H&R says Primaris bid, arrival of Target signals changes in shopping malls

TORONTO – The decision to purchase Primaris Retail REIT was easy to make in a changing shopping mall landscape that will see the arrival of Target stores in the coming months, the head of H&R Real Estate Investment Trust says.

“The dynamics of these malls are going to change,” said H&R president and chief executive Tom Hofstedter in an interview Thursday.

“They’re going to improve, they are going to have more people in them. It’s going to drive sales up, and drive rents up, and drive value to our unitholders.”

Target (NYSE:TGT), the No. 2 discount retailer in the U.S. after Walmart, is set to open the first Canadian wave of stores in 10 Primaris properties starting later this year.

Hofstedter told investors during a conference call that the proposed friendly deal for Primaris (TSX:PMZ.UN) — which was unanimously approved by boards at both companies but still requires unitholder approval — will set up H&R (TSX:HR.UN) for the expansion of Target and other U.S. retailers.

“(This) shouldn’t be a story about accretion,” he said. “It should be a story about getting better, getting stronger, getting in at a time where there is a game changer out there called Target, just being the first of many international retailers invading Canada. And in invading Canada, changing our landscape.”

The deal, announced late Wednesday after the markets closed, offers Primaris unitholders 1.13 stapled units from H&R or $28 in cash, with a limit of $700 million to the cash portion.

If the cash ceiling is surpassed, Primaris unitholders would get a combination of cash and units.

Primaris units closed Thursday at $26.58 per share, up seven cents, while H&R units were down 51 cents at $23.28 on the Toronto Stock Exchange.

The bid tops a hostile offer last December by a consortium led by KingSett Capital, which had support from RioCan REIT (TSX:REI.UN), Canada’s largest shopping mall real estate owner and the Ontario Pension Board.

A spokeswoman for KingSett, which had proposed $26 per unit in cash, had no comment on the H&R bid.

However, Kingsett did extend its offer, which was to expire Thursday, until Feb. 4 to give it time to review the H&R proposal.

Primaris owns 33 properties across Canada, including shopping centres in Alberta, Manitoba, Quebec and Ontario comprising some 13.7 million square feet and a 97 per cent occupancy rate.

Some of their flagship entities include Place d’Orleans in Ottawa, Fleur de Lys in Quebec City and Sunridge Mall in Calgary.

H&R owns 42 office, 115 industrial and 138 retail properties comprising more than 45 million square feet and two development projects.

If the proposed deal is approved by unitholders by late March, it will make H&R one of Canada’s largest real-estate trusts with a total of 330 properties in nine provinces and 28 U.S. states.

“Quite frankly, an opportunity like this never comes by,” Hofstedter said.

“It shouldn’t come by, Primaris is actually a great company. There shouldn’t have been a hostile bid to take it out, period. The real driver (of the deal) is the opportunity that is here that never exists.”

The proposed transaction is subject to approval by a two-thirds majority vote by Primaris unitholders and by a 50.1 per cent majority vote by H&R unitholders.

Under the agreement, H&R is entitled to $106.6-million break fee if Primaris accepts a superior proposal under certain circumstances.

The break fee includes a cash payment of $70 million and an option to acquire the Dufferin Mall and certain Yonge Street properties in Toronto owned by Primaris, priced at an aggregate $36.6-million discount to the appraised values of the properties.

Primaris president and CEO John Morrison says the company was in talks with several other potential buyers following KingSett’s proposal last month.

He says H&R’s deal signals that the “resurgence” of shopping malls and big-box stores in Canada.

“It just speaks to the importance of the shopping centre in the retail hierarchy,” said Morrison. “That’s where the majority of people shop and retailers have always recognized it, but continue to recognize it. We’re seeing a lot more demand for space, certainly.”

— With files from Brian McKenna