H&R Real Estate Investment Trust’s units sank on Thursday morning after the REIT parted ways with its president, who also ran its U.S. residential division, in a surprise move with little explanation.
Philippe Lapointe, a Canadian based in Texas, joined H&R a decade ago and rose through the ranks of the REIT’s U.S. multi-family division, known as Lantower Residential. Lantower is one of H&R’s bright spots amid a tough market for commercial real estate and in May, 2022, Mr. Lapointe was promoted to president of the entire REIT.
At that time, H&R founder Tom Hofstedter added the title of executive chair to his role as chief executive officer, and the moves suggested Mr. Lapointe could one day run the entire REIT.
One year later, Mr. Lapointe is gone, effective immediately, and Lantower’s chief operating officer Emily Watson is taking over his responsibilities in the United States. A new president for the entire REIT has not been named.
H&R’s units dropped 7 per cent on the Toronto Stock Exchange by late morning Thursday. The REIT did not return a request for comment.
The leadership team at H&R and the board have undergone considerable change this year. In March, the REIT appointed a new lead independent director by bringing in Donald Clow, the recently retired CEO of Crombie REIT, and in April H&R added two new trustees in order to settle a proxy fight with Toronto-based hedge fund K2 & Associates Investment Management Inc.
It is not clear if K2 had any role in Mr. Lapointe’s departure, and the hedge fund did not immediately return a request for comment.
H&R used to be a giant in Canada’s REIT sector, and as a diversified trust it owned everything from industrial properties, to apartment buildings, to enclosed malls. But it had a heavy weighting in office towers, such as the Bow in Calgary. The REIT has been run by Mr. Hofstedter since it was created in 1996.
H&R’s units have suffered since the COVID-19 pandemic erupted, and in early 2021 the company announced that it was considering a wholesale change to narrow its focus and pivot away from some of existing divisions. At the time, office and retail comprised 48 per cent and 29 per cent, respectively, of the REIT’s net operating income, and these two asset classes have generally fared the worst in commercial real estate.
To shake things up, H&R said it would undo its business strategy from the better part of the previous decade in order to focus on residential buildings and industrial properties. The shift included spinning out its enclosed mall portfolio, a major change considering H&R bought Primaris REIT, a major mall owner, in 2013 after a tense bidding war. At the time of the purchase, 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 multi-family 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.
Multi-family properties have performed well lately 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.
The changes announced Wednesday shake up the leadership for the division that will one day account for three-quarters of the REIT’s assets.
In a note to clients, Bank of Nova Scotia analyst Mario Saric described the move as “negative,” adding that he thought highly of Mr. Lapointe and that the “market will interpret (correctly or incorrectly) the move as a step backwards in the announced asset transition plan and commitment to change.”
He also noted the Scotiabank research team believe “the news will be quite surprising and we’re less constructive on the REIT pending greater clarity in terms of strategic plan implications.”
H&R reports quarterly earnings on Friday.