March 23, 2019

Homburg Canada (HCR) Real Estate Investment Trust (REIT)

The Homburg Canada (HCR) Real Estate Investment Trust (REIT) is very typical of the Canadian Real Estate Investment Trust industry.  It owns a variety of properties under a Trust structure.  For those that are unaware of why there are so many Trusts in the Canadian real estate world, the reason is that trusts get preferential tax treatment relative to corporations.  Whereas corporations and the vast majority of businesses have to pay a business tax before they either re-invest profits, or distribute them to shareholders, trusts get to distribute profits before this business tax stage (thus avoiding it entirely in the eyes of most unit holders).  This option used to be available to all sectors of the Canadian economy, by the tax loophole was eliminated for most Canadian companies as of January 1st, 2011.  Homburg has a portfolio that contains 127 properties and has roughly 8 million square feet of commercially leasable area.  Eighty-four of these are income-producing commercial properties in the retail and office space divisions, while 43 are multi-family residential properties (1,725 units) that are located across Eastern Canada.  Homburg (HCR) is based out of three separate centers in Montreal, Halifax and Calgary and employs over 200 people across Canada.

 

Like most of the real estate investment funds across Canada, Homburg has three principal objectives.  The first is to provide unit holders with a study dividend income that is distributed in an extremely tax-efficient manner.  The second is to enhance the value of assets through proactive management.  The final objective is to expand the Trust’s asset base through internal growth strategies and accretive acquisitions.  This straight forward setup is what makes REITs so profitable and such an attractive investment for investors looking for yield.

 

Recently, Homburg (HCR) has added to the retail portion of their portfolio by purchasing multiple shopping properties in Quebec and Ontario.  The Trust has also been active on the other side of the ledger as well, as they continue to sell off some of their isolated residential holdings.  Homburg paid about $115 million for the 29 separate shopping centres, while netting $65 million from the sale of 42 residential buildings.  The Homburg REIT (HCR) now owns 728,000 square feet of retail floor space.  Amongst these holdings are the notable commercial properties of Montreal’s CN Central Station, Scotia Centre in Calgary, and the Bathurst Mall in New Brunswick.  The corporate gian Jean Coutu group is the main tenant in 24 of the 29 shopping centres and figures to add prominently to the value of these properties.  Other tenants include mega-brands such as Metro, Shoppers Drug Mart, Dollarama and IGA.  Mr. Beckerleg, the Preident and CEO of the Trust stated, “With this acquisition, the REIT continues to grow its retail footprint in Quebec, and particularly in Montreal.”  It has become fairly clear at this point that the company is headed in a more retail-oriented direction, perhaps fearing a bit of a collapse in several urban-residential markets.

 

The Homburg Real Estate Investment Trust (HCR) is trading at about $12 a share.  It’s annual dividend of $.95, gives the trust a 7.6% dividend yield.  While I do not believe that the Homburg REIT is overly flawed (indeed, its partnership with Jean Coutu suggest otherwise) I would have a hard time recommending it against some of the other diversified REITs in Canada.  I’d personally like to wait to see what the Trust’s holdings will look like in a couple years after they go through this residential-to-retail conversion that they are currently undergoing, before taking a large position.