It looks like H&R Real Estate Investment Trust (CA:HR.UN) is ready to play nice with activist investor K2 Principal Fund L.P. and K2 & Associates Investment Management Inc., with the April 25 announcement that the parties have reached a support agreement.
The activist investor had pushed for the nomination of four trustees at the REIT’s June 15, 2023, meeting of unitholders. As part of the agreement, K2 has withdrawn its slate of nominees.
Instead, it has agreed to support the nomination of two independent trustees to the board, increasing the board size to 10 seats.
With HR.UN stock down nearly 3% year-to-date and off 43% over the past five years, it is unlikely that the move will do much for the REIT’s share price.
Move Faster
K2 first approached H&R at the beginning of March, informing the REIT that it supported its transformational strategy launched in 2021. However, it indicated to the company that it felt the process needed to be moving faster.
When the REIT began its transformation in October 2021, it generated 48% of its net operating income from office real estate and 29% from retail. The new strategy proposed investing 75% of its real estate portfolio in U.S. multifamily properties and 25% in industrial real estate in Canada’s three major cities: Toronto, Montreal, and Vancouver.
As part of the new strategy, the REIT planned to sell $4.8 billion in assets. To date, it has sold less than one-quarter of those assets. (All figures in Canadian dollars unless otherwise specified.)
On March 13, the REIT announced the appointment of Donald Clow to the board, serving as H&R’s lead independent director. Clow was the CEO of Crombie REIT (CA:CRR.UN) for almost 14 years until he retired on Feb. 28.
“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 Globe and Mail reported the fund’s comments.
Slate of 4
Early in April, K2 sent a letter to H&R indicating that it would nominate four trustees at the June meeting. All four had business and finance backgrounds.
The two parties continued to talk through April, leading to the announcement earlier this week.
The two appointees to the board are Lindsay Brand and Leonard Abramsky. Brand was most recently chief investment officer of Dream Unlimited Corp. (CA:DRM), a developer of office and residential real estate in Toronto and elsewhere. Abramsky founded Dunloe Capital Group, a real estate investment company. He currently serves on the First Capital REIT (CA:FCR) board.
“As a significant unitholder of H&R, we appreciate the Board and management’s willingness to engage in a constructive dialogue,” said Shawn Kimel, K2’s chief investment officer and chairman. “We welcome the addition of Mrs. Brand and Mr. Abramsky to serve on the Board of Trustees and we will continue to closely engage with management and the Board of Trustees to drive unitholder value.”
While adding Brand and Abramsky provides additional real estate experience to H&R’s board, it’s hard to imagine this move doing much for the stock.
Where This Leads
Shareholder activism is on the rise in Canada, with K2 moves toward H&R REIT just the latest example. According to The Globe and Mail, there have been 35 proxy contests launched since July 2022. That’s more than happened all of last year.
“This really is the age of shareholder activism,” Kai Li, a finance professor at the University of British Columbia’s Sauder School of Business and the Canada Research Chair in Corporate Governance, told the newspaper. “Management teams in Canada should not be complacent, because investors are really chasing returns.”
One of the activist investors’ most important tools for change is shaking up, or refreshing, corporate boards. K2 pushed for four of its own but got only two, and H&R mutually agreed.
“Upon election of Mrs. Brand and Mr. Abramsky, all eight of the REIT’s independent trustees will have joined the Board within the last three years, and 40% of the Board will be comprised by women,” stated H&R’s April 25 support agreement press release with K2.
As a result of asset sales in 2022, H&R reduced its debt to total assets by 260 basis points, to 44.0% as of Dec. 31. It will continue to chip away at its leverage ratio in 2023.
Adding two independent directors does little to change the narrative. Investors remain cautious about H&R’s transformation, not necessarily the speed at which it occurs.
K2’s activism does little for H&R’s share price.
This article originally appeared on Fintel
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