Richard Stolle interview
- When:
30 Jun 2009
- Time:
- Where:
Source: www.beursexpres.nl
A few weeks ago Canadian property fund Homburg Invest announced a number of
major changes to its corporate strategy. Last week we spoke to President and COO
Richard Stolle to gain a better insight into the proposed initiatives. One
important aspect that needed clarification was the fact that the company’s
development arm will not be divested, but spun off with shareholders taking a
pro rata stake in it. This will enable shareholders to continue to benefit from
the upward potential locked into these activities while at the same time
improving their risk profile. Of course we also asked Stolle about the property
market in general and Homburg Invest’s prospects for the future.
Key point in the strategic change is the shift in focus exclusively onto
income producing properties. That means that the company’s development
activities and the land bank will no longer belong to the listed company. The
reasoning for this is that the sum of the individual parts is worth more than
the combined entity as currently expressed in the market valuation of Homburg
Invest. Most development projects have been put on hold and no new projects are
being started due to the current reticence of banks to provide financing.
Stolle: “Banks are demanding 60-70% advance sales or rentals and that is
impossible to achieve in this market.” This has clearly weighed on the market
value of Homburg Invest.
A second aspect of the announced changes concerns the company’s plan to
simplify its equity structure and strengthen the composition of its balance
sheet. These measures are aimed at improving transparency and therefore also the
market value and growth opportunities of Homburg Invest.
Development activities
Homburg Invest has a substantial development arm which should be worth about
CAD 3 billion (EUR 1.86 billion) at maturity. This is huge when taking into
account that the value of the company’s property portfolio is CAD 3.5 billion.
In good times development projects sold by the company achieved returns of 25%
or more. Stolle: “We have always said that the development activities harbor an
enormous net asset value. This was apparent in good economic times when they
were a very stable source of income, but the value drops somewhat in tougher
times such as now, when we are unable to obtain financing. It’s only worth
something when you are actually able to develop. Now our own money is tied up in
it and it’s not showing a return.” Even though it is costing Homburg Invest
money now that projects are being put on hold, the potential for substantial
value creation remains. Nevertheless, Stolle expects banks to be more cautious
in the future. This will remove some leverage and weigh on returns. Homburg
Invest does not believe selling the development portfolio under current
conditions would be wise, particularly as property investors will be seeking
alternative forms of financing in better economic times. The company has a
strong belief in its own development projects and regions. Stolle noted that the
company will not hesitate to undertake risk development again once conditions on
the credit markets permit. Beleggings Expres estimates the current value of the
development activities at CAD 350-400 million, i.e. more than 10% of the current
property portfolio. This concerns both land positions and ongoing development
projects. Everything does, of course, still have to be valued and Stolle added
that the cost to shareholders of spinning off the activities must not be too
high. The idea is to spin off the development activities in a separately listed
company in which Homburg Invest shareholders will get a stake proportionate to
their stake in the existing company. It will be up to Homburg Invest
shareholders to decide whether they want to sell or retain the stakes. This will
help preserve the upward potential of the development activities for the
shareholders. The development activities will likely be listed, albeit initially
only on the Toronto Stock Exchange.
Homburg Invest’s development activities are spread across three regions in
Canada. Most are located in Calgary and part of Edmonton in Alberta, a province
renowned for its oil industry and vast tar sands. The second large development
area is in the city of Montréal, where the company’s development projects
include ‘Viger’, an immense project for the redevelopment of an existing hotel
with the addition of a shopping square, condominiums and an underground parking
facility. The location is stunning, bordering on Old Montréal across from the
largest hospital in the city, Stolle explained. Viger is currently on hold due
to a lack of financing but its value remains clear even though the project will
take a bit longer to complete than initially expected. Homburg Invest has also
undertaken a Montréal project at the headquarters of Canadian National, where it
has obtained the rights to build another office tower or hotel and office tower.
Finally, Homburg Invest also has projects on Prince Edward Island where it is
redeveloping an office building, hotel and shopping complex as well as building
homes in the center of Charlottetown.
Equity structure
The initiatives being taken by Homburg Invest include offering holders of
Homburg bonds the opportunity to exchange their holdings for the company’s new
‘Capital Securities’ product, a 99-year (perpetual) bond bearing an interest of
9.5%. That means, for example, that someone who invested a nominal amount of EUR
20,000 in any of the Homburg bonds would receive Capital Securities worth an
equal amount. The balance sheet value of the Homburg bonds is CAD 550 million.
Bond 1 has already been redeemed, while redemption of bond 2 is scheduled to
take place in April next year. Homburg Invest has the right to redeem the
Capital Securities after five years if the market interest rate is attractive.
Stolle: “We believe we are offering an interesting product that provides the
advantages of a higher return and more liquidity due to the fact that the
Homburg Securities will be traded on the stock markt.” The Capital Securities
that will be issued for the exchange have nothing to do with the existing issue
of Capital Securities, which are aimed at raising EUR 25-75 million and have
already raised around EUR 21 million. The two loans (Capital Securities A and B)
will, however, have identical terms and conditions. Homburg Invest is paying on
average 2.25% more interest on the Capital Securities, but this comes to only
around 1.2% net. Even though Homburg Invest is permitted to discontinue the
current issue if the proceeds fall short of the target, Stolle said he is
confident the threshold of EUR 25 million will be reached. The big advantage for
Homburg Invest is that 80% of the Capital Securities can be booked as equity,
thus strengthening the balance sheet. This is obviously also good news for
shareholders since a company with more capital has more growth opportunities.
The company’s consolidated debt ratio is currently close to 85% and this makes
its share price quite vulnerable to property depreciation. It is expected that a
stronger balance sheet will boost the share price, opening the door to more
financing opportunities. The company is targeting a debt-to-equity ratio of
50-60%, which is more in line with European property funds.
Stolle stressed yet again that Homburg Invest has a unique structure
comparable to investment funds focused on property investment. The parent
company is using equity and the proceeds from the Homburg bonds to capitalize
the underlying structures. Under the parent company there are a large number of
subsidiaries -- the so-called ‘Homcos’ -- which house the various investments.
Financing for these Homcos stands at around 62%, but this is on a full
non-recourse basis with mortgage loans at generally favorable conditions and
with funds from the Homburg bonds and equity. In this context, non-recourse
means that liability remains limited to the Homco in question -- like a kind of
private limited company structure. And that means that Homburg Invest would only
be in trouble if all 120 Homcos were to fold. This seems highly unlikely given
the company’s exceptionally good spread. While strong fluctuations in the
valuation of the properties are detrimental to the share price, they do not
affect the company’s activities. Stolle: “Even if the value of the real estate
had to be depreciated heavily again and equity were to drop 50%, it still
wouldn’t be a problem for the company. The share price would likely drop a lot
more, but we set up this construction specifically to be able to weather such a
storm. There is not a single bank out there that has control over Homburg
Invest. We have, however, reached the conclusion that a better equity structure
will help us grow. We’re talking about the corporate balance sheet structure in
this respect, for there is absolutely no need to repay the mortgage loans
attached to individual projects.”
As part it its move to modify its equity structure and increase transparency,
the company is also looking into the possibility of creating one single class of
shares instead of the two different types that currently exist. This single
class would give each share one voting right and the same dividend entitlement.
Homburg Invest currently has ‘A’ and ‘B’ shares, each with different rights. The
‘one share, one vote’ principle applies to the ‘A’ shares, while each ‘B’ share
carries entitlement to 25 votes. Richard Homburg holds most of the ‘B’ shares
and would therefore have to surrender some of his voting rights. The terms and
conditions of this change will be announced in the coming months and voted on by
shareholders. The proposed breakup of the company will also be submitted to a
shareholders’ vote even though Homburg Invest is not legally required to do so
because the matter only concerns a very small part of the balance sheet total.
The stock exchange listings in Amsterdam and Toronto will remain unchanged.
Dividend
Homburg Invest has also announced it will not distribute a dividend this year
in order to strengthen its balance sheet. The company did distribute an interim
dividend in September last year, which actually means that it is only the final
dividend that is being passed. It is a somewhat painful decision but by no means
a permanent one. Quite to the contrary actually, as the property fund expects to
become a growing real estate investment fund with a strong cash flow and sound
balance sheet positions, capable of paying a healthy dividend each year. The
company noted that this depends on market conditions, which undoubtedly refers
to credit markets and its own balance sheet positions. Stolle did, however, not
rule that a distribution could still take place, for example early next year in
the form of a final dividend for 2009, if success is achieved in sales and/or
the exchange of bonds into Capital Securities. The company is unable to provide
any guidance on this at this time. By not paying a dividend this year, Homburg
Invest is retaining CAD 40 million which can be used to repay debts. It also
prevents a dilution of profits in the event the company were to distribute a
stock dividend.
Another strategic shift concerns the fact that Homburg Invest is seeking
partners for a number of large projects in Europe and Canada. The example Stolle
gave was is the CN Central Station in Montréal which required an investment of
CAD 365 million. Homburg Invest has around CAD 130 million of its own money
invested in the project. “If we were to find a partner who wants in for 50%,
then we would be able to free up around CAD 65 million which we could then, for
example, use to repay debts,” Stolle said.
Conclusion
The share price had been picking up nicely but recent announcements have not
been received well by the market, likely mainly as a result of the decision to
forego the dividend. We do, however, believe that the measures being taken by
Homburg Invest are the right ones for shareholders who will continue to benefit
from future growth in the value of the development activities and at the same
time gain possession of a Homburg Invest share with an improved risk profile and
growth potential. In this respect the sum of the two parts should indeed exceed
the whole. The spin-off and proposed strengthening of the balance sheet has of
course yet to be realized, but the strategic logic is good. And Homburg Invest’s
real estate portfolio also looks solid, with long-term rental agreements
carrying an average term of eight years, no forced sales, and an occupancy rate
that has remained stable at the very high level of 94.1%. Homburg Invest wrote
off 7.7% on the value of its real estate portfolio this past year -- more than
other property funds – implying that its valuation is relatively conservative.
Accordingly, no further write-offs were taken in the first quarter this year.
The new structure offers good growth opportunities for the real estate portfolio
and that also applies to the development activities in the longer term. For
example, Stolle said he could imagine other parties wanting to transfer their
land and development positions to the new listed company in exchange for shares.
Up to now this has not been possible. It is also conceivable that third parties
may show an interest in certain parts of the development activities. These are
all scenarios that can create added value for the shareholder.
It cannot, however, be ruled out that the wider real estate sector may face
further drops in value and this could have a negative impact on share prices.
Nor is the rise in long-term interest rates favorable for real estate. On the
other hand, it must be noted that the Homburg Invest share is already trading at
a sharp discount to the net asset value. The principal purpose of real estate
investments is to provide stability in a portfolio due to their stable flow of
income. So one can only hope that Homburg Invest starts paying a dividend again
soon as this will surely benefit the share price. Homburg Invest is all too
aware of this and the proposed initiatives are aimed at being able to pay good
dividends in the future. Homburg Invest’s development activities are mainly
located in Alberta and this Canadian province should definitely benefit now that
oil prices have picked up. In turn, this could benefit Homburg Invest. At the
current share price we recommend holding the shares.
*Date of publication on website 30 June at EUR 4.38. By P. Schutte. Author
had no position in Homburg Invest at the time of writing.
Corporate info
Homburg Invest Inc. (HII) is a real estate investment and development
company, publicly traded on the Toronto Stock Exchange (TSX.
Development Pipeline
Homburg is developing real estate in Europe and North America.
Strategy
We use all of our management team expertise in acquisition to minimize risk
to our investors, maximize shareholder profitability and to maintain our base of
satisfied clients in each sector.
Contact
About Homburg, PR- and mediarelations, news releases, advertising and
marketingactivities.
