Ontario’s Golden Horseshoe is one of North America’s fastest growing cities. N
In 2006, Ontario adapted the GNG project. This video explores the development of Toronto and surrounding municipalities.
In 2006, Ontario adapted the GNG project. This video explores the development of Toronto and surrounding municipalities.
If you understood a business perfectly and the future of the business, you would need very little in the way of a margin of safety. SO, the more vulnerable the business is, assuming you still want to invest in it, the larger margin of safety you’d need. IF you’re driving a truck across a bridge that says it holds 10,000 pounds and you’ve got a 9,800 pound vehicle, if the bridge is 6 inches about the crevice it covers, you may feel okay, but if it’s over the Grand Canyon, you may feel you want a little larger margin of safety.”Warren Buffett, 1997 Berkshire AGM
Over the past few days, I’ve been posting the first quarter operating results of top ten REITs from our property portfolio.
Most of the REITs have reported satisfactory results. They’ve all survived the pandemic and now they’re emerging as expected. Revenues, Net Income, FFO (Funds from Operations), SPNOI (Same Property Net Operating Income) and Occupancies were up for the most part. Outstanding rents have been recovered. Most are proceeding with further development of their pipelines.
A couple of exceptions bear note. Figures at H&R REIT were a bit abnormal. Last Summer, H&R REIT sold the Bow to affiliates of Oak Street Real Estate Capital. “The Bow” is one of the tallest buildings in Western Canada and it was a crown jewel in H&R’s property portfolio. Then, they spun off a large division of their enclosed shopping centres (including Orchard Park Shopping Centre). Those properties now trade as Primaris REIT (listed on the TSE under PMZ.UN). As a result, H&R’s results weren’t “normalized.”
Also, Allied Properties REIT – which focuses on Office properties had occupancies dip below 90%. Not everyone is in a hurry to return to the office. But, Allied’s brick and beam properties appeal to younger professionals – especially in the digital, high tech and telecommunications sectors. They’re desirable locations to work and they should start to see occupancies return closer to capacity.
Hence, I was curious. Given that most operating results have been “normalized,” how was the marketplace valuing these REITs compared to their book value /unit – a figure that’s meant to represent current or fair market value (FMV).
The table below lists the results of my inquiry. On Wednesday, May 18, all of our REITs were all selling below book value. Theoretically, the properties could be sold into the market place and unit holders would realize a gain on the difference between the REITs unit price and the underlying assets. In some instances, those discounts were 30% or more. An unweighted average suggests the top ten holdings are selling about 20% below their fair market price in aggregate.
I’ve also included their debt ratios as a means of gaging how leveraged they are (higher debt levels erode unitholders’ equity during downturns). Most are conservatively financed with debt ratios ranging between 21.5% of assets (Granite) and 46% of assets (Smartcentres).
In his book, The Intelligent Investor, Ben Graham talks about 2 concepts central to his approach to investing. The first is the idea of “intrinsic value.” He suggests investing (not speculating or trading) should involve independently reviewing the business attributes of a securities issue (i.e. future cash flows, etc.) and assigning a value to that enterprise. That value might ultimately represent what a prudent or reasonable person would pay for the property or business in a private business transaction.
Then, recognizing that errors could be made with assumptions, calculations, etc., one should leave a “margin of safety” prior to committing capital. By buying at a discount to intrinsic value (i.e. a margin of safety) an investor helps to protect against downside and a permanent capital loss. It’s how one preserves capital.
It’s impossible to predict what the capital and real estate markets will do over the short term, but for patient, long term investors, a portfolio of REITs might represent a solid opportunity to enhance your and your family’s wealth.
What You Can Learn from My Real Estate Investments by Warren Buffett. Published in the February 24, 2014, edition of Fortune magazine. If you can’t access the article, it can also be found on page 17 of the 2013 Berkshire Hathaway Annual Report under “Some Thoughts About Investing.”
Nearly all the REITs held in our Real Estate investment contracts have reported their first quarter earnings. Canadian Apartment REIT reports tomorrow.
Normally, one shouldn’t attach too much significance to quarterly earnings as it can take years for the value of great properties and enterprises to be realized. Nevertheless, operating results for the first quarter are presented here as an indicator of how business operations are unfolding as the REITs and economy emerge from pandemic restrictions.
Overall, revenues, income, funds from operations (FFO), occupancies have improved significantly. CAP REIT reports tomorrow. Rio-Can figures reported in an earlier blog and can be viewed here: https://think-income.com/2022/05/11/getting-it-reit/
On April 27, Allied Properties REIT reported the following:
“Allied’s first-quarter results for 2022 met or exceeded expectations, with AFFO per unit and average in-place net rent per occupied square foot rising to record levels,” said Michael Emory, President & CEO. “FFO per unit was 61 cents and AFFO per unit 56 cents, up from the comparable quarter last year by 4% and 7%, respectively. NAV per unit at quarter-end was $50.92, up from the end of the first quarter last year by 5% and up from the end of 2021 by 1%. Leasing activity continued to accelerate through the quarter, with average in-place net rent per occupied square foot rising to $25.13, up from the comparable quarter last year by 4% and up from the end of 2021 by 2%.”
For more information, see: https://alliedreit.com/wp-content/uploads/2022/04/Q1PressRelease_AP_04272022.pdf
On May 9th, Boardwalk posted their quarterly results. Chairman & CEO Sam Kolias reported:
“We are pleased to report on another solid quarter to begin 2022, with growth in NOI, FFO, and Profit through the Omicron wave of the pandemic and non-controllable cost inflation primarily in our utilities expense through the winter months. As we look forward to our busy spring and summer leasing season, we have seen significant leasing gains with our May occupancy increasing to 96.6%. Leasing spreads on both renewals and new leases have seen strong improvement, and in our largest market of Alberta, have seen renewal spreads increase to 4.7% in the month of April. New lease spreads have also turned positive with housing fundamentals improving in each of our markets allowing for incentive reductions and positive rental rate growth.”
For more information: https://www.bwalk.com/media/34695/pr-05-09-2022-q1-results-final.pdf
Reporting on May 17 (tomorrow)
On May 3rd, Dream Industrial reported net income of $442.9 million in Q1 2022, a 364.9% increase when compared to $95.3 million in Q1 2021. The increase was primarily due to increases in fair value adjustments to investment properties (NOTE: companies are required to include unrealized gains in the value of assets as a part of earnings).
Net rental income was $65.3 million in Q1 2022, a 40.0% increase when compared to $46.7 million in Q1 2021. Year-over-year net rental income growth was primarily driven by 38.8%, 46.5% and 264.9% increases in Ontario, Québec and Europe, respectively.
Diluted funds from operations (“FFO”) per Unit were $0.22 in Q1 2022, a 16.0% increase when compared to Q1 2021, where the diluted FFO per Unit were $0.19.
• Total assets were $6.7 billion in Q1 2022, a 10.8% increase when compared to $6.1 billion in Q4 2021;
• Net asset value (“NAV”) per Unit was $16.48 in Q1 2022.
For more information, see: https://dream.ca/wp-content/uploads/2022/05/Q1-2022-DIR-Press-Release-FINAL-1.pdf
On May 3rd, First Capital REIT reported:
For further information, see: https://fcr.ca/wp-content/uploads/2022/05/2022-Q1-Press-Release-v28-FINAL.pdf
Granite’s net operating income (“NOI”) was $91.2 million in the first quarter of 2022 compared to $81.5 million in the prior year period, an increase of $9.7 million primarily as a result of net acquisition activity beginning in the first quarter of 2021;
• Same property NOI (Net Operating Income) or SPNOI – cash basis increased by 4.6% for the three-month period ended March 31, 2022.
• Funds from operations (“FFO”)(1) were $69.4 million ($1.05 per unit) in the first quarter of 2022 compared to $57.1 million ($0.93 per unit) in the first quarter of 2021.
• Granite recognized $490.6 million in net fair value gains on investment properties in the first quarter of 2022 which were attributable to various factors including fair market rent 1 increases as well as compression in discount and terminal capitalization rates for properties located in the GTA, the United States and Europe. The value of investment properties was partially offset by unrealized foreign exchange losses of $146.1 million resulting from the relative strengthening of the Canadian dollar against the US dollar and
• Granite’s net income attributable to stapled unitholders increased to $497.7 million in the first quarter of 2022 from $230.1 million in the prior year period primarily due to a $281.1 million increase in net fair value gains on investment properties and a $9.7 million increase in net operating income as noted above, partially offset by a $30.6 million increase in deferred tax expense
For further information, see: https://granitereit.com/prmay11-2/
On May 12, 2022, H&R Real Estate Investment Trust (“H&R” or “the REIT”) (TSX: HR.UN) reported the following operating results:
“Our strong first quarter financial results mark a pivotal moment in the continuation of our transformation and the surfacing of the embedded value within our portfolio,” said Tom Hofstedter, CEO. “Following the successful spin out of our enclosed shopping centre division (i.e. Primaris) and the sale of the Bow and Bell office campus, our portfolio today is significantly more concentrated on higher growth asset classes within strong urban markets. Today’s results are a testament to the quality of our properties, platform and strategic plan.”
For further information, see: https://www.hr-reit.com/wp-content/uploads/2022/05/Final-Q1-2022-PR-.pdf
“Killam’s first quarter earnings growth and operating performance were strong,” noted Philip Fraser, President and CEO. “The same property revenue growth of 5.1% in Q1-2022 reflects the strong demand for housing across all our markets. Despite a colder winter season and higher heating costs this quarter, Killam achieved 3.1% same property net operating income growth to start the year.”
On May 11, SmartCentres REIT reported, “substantive improvement in retail leasing momentum across the portfolio with growth from both existing and new tenants;”
A most interesting opinion piece in today’s New York Times entitled, “The Rich Are Not Who We Think They Are. And Happiness Is Not What We Think It Is, Either,” written by Seth Stephens-Davidowitz .
The author suggests:
The advantages of business equity isn’t lost on the owners. Most of them are happy to maintain the status quo. Turnover is minimal (i.e. don’t be looking to purchase one of these businesses at a discount anytime soon).
The author then asks, “If pop culture is right in suggesting getting rich is a path to happiness?” I’ll examine that in a subsequent blog. For now, I’m going to see if I can find a cheap distribution business.
About the Author:
Seth Stephens-Davidowitz graduated from Harvard in 2013 with a PhD in Economics. His work has focused on using big data sources to research behaviours and attitudes. Using “big data” sources, his essay explores who are the rich in America and what relationship wealth plays in happiness (not for the faint of heart).
For years, financial professionals have suggested retirees draw 4% from their nest egg as a means of drawing sustainable income. That plan – designed by Financial Planner Bill Bengen in 1994, typically included allocating 60% into equities for long term growth and 40% into cash and fixed income as a means of dampening market volatility.
In theory, a senior with $250,000 of retirement savings would allocate $150,000 into equities for long term growth and $100,000 into cash and bonds. Then, they would draw $10,000 /year (or $833 /month) from the cash portion and re-balance the portfolio annually.
That plan is now being challenged by… the individual who first advocated the 4% rule.
In a recent Wall Street Journal article, Bill Bengen suggests retirees cut spending and exercise caution with the latest surge in inflation. He suggests adherents to the 4% rule take a pay cut and roll back their drawdown rate to 3%. (See: https://www.wsj.com/articles/cut-your-retirement-spending-now-says-creator-of-the-4-rule-11650327097?st=gmubxx8uvq6aakz&reflink=desktopwebshare_permalink )
The problem is that there’s no precedent for today’s conditions,” he said.
A recent Morningstar report recommended a 3.3% initial withdrawal rate for those retiring today. It suggested that was an optimal rate for those who want spending to keep pace with inflation over three decades and want a high degree of certainty their money will last.
As of March 1st, Canadians had $2 trillion invested in mutual funds. Roughly 1/2 of those funds were invested in balanced funds, 1/3 were invested in equities and 1/8 were invested in fixed income/bond funds. Old ways of thinking still permeate retirement income strategies and expose Canadians to
Any retirement income strategy ought to include the use of annuities. Retirees receive higher, tax favoured income and retirees can rest assured they will never have to take a pay cut. Recent rates were posted here: https://think-income.com/annuity-info/