Spinoff Success: 2 REITs That Are Actually Beating the Market

Two formerly intertwined REITs have performed better and are beating the market in 2022 as standalone landlords.

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The TSX’s real estate sector isn’t doing great in 2022 and might end the year in the red. The sector is the third-worst performer after healthcare (-50.72%) and technology (-34.37%), with its 23.34% year-to-date loss. The heightened volatility in real estate stocks, including real estate investment trusts (REITs), is due mainly to rising interest rates.

However, two REITs are surprisingly outperforming, despite the bearish sentiment. H&R (TSX:HR.UN) and Primaris (TSX:PMZ.UN) were intertwined until the former decided to spin off the latter early this year. As of this writing, both are beating the market since they became standalone REITs in January 2022.

Transformation and strategic repositioning

On January 4, 2022, H&R announced the completion of an internal reorganization, particularly the spinoff of its enclosed shopping mall business and certain other assets. According to its chief executive officer (CEO) Tom Hofstedter, it was a significant milestone and an integral part of the REIT’s strategic repositioning plan.

The objective is to transform from a diversified REIT to a simplified, growth-oriented REIT with increased multi-residential and industrial exposure. Hofstedter said, “H&R REIT enters 2022 with a more focused portfolio, clear strategic direction, and the resources to create and surface value for unitholders.”

While repositioning and transferring 27 properties to Primaris significantly impacted the financial results in 2022, H&R realized significant growth within the portfolio. In the third quarter (Q3) of 2022, net operating income (NOI) decreased by 18.6% to $148.4 million versus Q3 2021 due to the spin-off of Primaris.

Hofstedter said, “H&R’s third-quarter results highlight the quality of our properties and the embedded growth that we are surfacing as a result of the increasing focus on higher growth assets. The distribution increase is supported by our strong year-to-date performance and outlook for the future.”

On a year-to-date basis (nine months that ended September 30, 2022), net operating income (NOI) declined 21.3% year over year to $386.8 million. Notably, net income jumped 146.6% to $961 million from a year ago. H&R president Philippe Lapointe said the strong results after three quarters in 2022 are a direct result of the repositioning plan.

Lapointe added that the REIT is well on its way to creating a simplified, growth-oriented company. At $12.20 per share (+1.41% year to date), H&R pays an attractive 4.5% dividend.

Strong operating results

Primaris’s showing since it began trading as a standalone REIT is remarkable. At $14.85 per share, the total gain from January 5, 2022, is 24.8%. If you invest today, the dividend offer of this $1.46 billion REIT is a juicy 5.52%. Its president and CEO Patrick Sullivan said, “Throughout 2022, enclosed malls across our portfolio have been experiencing a significant rebound in tenant sales.”

As of September 30, 2022, the in-place occupancy rate and committed occupancy rate of the portfolio were 90.7% and 91.7%, respectively. In Q3 2022, the net loss was $20.5 million compared to the $209.12 million net income in Q3 2021. Nevertheless, Sullivan said the operating results reflect normalizing shopping behaviour and recovering tenant sales productivity.

Steady REITs

Expect the steady performances of the two REITs in focus to continue. H&R is transforming, while Primaris is cementing its position in the retail landscape through development initiatives and remerchandising. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends Primaris Real Estate Investment Trust. The Motley Fool has a disclosure policy.

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