Jason Parker, a credit analyst at BMO Capital Markets, has added his weight to the prevailing view that the residential real estate market in some parts of the country won?t be as attractive in the near term future as it has been in the past.
Parker comes at that conclusion from analyzing the recently released financial results of Teranet? Holdings LP, a once public company that?s now owned by OMERS, but which is a reporting issuer given that it has six outstanding issues of debt securities. The now private Teranet Inc. owns Ontario?s electronic land registry system and its electronic writs system.
?Overall, we view the 2012 financial results as negative from a corporate debt perspective, in large measure because the company encountered more meaningful pressure on its top-line performance in the second half of the year due to the weakening Ontario real estate market,? said Parker in a report about the issuer that?s rated BBB (high) by DBRS and BBB+ by S&P.
For the year Teranet?s overall revenue of $251-million was 0.3% lower than 2011 while electronic property registration revenues declined by 2.1%. EBITDA as well as EBITDA margin was about the same in both years.
When commenting on the results, Parker noted that ?the RAR (the registration activity rate softened further and remains towards the low end of its historical range, which is not an ideal situation heading into a slowing real estate environment. Nonetheless, the parcel base continues to grow and VAS demonstrated a decent performance in helping to diversify revenues,? added Parker, saying that he remains ?cautions on the Ontario real estate environment over the near term given the current headwinds facing the sector.?
For the medium term, Parker is not as cautious given that the ?current low interest rate environment and the recent resurgence of aggressive pricing and competition in the domestic mortgage market will likely provide some support for real estate pricing and perhaps even stimulate activity.?
As for which part of Teranet?s yield curve to invest, Parker said that while Teranet?s bonds represent a ?decent spread pick-up? relative to Highway 407 sub debt [the actual issuer is 407 International Inc.] and higher grade Telecom debt, investors? ?will likely be exposed to greater volatility in an economic downturn.?
Parker, who was out of the office Monday, noted that ?Teranet?s longs will likely remain the domain of investors? who have done their homework on the credit.? As well Parker wrote that ?the 5s-10s pick up of over 39 basis points still presents decent relative value for the middle part of the curve and provides investors with a greater degree of liquidity comfort.?
To broaden its revenue base, Teranet has expanded. Last December it entered into an agreement in principle with the Province of Manitoba for a long-term license to operate The Property Registry (TPR) in that province. According to Parker?s report, Teranet will be granted a 30-year license to operate TPR?s Personal Property and Land Title registries on behalf of the Province. Teranet will provide an upfront payment of $75-million, as well as annual royalties starting at $11-million, which are expected to increase to $24-million by the end of the term. ?
The good news: Teranet plans to use internal sources to finance the $75-million up front payment while the expansion will be accretive and reduce Teranet?s concentration risk.
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