s appointment as a positive change, it still maintains that more change is necessary, and that time is of the essence,” the fund said in its statement.
K2 is looking to nominate the following four people to H&R’s board: Moti Jungreis, the recently retired head of global markets at TD Securities; Josef Vejvoda, K2′s former CEO; Michael Siskind, the former president of Self Storage Plus; and Daniel Farb, who has a background in finance.
K2 did not return a request for comment asking whether it seeks changes to H&R’s management team.
In a statement Tuesday, H&R said it will “continue to engage with K2 in good faith, as it does with all unitholders.” But the company said “it will not put K2′s shorter-term interests ahead of the longer-term interests of other unitholders.”
Editor’s note: This story has been updated to adjust for the spinout of H&R’s malls into a separate company when calculating market returns.