Bridgemarq Real Estate Services Inc. (BRE) Earnings Call Transcript & Summary

Good morning. My name is Christina, and I would like to welcome everyone to the Bridgemarq Real Estate Services Inc. 2020 First Quarter Results Conference Call. [Operator Instructions] I would like to introduce you to Mr. Phil Soper, President and CEO of Bridgemarq Real Estate Services Inc. Mr. Soper, you may begin your conference call.

Thank you, Christina, and good morning, everyone. With me today is our Chief Financial Officer, Glen McMillan. We appreciate you joining the call. I will begin with a brief overview of the company's first quarter results and business updates. Afterwards, Glen will discuss our financial results in more detail, and I'll conclude by providing some remarks on the operational highlights, company updates and market developments. Following our remarks, both Glen and I would be happy to take your questions. I want to remind you that some of the remarks expressed during this call may contain forward-looking statements. You should not pay -- place reliance on these forward-looking statements because they involve known and unknown risks and uncertainties that may cause the actual results and performance of the company to differ materially from the anticipated future results expressed or implied. I encourage everyone to review the cautionary language found in our news release and in our regulatory filings with respect to forward-looking statements. All of these documents can be found on our website and on SEDAR. Also on today's call, we will be making references to the impact of the COVID-19 pandemic on the real estate market of the company. This pandemic started to negatively impact our business near the end of the first quarter and is continuing to negatively impact us in the second quarter. It is important to note that due to the uncertainty in the duration and the magnitude of the medical and financial crisis, the company cannot reasonably determine the impact to the company's results on operations or financial position. The company had a strong first quarter, which was the result of a vibrant real estate market. The market did see a sharp decline in sales in the second half of March, when social distancing and mandated shelter-at-home measures were introduced across Canada. However, the strength of the quarter leading up to those measures produced healthy financial results to begin the year. Revenue in the first quarter was up 10% over the first quarter of the previous year, rising to $11.1 million. The strong national market was a primary driver of the increase as well as the increase in franchise fees, which were announced last year and took effect on January 1. The company's network grew marginally during the quarter to 19,120. The Board of Directors has approved a dividend payable on June 30 of $0.1125 per share to shareholders of record on May 29. This indicates an annualized dividend of $1.35 per share, which is consistent with 2019. Today, the company announced that it has taken supportive measures to protect business continuity and support distributions to shareholders. These measures include entering into an agreement with Brookfield Business Partners L.P., the company's largest investor with a 28% stake in the company, and Bridgemarq Real Estate Services Manager Limited, the manager of the company, to support the company's liquidity at this time of uncertainty. Under this -- the terms of this agreement, the company can defer management fee payments and distributions on the exchangeable units held by Brookfield Business Partners from April to September. There is an option to extend this deal to December 2020, subject to mutual agreement. Amounts deferred under this agreement are noninterest-bearing and are due 5 years from the date of the deferral. At any point during that time, the company can elect to pay the deferred balances in cash or by issuing additional exchangeable units at company's option. These accommodations increase Bridgemarq's financial flexibility to manage through a period of uncertainty and expected market disruption, while protecting distributions to existing shareholders in the short term. And with that, I'd like to turn the call over to Glen for a look at our first quarter financial performance.

Thank you, Phil, and good morning, everyone. As Phil mentioned, revenue in the first quarter was up 10% over last year, rising to $11.1 million. Net earnings for the quarter were $20.1 million or $0.05 per fully diluted share compared to a loss of $8.4 million or $0.88 per share for the same period in 2019. The primary driver of the significant improvement in net earnings is the determination of the fair value on the exchangeable units issued by the company. The spread of COVID-19 contributed to a substantial fall in equity markets, which saw the company's share price drop to $8.43 at the end of March. The valuation of the exchangeable units is a direct function of the market value of the company's restricted voting shares. The drop in the share price drove a significant reduction in the liability associated with those exchangeable units, triggering a large gain in the company's earnings. Distributable cash flow during the first quarter was rose 11.4% to $3.9 million compared to $3.5 million in the first quarter of 2019. The increase was driven by higher revenues, partly offset by higher management fees. As Phil mentioned earlier, at the close of the second quarter, the network was comprised of 19,120 realtors, up 9 compared to the end of last year. These realtors operated out of nearly 700 locations across Canada. Phil also noted that our largest investor, Brookfield Business Partners, has provided us with a deferral on our management fees and our payment of distributions on the exchangeable units on very favorable terms. This accommodation increases Bridgemarq's financial flexibility to manage through this period of near-term uncertainty and expected market disruption, while protecting dividends to existing shareholders in the short term. In the first quarter, the Canadian real estate market closed up 30% compared to Q1 of 2019. The increase was driven by a 15% increase in unit sales and a 13% increase in average selling price. The total transactional dollar volume during the first quarter was just under $58 billion. The Greater Toronto Area saw significant year-over-year improvement during the first quarter, rising 41% to $17.7 billion. The primary driver was a 23% increase in unit sales compared to Q1 last year, while the average selling price increased 15%. And just as a point of reference, the Greater Toronto Area represents approximately 30% of the national housing market. The Greater Vancouver market closed up 54% at $6.5 billion in the first quarter compared to last year, driven by a 45% increase in units sold and a 6% increase in average selling price. In the Greater Montreal Area, the market closed up 25% at $6 billion compared to the same period last year, driven by a 13% increase in units sold and a 12% increase in average selling price. Phil will now provide additional insights into the markets and an update on our operations.

Thank you, Glen. Since mid-March, unit sales have significantly declined as governments from coast to coast enacted emergency measures to combat the spread of the virus. These measures, which included the implementation of travel bans, self-imposed quarantine and social distancing, have had an immediate negative impact on the Canadian economy and, of course, the real estate services industry. Recent information released from real estate boards servicing some of Canada's largest markets indicate activity in April to be as much as 70% lower than April 2019. All provinces have deemed real estate services an essential service with the initial exception of Quebec. However, on April 20, Quebec revised its list of essential services to include real estate services. So during this time, since the beginning of the pandemic, our network has been able to serve buyers and sellers who have urgent need to transact and urgent need to find or sell real estate. This includes those who have found themselves in financial hardship or buyers who have sold before purchasing their next home. Recently, provinces have begun to unveil plans for more relaxed measures and additional business activity as long as this can be conducted in a safe manner. At this time, the company cannot forecast when buyers may return to the market in significant numbers, but we have already begun to see an uptick in volumes, particularly in our secondary markets. Many of the Canada's largest urban centers have been facing inventory shortages, which contributed to the 13% year-over-year average price gain in Canada during the quarter. Low inventory remains a challenge throughout the pandemic. However, once the market reopens for all consumers, demand is expected to be lower than it was in pre-COVID-19 levels as Canadians become concerned with the economy and their own job security. On previous calls, I have commented on Canada's employment numbers as a leading indicator of the real estate market. While the impact of COVID-19 on the labor market has been profoundly negative, supportive measures from the federal government and provincial governments, including support for furloughed workers and small businesses, have absolutely mitigated some of the damage. The company moved quickly to ensure we would maintain adequate liquidity through these uncertain times and maintain our dividends in the short term, with significant support from Brookfield Business Partners. To support and preserve the company's network of realtors, the company and the manager took immediate action. On March 27, 2020, the company announced a temporary fee relief program in an effort to minimize the potential deterioration of the network at a time when realtors are expected to see an unprecedented drop in their transaction volumes. The company was pleased that the pandemic fee relief program was very well received. We expect that the plan positions the company to maintain the strength of its network in the short term and beyond. The leadership of the company's brands immediately recognized the network's new and evolving needs to navigate a challenging and unprecedented business environment. The company enhanced its communication platform to maximize network engagement and to provide training to support the network to be productive and successful when the impact of the pandemic subsides. While the need for these new tools became an immediate priority for the company, we also recognized the need and growing demand for highly anticipated and scheduled program of game-changing technology, training and marketing communication initiatives. On previous calls, I mentioned our development -- planned deployment of rlpSPHERE, the industry's most advanced next-generation digital real estate platform. We felt that more than ever, a cloud-based, AI-driven real estate operational platform that increase the productivity of our frontline practitioners, no matter where they were working, office or field, was absolutely necessary. With that, we decided to forge ahead. I am pleased that rlpSPHERE has passed its final stage of testing and has begun -- and the phased rollout across Canada has begun. The need for this digital ecosystem has been heightened by the pandemic and this product can reduce cost to the franchisee as well as increase the ability of the frontline realtor to service their client as opposed to dealing with administrative processes. rlpSPHERE is designed to seamlessly bring together all the tools and systems that a national firm and franchisor like us provides the frontline agent so that they can more easily run and grow their business. It is a market differentiator that is expected to attract, and of course, retain top performers in the industry. Historically, during down markets, we do see what we call a flight to quality as realtors realize the need to invest in their tools and services to remain competitive among the shrinking pool of customers. As a result of our brand's enhanced offering during this pandemic as well as our reputation of delivering superior tools and services through best-in-class technology and training, the company is expecting more interest from realtors and brokerages outside of our network. In conclusion, the strong first quarter leading up to the COVID-19 pandemic has resulted in a 10% year-over-year increase in revenue and an 11.4% increase in distributable cash flow. The company has taken supportive measures to protect business continuity and support distributions to shareholders, including entering into an agreement with Brookfield Business Partners L.P. and Bridgemarq Real Estate Services Manager Limited to defer the payment of a portion of the management fees and distributions on exchangeable units. The company's brands have enhanced their tools and services to help the network navigate business challenges brought on by COVID-19. In addition, the company is committed to delivering rlpSPHERE across Canada in 2020 to increase productivity and reduce costs to our brokerages and realtors. Lastly, before opening this call up to any questions, I want to take this opportunity to thank our staff, our brokers and, of course, our frontline realtors and administrators. Their collective and collaborative efforts have made it possible to continue to deliver best-in-class real estate services to our highly valued clients transacting in a very difficult and stressful time. It is an honor to work closely with such professional and hard-working individuals, who ultimately have helped the company manage our business effectively and safely through this challenging time. With that, I will turn the call back to our operator and open up the call to questions.

[Operator Instructions] And we do have a question from [ Andrew Kucey ] from CIBC.

You're emphasizing quite a bit that the dividend will be sustained in the short term. Can you describe sort of a potential scenario where you may have to relook at the dividend payment rate? I know you've pushed out cash needs through the agreements with Brookfield and BBU. Could you describe the potential scenario where you have to relook at that dividend?

Yes. The uncertainty caused by the pandemic has caused us to take this action with BBU's support, which we are very grateful for. And it should get us through to a period of more normal real estate market activity. Coming into the pandemic, household formation and the demand for real estate services was consistently strong across the country. We were even seeing positive changes in some of our energy-producing regions, which have had difficult time for some 5 years. And the fundamentals of that demand haven't changed, the high degree of household formation with the millennial generation leaving parent's homes or moving in from rental to ownership status and the new Canadians that have arrived over the last 7 years are rapidly moving into homeownership. The other issue was -- or the other fundamental driving factor was the -- essentially, a structural housing shortage in many of our markets across the country. So we have a demand that has exceeded supply for some time, which tends to -- which does support housing prices. So we believe the combination of the mortgage deferral program, the bridging programs on people's incomes, the support for businesses to rehire employees, landlord tenant support programs, all of these together should provide a path to a return to more normal housing markets and get us through this crisis. But of course, if the things are different in the future, if we've underestimated the severity of the economic decline, we'll have to look at everything associated with our finances in -- from top to bottom. And I think that includes our expenses and our dividends and everything. Glen, do you have anything else to add in that regard?

No, Phil. I think you summed it up pretty well. Andrew, I think as everybody can appreciate, there is a very high degree of uncertainty going forward. So it's difficult for us to speculate as to what possible scenarios could happen or what possible scenarios could impact our policy and practices with respect to dividends. But I think the deal that Brookfield has decided to support allows us to defer the payments on the exchangeable units as well as payments of management fees from April until September, and that, that deferral is for a period of up to 5 years at no interest. So very generous terms that we think is sufficient over that time line to allow us to continue to support the dividends to shareholders in the short term.

That's great. So we're sort of looking at -- shouldn't we talk about short term? You've got an agreement until basically September for a potential rebound in activity. And then in depending what the world looks like September onward, you sort of have to go from there?

Yes. There is a provision in the agreement that allows for extension to December by mutual consent. But right now, we're only -- they're only committed until September.

There are no further questions at this time.

Thank you very much, operator. As previously announced, the company's Annual Meeting of Shareholders, which was originally scheduled for May 2020, has been delayed until a later date. This was permitted in connection with the Government of Ontario's cessation of nonessential business activities and the company's commitment to combating the potential spread of COVID-19 through minimal human contact and social distancing. We will issue a press release once the new meeting date has been confirmed. With that, I'd like to thank everyone once again for participating in today's call, and I look forward to updating you again in the next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.