H&R Real Estate Investment Trust, one of Canada’s largest real estate investment trusts with total assets of approximately $14.7 billion at December 31, 2018, has entered into an agreement to sell The Atrium for $640 million, subject to customary closing conditions. The purchase price equates to a capitalization rate of 4.56%. Closing is expected to occur on or about June 6, 2019.

The Atrium, comprising 595 Bay Street, 20 & 40 Dundas Street West, and 306 Yonge Street, is a 1.1 million square foot office and retail complex, effectively occupying a full city block in downtown Toronto at one of the busiest intersections in Canada.

The Atrium sale demonstrates H&R’s commitment to its industry-leading balance sheet and BBB+ credit rating, as well as the capital discipline to prioritize investment opportunities and recycle capital. At December 31, 2018, H&R had $1.6 billion of properties under development, with multiple additional high-return development, redevelopment and intensification opportunities embedded in its portfolio.

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H&R purchased The Atrium for $344.8 million in 2011 and since the acquisition, has increased annual net operating income by $6.5 million, creating substantial value for unitholders. The Atrium’s IFRS value as at March 31, 2019 was $600 million, up from $548 million as at December 31, 2018. Management expects to record a gain of approximately $40 million, relative to its IFRS value, and a sale price approximately $295 million higher than its original purchase price.

The Atrium is currently unencumbered. H&R will provide the purchaser with a vendor take-back (VTB) mortgage of $256 million, bearing interest at an annual rate of 4.56% and maturing on January 2, 2020. Assuming the proceeds from the sale were used to repay debt, H&R’s debt to total asset ratio would improve to 42.1% from 44.6% at December 31, 2018.

H&R’s president and CEO Thomas Hofstedter said: “Given the strong investor demand for Toronto office properties and the substantial capital this asset will require over the next several years for redevelopment and intensification, we chose to take advantage of strong market pricing, and reallocate capital to both strengthen our balance sheet and to fund our value-creating developments.”

Source: H&R Real Estate Investment Trust