August 15, 2010 - 10:19pm EST by
2010 2011
Price: 9.70 EPS $1.02 $1.12
Shares Out. (in M): 30 P/E 9.7x 8.8x
Market Cap (in $M): 291 P/FCF 12.9x 11.5x
Net Debt (in $M): 450 EBIT 19 30

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TransGlobe Apartment REIT
TGA.UN on tsx ($9.70)


An investment in TransGlobe REIT is a modest risk, modest return investment in the Canadian multi-residential space through a small cap REIT vehicle (approx market cap of C$300 million).  TransGlobe ("TGA") owns 65 apartment properties comprising 8,179 suites across Canada.  The geographic breakdown of units is as follows:

Ontario - 79%

Alberta - 9%

Atlantic Canada - 10%

Quebec - 2%


Investment Opportunity

TGA went public earlier this year at $10 (all numbers in Canadian dollars) and currently trades at a modest discount to its IPO price and has a yield of 7.7%.  It trades at 11.5x 2011 AFFO whereas its comparables trade closer to 15x.  These comparables include Killam Properties and Canadian Apartment Properties ("CAP") REIT.  NAV is approx $10 and it trades at a 3% discount to NAV.  The investment opportunity lies in the shrinkage of the discount versus its peers as well as access to a large acquisition pipeline to grow NAV and AFFO.


Balance Sheet Debt Structure

TGA's debt to book value ratio is approximately 60%, which is higher than its peers by approx. 6% and is one of the reasons for the discount.  TGA also has a short-term mortgage maturity profile (3.2 years).  Though this higher leverage and shorter-term maturity profile are not a major source of concern given the defensive nature of the apartment business, it is nevertheless a modest negative.  TGA is taking steps to simplify and strengthen their capital structure.  They are in the process of obtaining secured long-term mortgage financing to pay off higher cost short-term debt (approx. financing value of $27 million).


Acquisition Pipeline

The multi-residential properties that form TGA were part of TransGlobe Investment Management (TGIM).  In order to strengthen its capital base, TGIM sold some of its properties into TGA (approx. 8,000 units).  There are another 18,000 units owned by TGIM where TGA has a Right of First Offer.  Management intends to drive earnings growth via accretive acquisitions and TGIM is a substantial source of apartment units.


Rental Revenue Upside

TGA's average in-place monthly rent is $886, whereas the average market rent is approx $912 according to management's estimates.  This represents a potential uplift of 3% to the revenue line.  Though the potential upside to NOI is modest, it is nevertheless a small positive.


Capital Expenditures

As part of the IPO process, Business Condition Assessment reports were done for each property in the portfolio.  There were no significant capital expenditures of note and recommended long-term capex is in line with management estimates.


External Management

TGA is managed externally by essentially TGIM and its subsidiaries.  Generally, the fees appear reasonable and in-line with fees charged by third-party operators.  TGIM owns roughly 19% of TGA.


Distribution Payout Ratio

TGA's yield of 7.7% represents a 95% payout ratio, implying a fully-covered distribution.



Changing government regulation, increased competition from condo rentals as well as home ownership, small market capitalization and resulting lower trading liquidity.



Discount valuation, capitalizing on the acquisition pipeline.



Discount valuation, capitalizing on the acquisition pipeline.

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