Bridgemarq Real Estate Services: Stock and Dividend Analysis

A quick note before we start. Parkland Corporation (TSX:PKI) has agreed to be acquired by Sunoco (NYSE:SUN). I will have many thoughts on Friday, but I just wanted to quickly say that I’m not selling my shares. At least not yet. I think there’s another shoe to drop here.

Let’s start things off today by talking a little bit about the Canadian real estate market.

Folks have been saying homes in Canada have been in a bubble for at least a decade now (longer if you’re Garth Turner). At one point I agreed, especially when it came to Toronto and Vancouver. They were just too high compared to average incomes, and were due for a correction.

But then I looked at other cities around the globe — places like New York City, London, Paris, Tokyo, Seoul, and similar — and discovered pretty much the same thing. Real estate wasn’t affordable in those cities, either. And, perhaps most importantly, those cities hadn’t been affordable in decades. 

Demand for real estate in world class cities doesn’t just come from locals. All you need is a few thousand prospective immigrants (or outright speculators) putting their cash to work in the that particular market, and it really skews things for your average citizen who is just looking for a reasonably-priced place to lay their head each night.

This phenomenon is why I’m extremely skeptical government can make a difference in housing affordability. It takes a lot of money and only benefits relatively few people. It’s not a great place for government to spend.

Put it all together, and I have no problem investing in the Canadian housing market. I might think Toronto or Vancouver are overvalued — even going as far as saying I wouldn’t buy property there if I resided in either of the two cities — but I also think shorting either is a bad idea.

I continue to own shares of Canadian banks, and residential REITs, and other companies with at least some exposure to real estate.

Let’s take a closer look at another real estate-related Canadian stock, Bridgemarq Real Estate Services (TSX:BRE), which has changed quite a bit in the last year or so. Let’s take a closer look.

The skinny

Bridgemarq Real Estate Services is the owner of various real estate brokerage assets in Canada. Its main brand is Royal LePage, but it also owns the Proprio Direct, Via Capitale, Les Immeubles Mont-Tremblant, and Johnston & Daniel brands.

Royal LePage operates across the country, while Johnston & Daniel has carved out a niche focusing on the higher end market in Southern Ontario. The other brands are focused on the Quebec market.

Royal LePage is the real beast here. It was founded by A.E. LePage in 1913, a man who wanted to focus more on service. It has more than 20,000 agents and some 670 offices across Canada. The company has the number two market share overall in the country, and it’s the leader in about 200 cities and towns. It also has the most trafficked real estate company website in Canada.

Royal LePage is strong pretty much across the country, and is even respectable in Quebec. When you combine its exposure in La Belle Province with Via Capitale — who is a formidable player itself — and fellow Bridgemarq brand Proprio Direct, they rival Re/max as the largest player in the province.

Between all those brands, the company’s various franchisees participated in approximately 30% of all home resale transactions in the country in 2024.

Bridgemarq was originally called Brookfield Real Estate Services after Cushman and Wakefield acquired the Royal LePage brand all the way back in 2005. It was almost immediately spun out and listed on the TSX as an income trust (remember those?), and the stock hasn’t done much of anything since. Shares cratered during the 2008-09 and 2020 bear markets, but only temporarily. Besides those two big moves, the stock has pretty much traded between $12 and $18 for 20 years.

We’re flirting with the $14 level today, which isn’t particularly cheap nor expensive.

The big reason for this is the vast majority of earnings get distributed out to shareholders via one of the most generous dividends you’ll see on the TSX. The current yield is 9.4%, and it has been maintained for quite a long time. It’s one of those 10%(ish) dividends that is actually pretty sustainable.

If you reinvested those dividends back into Bridgemarq shares, you would’ve massively outperformed the TSX.

For years Bridgemarq quietly existed, operating an asset-lite business model. Rather than owning the brokerages directly, the company owned the trademarks. Fees were originally collected on a per-transaction basis, with the agent paying the parent every time they made a transaction. Those per-transaction fees still exist today, but the company has pivoted to a monthly fee model. Essentially, they want to get paid whether a Realtor sells a place or not, which does create a little more certainty.

There’s a small chance that a brokerage jumps ship and flies different colours when the franchise agreement expires, but for the most part these folks renew. The Royal LePage brand is a good one.

But the company recently made one of those transformative acquisitions that should make y’all nervous. I’ll explain it in a second, but first here it is in chart form.

One of those years is not like the others.

The business transformation started in December, 2023, when the company announced two transactions:

1. It would acquire real estate brokerage assets in Ontario, Quebec, and B.C., which included large Royal LePage franchises in Toronto and Vancouver

2. It would acquire the company’s outside manager, giving a one-time payment in exchange for getting rid of the fees paid on an annual basis

Here’s a snapshot of the new brokerage assets.

We’ll note that Bridgemarq acquired the brokerages from part of Brookfield (Brookfield Business Partners), which isn’t exactly an arm’s length transaction. Especially since another arm of Brookfield was the company’s external manager.

The net impact of the two transactions is the public owns a 61.5% interest in the company, and Brookfield owns the additional 38.5%.

Like a lot of transactions, this one has both pros and cons. On the plus side, this gives the company the platform needed to start rolling up brokerages across Canada. It gives potential exit liquidity for current franchisees, and prices to acquire them should be relatively attractive. The real estate brokerage model is also pretty good, although it does suffer from some cyclicality. The parent was able to protect itself from real estate busts by getting more monthly fees from agents. Brokerages, meanwhile, are much more dependent on sales.

On the negative side, we went from this asset-lite business that only had to sit back and collect fees to something much more actively managed. It adds more cyclicality into things, and increases exposure to both the Toronto and Vancouver markets. The deal was paid for by issuing more than 2.9M shares to Brookfield, which puts pressure on the dividend if these brokerage assets don’t perform.

2024 was the first year of the new Bridgemarq, and results were mixed. EBITDA was about 10% higher than 2023, and cash flow from operating activities was about 25% higher. But that doesn’t account for any of the dilution used to pay for the deal.

Basically, it goes like this. Before the deal closed, in 2023, there were 9.483M shares outstanding that were owned by the public, and 3.32M shares owned by Brookfield. After all this there are still 9.483M shares owned by the public, but 6.25M shares owned by Brookfield.

The dividend remains the same, but since there are more shares outstanding, it creates a bigger dollar value heading out the door, as we can see with the 2024 financial statements.

So, basically, we put it all together and the company earned $16.8M in free cash flow in 2024. That was slightly below 2023’s number of $18.1M, but there’s reason to be optimistic. Q4 had a few one-time costs from the brokerage division that won’t be repeated.

Meanwhile, the stock has a market cap (this excludes the Brookfield shares, which are classified as debt) of $134M. So we’re trading at about 8x free cash flow. That’s cheap, especially considering there is some upside potential.

The opportunity

The opportunity here is these guys suddenly have a lot more leverage with the Canadian real estate market. It’s not just an income play any longer; there’s growth potential here.

There are dozens of Royal LePage brokerages that can be steadily acquired going forward. There’s also potential to put Royal LePage brokerages in towns that don’t already have one — although there aren’t so many of those out there. The brand is already pretty well established.

Growth will also come whenever the Canadian real estate market booms again. Both the Toronto and Vancouver markets are a little bit tepid right now, with particular weakness in the Toronto condo market. Owning the underlying brokerages comes with nice operating leverage — when those markets recover and folks really start getting excited about buying again, earnings will grow nicely.

I also like the exposure to Quebec here. The Montreal market is the more reasonably priced of the three largest in Canada, which I think is healthy for the long-term. I also like the multiple brands in that market.

Furthermore, there’s potential to acquire other brands. Canada has a fairly fragmented real estate brokerage marketplace. For instance, Diversified Royalty Corp (TSX:DIV) owns Sutton Group, which has about 6,000 agents across Canada. Sutton isn’t the only one of these, either. There are a few that have a presence across multiple provinces, with others more local in nature.

Basically, this stock went from a boring income play to an income play with some growth attached. But the growth will be a little bit lumpy and cyclical, and therefore isn’t getting a lot of love from the market.

Dividends and buybacks

Bridgemarq isn’t big on buybacks, choosing instead to pay out the large dividend. On the plus side, it hasn’t been a serial issuer of shares either. Besides the dilution needed to buy the brokerage assets and get out of the management agreement, shares outstanding stayed the same for pretty much 15 years.

Onto the dividend, which has suddenly gotten a little trickier.

The good news is these guys have paid steady dividends for years now. Records are hard to find, but as far as I can tell the payout was maintained through the 2008-09 period. The only dividend cut was in 2011 when the company converted from an income trust to a corporation, and you can’t blame them for that. Every income trust cut the payout.

As it stands today, the payout is pretty reasonable. There’s enough free cash flow to cover the dividend, the dividend on the Brookfield shares (which is classified as interest), and there’s a little bit left over.

Here’s a snapshot of the 2024 results, and that even included the aforementioned weak Q4:

That gives us a payout ratio in the ~80% range, which is nice. There’s a little wiggle room there.

But the new company has more exposure to underlying real estate operations, which does make the payout a little less stable than before. The company went from mostly collecting monthly fees from agents to being more exposed to transactions. There’s some risk there. It should result in more long-term upside, but at the expense of some short-term volatility.

There’s a chance that short-term volatility could cause a dividend cut, although at this point I think the dividend is still pretty safe. We’d have to see a pretty significant downturn in the real estate market. That’s always possible, but I don’t see it happening anytime soon.

Dividend security: Medium
Dividend growth potential: 0%

The bottom line

Let’s summarize. On the bull side, we have:

• A growth platform for the first time in the company’s history

• Strong underlying brands

• It has shed an expensive management contract and retained key managers

• The dividend is generous and fairly safe

And on the bear side, we have:

• A business that is more exposed to the general whims of the real estate market

For years, Bridgemarq was basically a bond proxy that delivered generous dividends. Growth really wasn’t there, but returns were quite good if you bought when the price was low and if you reinvested your dividends.

You’re still getting that, but the business is slightly different today. There’s that brokerage growth arm sort of stapled on top. This should be a good thing long-term, but it could be a bumpy ride. There’s a risk that some of those bumps might be enough to force a dividend cut, but at this point that doesn’t seem super likely.

If you’re looking for a little extra yield in the portfolio, you could do a whole lot worse.

Your author has no position in Bridgemarq Real Estate Services. You can view his portfolio here. Nothing written above is investment advice. It is for research and educational purposes only. Consult a qualified financial advisor before making any investment decisions.