December 10, 2018

TransGlobe Apartment Real Investment Trust (TGA-U)

The TransGlobe Apartment Real Investment Trust (TGA-U) is perhaps the most profitable of all the residential-based income trusts in Canada.  If you are unfamiliar with the difference between an income trust and a corporation, the main distinction is that a corporation has to pay a business tax on the money it makes before either taking that money and re-investing it in the company, or paying it out shareholders in the form dividends.  Income trusts on the other hand, get to distribute their profits before they pay any taxes.  This allows owners (called unit holders as opposed to shareholders) to enjoy much higher yields than the vast majority of corporations could ever dream of offering.  As of January 1st, 2011, real estate is the only sector within Canada that is allowed to take advantage of these tax rules, and TransGlobe has definitely used these rules to their boost their returns.

 

TransGlobe (TGA-U) now owns almost 22,000 residential suites across Canada, spread out across about 150 properties.  They are very geographically diversified, and are very focused on finding the best deals in the residential market.  Their portfolio contains high-quality apartments and townhouses that are located in high-demand urban centres.  They are primarily based out of Alberta, Ontario, Quebec, New Brunswick and Nova Scotia.  TransGlobe’s growth strategy revolves around expanding their footprint in markets where they have already established a proverbial beachhead.  By acquiring properties where a management and administrative infrastructure is already in place, TransGlobe (TGA-U) can maximize profits and value for unit holders.

 

A good recent example of the execution of this growth strategy is the Sept.16, 2011 acquisition of 23 apartment properties in Eastern Canada totalling almost 1300 suites.  The holdings are located in and around the regional hubs of Dartmouth, Halifax, Moncton, and Fredericton.  These purchases were the perfect addition to the existing properties the trust already owns in the area.  Transglobe paid approximately $65 million for the portfolio of properties.  Kelly Hanczyk, the CEO of TransGlobe (TGA-U), commented, “We are pleased to be strengthening our presence in Nova Scotia and New Brunswick; strong rental markets with solid upside potential… We expect to generate strong increases in cash flow over time as we benefit from the significant operating synergies available by consolidating this new portfolio into our existing and highly effective property management infrastructure.

 

When it comes to comparing Canadian REITs, the most important comparison point is the dividend yield because of the appeal as an income-producing investment vehicle.  While TransGlobe (TGA-U) will likely see its share of capital appreciation, there is little doubt that its most attractive feature is its extraordinary 6.8% dividend yield.  It is currently trading at around $11 per share and has shown little volatility over the last few years.  The market capitalization of the trust is just over $400 million.  There is no news on the horizon about the Canadian government changing its stance towards the advantageous tax treatment of REITs, so I would argue that this competitive advantage should mean stable monthly dividend checks for the foreseeable future.  Instead of purchasing a single revenue-producing real estate property, why not invest your real estate-exposure dollars in the hottest urban markets across all of Canada?