[MONTREAL, QE] - Homburg Canada Real Estate Investment Trust is making the largest acquisition in its history as the property owner looks to further tap into Calgary's energy-fuelled growth.
The Montreal-based trust said Friday it's buying a 50 per cent stake in Calgary's Scotia Centre office building for $116 million.
Scotiabank will keep the remaining ownership of the 42-storey, 55,000 square-metre downtown tower and mall and provide $69.6 million in mortgage financing in the deal. Homburg will pay the rest in cash.
“We think this is a really exciting opportunity for the REIT because we think that Calgary is one of the premier office markets in the country and over the last year has experienced a significant turnaround,” chief executive Jim Beckerleg said in an interview.
The building has been the bank's longtime headquarters in the city and will remain a tenant.
Each partner retains first rights to increase their stake, but Beckerleg said Homburg is content to remain a long-term partner with Scotiabank.
The transaction is expected to close by mid-month. The bank had marketed the building through CB Richard Ellis Group, the world's largest commercial real estate services firm in terms of revenue.
Higher oil prices have helped to turn around the economy of Alberta's largest city over the last 18 months. It also has prospects for further growth once moribund natural gas prices recover, Beckerleg added.
In addition to being its largest transaction, it is also the first in Calgary since the trust went public last year.
Armed with $98 million from a recent bought deal financing, Beckerleg said Homburg has sufficient liquidity to pursue other acquisitions.
The REIT has $1.2 billion of assets. It plans to grow by at least 10 per cent a year and should reach $1 billion market capitalization in about three years, he added.
Its immediate focus is on office and retail opportunities in Montreal, Halifax and Calgary, where it already owns nine mostly office buildings. But it eventually foresees expansion to other Canadian cities, including Toronto.
In February, it completed a $100 million retail acquisition in Quebec. But the Scotia deal is its first new project of the year.
Beckerleg said it is looking for office and retail opportunities ranging between $25 million and $100 million.
“I don't exclude things outside of that but that would be our sweet spot.”
In addition to location, Homburg is looking for properties with diversified lease maturities unless they are marquee properties such as its CN property in Montreal or Penwest in Calgary.
The Scotia Centre is 96 per cent occupied, with larger tenants including Scotiabank, Gowlings and Shaw Cablesystems.
Jeff Roberts of Desjardins Securities said the acquisition is positive even though a couple of new largest buildings may constrain market rents in the short-term.
“But we believe that in a few years, Calgary market rents will increase notably,” he wrote in a report.
“Considering that average rents in Scotia Centre are just moderately above market rents, with little turnover in the next three years, we believe that Homburg may generate significant rental upside from the building in a few years.”
Roberts added that the acquisition again demonstrates management's ability to secure “quality properties in accretive transactions and to diversify the portfolio.”
Homburg Canada REIT owns a portfolio of Canadian income-producing commercial properties, mainly retail and office, as well as 1,725 multi-family residential units.
Its units gained four cents at $12.22 in afternoon trading on the Toronto Stock Exchange.