80% Returns And A Fair Valuation Forced A Sell On Bridgemarq
Summary
- Bridgemarq Real Estate Services was priced like it was going out of business in March.
- Q1-2020 results were quite strong, but Bridgemarq has still to feel the full brunt of the pandemic.
- Barring management fees being cut, the dividend looks increasingly endangered in 2020.
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When we last covered Bridgemarq Real Estate Services (OTCPK:BREUF), we took a bullish stance despite what appeared to be cataclysmic headwinds in the face of COVID-19. Specifically, we said,
We are upgrading this to a buy based purely on valuation. We still had to work hard to overcome the blatantly egregious fees that management is fishing out of this incredibly "easy to run" business. Yes, the climate is depressed but BREUF is trading at about 6X sustainable free cash flow. We think 8X-9X is achievable in the longer run and we are putting a price target at $10.00, about 50% higher. Dividends may be cut in the short term as management is unlikely to reduce its share of the pie.
Source: Bridgemarq: A (Rough) Gem Again At These Levels
That has worked out.
Data byBridgemarq released Q1-2020 results recently, and we had time to analyze more data from the ongoing impact of the pandemic. Based on that, we update our views on this stock.
Q1-2020
Bridgemarq reported solid Q1-2020 numbers. Revenues from both fixed and variable fees were up, and distributable cash flow was up versus the prior year.
Source: Bridgemarq Q1-2020
Real estate transactions have a long lead time, and Bridgemarq was likely less impacted than most other companies during the late March time frame. The distributable cash flow, though, did not cover total dividends paid. In the case of Bridgemarq, that number is the sum of actual dividends paid and interest on exchangeable units (which is the equivalent to dividends to a different set of holders). A key culprit in the lack of coverage was the ridiculous management fees. Between management fees and administration expense, Bridgemarq paid out 42.5% of revenues. Bridgemarq also had one of its rare downticks in realtor counts during the quarter. That is something that bears watching.
COVID-19 Relief Plan
The company announced measures to help its realtors through this difficult time and we applaud that decision.
For the period from April 1, 2020 through December 31, 2020, Royal LePage franchisees will be permitted to participate in a temporary franchise fee structure which has been designed in response to the challenging economic situation created by the COVID-19 pandemic. Under the temporary plan, franchisees will pay franchise fees to the Company calculated as follows:
Fixed franchise fees will be temporarily suspended.
Variable franchise fees for individual REALTORS® who do not participate in the commercial program will be calculated as 3% of GCI up to a maximum variable franchise fee of $2,295 for the nine-month period.
Variable franchise fees for individual REALTORS® who participate in the commercial program will be calculated as 4.2% of GCI up to a maximum variable franchise fee of $3,213 for the nine-month period.
Variable franchise fees for teams of REALTORS will be calculated as 3% of average GCI per team member up to a maximum variable franchise fee of $1,275 per team member.
Source: Bridgemarq
Prior to this, the cap on the variable fees was set at $1,400/year. Hence, this move removes the fixed fees, but Bridgemarq will collect the full revenue from realtors who do well despite this environment. While April 2020 showed extremely bleak sales for real estate, there was definitely a bounce-back as spring got going.
Activity in Canada's largest housing market warmed up in May after going into a deep freeze at the onset of the COVID-19 pandemic, and the local real estate board says the momentum should continue so long as there aren't setbacks in re-opening the economy.
There were 4,606 property sales across the Greater Toronto Area in May, according to the Toronto Regional Real Estate Board (TRREB). While that was less than half the number of sales registered a year earlier, it was a 53.2 per cent rebound from April.
Despite the sequential improvement in May after home sales cratered starting in mid-March, there's still a long way to go for the market to recover. Indeed, the activity in May was still well below the 7,256 sales registered in February pre-pandemic.
Source: BNN Bloomberg
No Fee Reduction From Management
Despite the rather unprecedented situation alongside the fact that Bridgemarq management was already taking such a huge piece of the pie, there was no reduction in this egregious fee. Instead, Brookfield Business Partners (BBU) allowed deferral of certain payments by Bridgemarq.
The Company has recently entered into an agreement with Brookfield Business Partners and the Manager to provide the Company with alternate sources of liquidity to support the Company's operations and dividends to shareholders in the short-term.
Under the terms of the agreement, the Company may defer the payment of a portion of management fees to the Manager, in certain circumstances, and payment of distributions on the exchangeable units to Brookfield Business Partners for the period from April, 2020 to September, 2020 for up to 5 years. At any point during that time, the Company can elect to pay the balance of deferred management fees or interest on exchangeable units in cash or by issuing additional exchangeable units.
Source: Bridgemarq
Dividends
Bridgemarq already had a plus 100% payout ratio, thanks to the new management agreement put through at the beginning of 2019. The company had $17.2 million in distributable cash flow and paid out over $18.6 million in dividends or dividend equivalents.
Source: Bridgemarq 2019 results
Assuming even a 20% reduction in revenues in 2020, payout ratio jumps by more than 40%.
Source: Author's estimates for 2020
We have reduced expenses by 15% above as well, although that will be difficult to accomplish as expenses are less variable than revenues. Based on all the information, BREUF has a "High" level of danger of a dividend cut on our proprietary Kenny Loggins Scale.
This rating signifies a 33%-50% probability of dividend cut in the next 12 months. Despite the exceptionally low coverage, we would only dial up the danger level further once we had visibility into Q2-2020 numbers.
Conclusion
Bridgemarq worked out as a great and timely trade. We sold our position prior to this article being submitted. At the bottom, we saw it at close to 6X worst case distributable cash flow numbers. The stock has almost doubled since then, and in this market, that is fair value to us. We may develop more optimism on this company should management change the fee structure. For now, we are neutral on the stock and downgrading it to a "Hold."
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TIPRANKS: Downgrade to Hold
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This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in BBU over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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