Tag: Annuities

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The Intelligent REIT Investor

Just completed The Intelligent REIT Investor by Brad Thomas. Sorry I didn’t get to it sooner.

Thomas has written a book that combines the thinking of two legendary investors:

1) Ben Graham – author of Security Analysis, The Interpretation of Financial Statements and the Intelligent Investor and the Columbia Business Professor who mentored Warren Buffett, and

2) Ralph L. Block – longtime proponent of REITs (real estate investment trusts) and author of Investing in REITs

Ben Graham revolutionized the investment industry by suggesting long-term investors take a business approach when assessing the value and potential growth of stock and bond securities. For him, that meant paying attention to fundamentals like earnings and earnings growth, purchase price and a number of profitability ratios.

Graham never addressed REITs in his classic investing book because they’re a more recent phenomena (i.e. modern REIT legislation was established in the 1990s).

Henry Block wrote his definitive book on REITS in 2002. In his book, “Investing in REITs,” Block introduced readers to REIT structures, types of REITs (residential, industrial, etc.) and how to decipher the balance sheet (why do we use FFO to gage REIT performance vs. Net Income?). That book was written two decades ago.

Thomas’ book does a wonderful job of combining the wisdom of both these authors and updating   readers with more recent trends. Technology has radically changed the nature of home and office properties over the past twenty years and Thomas does a commendable job of leading the reader through the changes.

Highly recommended for real investors.

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Feather in Our CAP REIT

On May 17-2022, Canadian Apartment REITs published their first quarter business results. They are the last of our property portfolio “partners” to report.

In addition to being the largest residential REIT and one of the largest holdings in our real estate portfolio, CAP REIT is also the largest landlord in Canada. Their operations are a fairly telling bell weather of the residential real estate business in Canada.

As of March 31, 2022, they reported the following results:

“Following another strong and accretive year in 2021, we continued to generate solid growth and strong operating performance in the first quarter of 2022. Occupancies rose to 98.0% at March 31, 2022, up from 97.3% at the same time last year while average monthly rents increased 3.9%. Importantly, our balance sheet and financial position remained strong and resilient with a significant liquidity position.”

“Total operating revenues increased 8.4%, driven by the contribution from acquisitions completed over the last twelve months, increased stable occupancies and higher average monthly rents. Total property Net Operating Income (“NOI”) rose 4.4% compared to the same period last year. Stabilized property NOI decreased slightly in the quarter due increased weather-related maintenance costs, higher utilities costs resulting from the colder winter this year and a significant increase in the cost of natural gas, and higher property taxes. Importantly, to date we have collected over 99% of our rents, a testament to our successful initiatives to work with our residents and understand their issues through the pandemic.

During 2021, we acquired 3,744 apartment suites, townhomes and manufactured housing community sites in Canada and the Netherlands for total costs of approximately $1.05 billion. In the first three months of 2022, we further expanded our property portfolio with the purchase of 1,015 suites and sites for total costs of $439million[1]. These new properties will make a strong, accretive and growing contribution in the months and years ahead. Looking ahead, while our acquisition pipeline remains strong and robust, we will also be examining our total portfolio to determine opportunities to generate value for our Unitholders and additional capital to fund more accretive growth opportunities.”

Further information about CAP REITs financials can be found by clicking here: https://s25.q4cdn.com/722916301/files/doc_financials/2022/q1/Q1-22-Full-Report.pdf

Their most recent presentation to investors can be viewed here: https://s25.q4cdn.com/722916301/files/doc_financials/2022/q1/Q1-2022-CC-Slides-(FINAL).pdf

[1] Average cost per (apartment) units purchased in Q1-2022 was approx. $432,512.31. Average cost per units  purchased in 2021 was $280,448.71. That amount includes the purchase of “townhomes and MHCs,” which would explain the lower average suite cost.

This Post is published on or around May 17th, 2022, and it includes timely information that can be quickly rendered obsolete. It is FOR INFORMATION PURPOSES and simply meant to keep partners informed about some of the holdings in our portfolios.  This is NOT an OFFER to purchase securities or products & NO representation is being made. Items presented may NOT be suitable for everyone. Rates change. Values will fluctuate. Please consult an experienced, qualified, licensed professional prior to investing and ensure that your investments are a part of a comprehensive plan designed to help you & your family meet your long-term financial goals & objectives.

Gordon Wiebe is registered as a “Life, Accident & Sickness” insurance underwriter with the Insurance Council of B.C, the Alberta Insurance Council & the Saskatchewan.

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RIO-Can Getting it REIT

The Well in Toronto is Canada’s Largest Development ever. It’s Being Managed by RioCan & Allied REITs.

If anyone needed further evidence showing how uncorrelated a company’s share price (or a REIT’s unit price) can be from its underlying value, RioCan (REI.UN) provided a good example yesterday.

In the morning, RioCan announced First Quarter Results for 2022. Their operations resulted in:

  • Net income of $160.1 million, exceeding the comparable period last year by $53.3 million
  • FFO (Funds from Operations) of $0.42 /unit, up 27% year of year (YoY)
  • A 4.1% increase in SPNOI – Same Property Net Operating Income
  • 1.1 million sq. ft. of new and renewed leases
  • Occupancy was 97% – up to pre-pandemic levels
  • 42.6 million ft2 in the “development pipeline”
  • 16.8 million ft2 of zoning approved
  • 2.2 million ft2 under construction
  • 2.5 million ft2 “shovel ready”
  • 3.2 million ft2 actively being “redeveloped”
  • 1.7 million ft2 expected to be delivered in the next 24 months
  • 27.4 million of new funds expected in 2022
  • Weighted interest costs are at 2.98%
  • Book Value /unit $25.96 as of March 31, 2022.

Most landlords would be satisfied with those quarterly results. So, how did the market respond to their business operations? The unit price dropped $1.15 or 5% to $20.65 from $21.80 and then closed at $20.99. It was one of the most traded issues on the Toronto Stock Exchange.

RioCan owns and operates 204 premier retail properties in Canada. They lease over 36 million square feet of space and their enterprise value is roughly $15 billion.

At $21 /unit, an investor can purchase a pro-rata interest at a discount of 19%.

Further Reading, See:

Further Reading:

RioCan’s First Quarter 2022 Delivers Growth Across Key Metrics Driven by its Quality Portfolio

RioCan REIT Posts Strong Q1 Earnings: Is the Stock Now Worth a Buy?

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It’s Déjà Vu All Over Again

Tom Gayner once commented that the secret to investing successfully is surviving the first thirty years. He was half joking and half serious, but his reasoning was sound. He suggested, after that length of time an investor would have experienced several market trends and cycles and he ought to be able to recognize their recurrence.

Since the new year, market participants have seen the following:

  • a hike in interest rates
  • a 13.5% decline in the S&P 500
  • a 9.5% decline in the Dow Jones Industrial Average (DJIA)
  • a 25% decline in the NASDAQ

None of these should come as a surprise to anyone. As Yogi Berra might say, “IT’s déjà vu all over again.”

In January 1966, the Dow Jones Industrial Average hovered around 8,891. But, by June 1982 – after years of decline, the DJIA had surrendered 72% of its value closing around 2,406. “The Nifty Fifty” – a group of cutting-edge, high-tech companies including Xerox, Polaroid, Kodak, etc. had vaulted the DJIA to lofty levels. It seems speculators were willing to pay 50-100 times earnings – not unlike some of the valuations we’ve seen in the recent market environment.

The late 1990’s also saw similar valuations placed upon countless dot.com/high tech companies as the world prepared for Y2K.

When speculation ramps up, it can drive equities to levels that simply aren’t sustainable or justifiable. Is it any wonder the NASDAQ has lost 25 percent so far this year?

Investors and speculators seeking refuge in fixed income won’t find much comfort either. If interest rates continue to rise – as they’re likely to do, bond valuations will also decline.

As a reminder of this, I keep a de-commissioned “50-year bond” certificate on my wall. The bond was issued in 1945 by the Reading Railroad Co. (yes, the same one from Monopoly). The bond was set to mature in 1995 and the attached coupons paid an annual rate of 3.25%.

In 1972, the bond was surrendered. The owner would have likely seen a 40% drop in the value of the bond as interest rates climbed from 5.45% in March 1972 to 6.66% in July.

It’s impossible to know what interest rates or markets will do over the short term. There are advantages to be had by studying market history and those of us over 55, have been to this rodeo before.

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How Retiring Investors ThinK

Last August, J.P. Morgan Asset Management released “Retirement By the Numbers,” a report that examined how investors approaching retirement manage their portfolios, their income and their spending.

The report drew on a data base of 23 million 401(k) & IRA accounts. They reviewed the activities of some 31,000 people as they approached or began retirement between 2013-2018. (401(k) and IRA are retirement accounts similar to RRSP & RRIFs).

Findings

Research from the report suggested:

a) “De-risking” is common place. Three quarters of retirees reduced their equity exposure after “rolling over their assets from a 401(k) (RRSP) to an IRA (RRIF).

b) Retirees relied on the mandatory minimum withdrawal amounts when determining how much income to draw.

c) Income and spending are highly corelated. Where income amounts were increased (i.e. from social  security, pension plans, etc.) spending followed.

Retiree Profiles

The retirees studied in the report shared the following characteristics:

a) Roughly 30% of the subjects received pension or annuity income.

b) The median value of retirement  accounts was $110,000.00

c) The median investable assets were estimated to be between $300,000 and $350,000.00 (i.e. balance being held in non-registered accounts).

d) The most common retirement age was between 65-70.

e) Age 66 was the most common age to start receiving Social Security.

Other Observations

The study also recognized the following trends.

First, retirees who waited until the rollover date to “de-risk” (i.e. rebalance their portfolios) needlessly exposed themselves to market volatility and the potential for loss. For example, those  re-balancing their portfolios in April 2020 after the COVID pandemic, were still down 5-6% after the markets had recovered a year later. Retirees ought to consider rebalancing portfolios prior their obligatory rollover (age 71).

Second, the majority of retirees were using the RMD-required minimum distribution as a guide for withdrawal amounts versus basing amounts on  retirement income needs. Like U.S. IRAs, Canada’s RRIFs are also subject to a minimum withdrawal schedule that increases with age. Retirees relying on the schedule for guidance could limit or see future income amounts reduced.

Finally, 62 year-olds represent the peak year of 9.6 million baby boomers in Canada (and the greatest years of nest egg risk are between the ages of 58-66) Should they retire and de-risk en masse, Canadian equity markets will likely undergo increased downward pressure and volatility. Retirees should consider re-balancing or “annuitizing” while markets are fully valued and  prior to an increase in capital gains or interest rates.

NOTE: This blog first appeared in the October 2021 edition of the Capital Partner

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the BiGGEST Retirement Risk

This past week, I viewed a webinar presentation by Tom Hegna . Mr Hegna is an economist, a “retirement expert” and author of Pay Cheques and Play Cheques and other retirement books.

During his presentation, Mr. Hegna highlighted 10 different risks unique to “retiremenThis past week, I viewed a webinar presentation by Tom Hegna . Mr Hegna is an economist, a “retirement expert” and author of Pay Cheques and Play Chequesand other retirement books.

During his presentation, Mr. Hegna highlighted 10 different risks unique to “retirement.” They included:

  1. Longevity Risk – the risk of outliving your money
  2. Deflation – the risk that goods and services might decline (like during the Depression)
  3. Market Risk – the chance of a sustained bear market
  4. Withdraw Rate Risk – the risk of drawing down too much from your nest egg
  5. Sequence of Returns – risk of a permanent capital loss by drawing funds in a down market
  6. Regulatory Risk – a change or failure in regulatory framework (governance, Madoff)
  7. Taxation Risk – a hike in current rates or the imposition of new unforeseen taxes
  8. Inflation – an across the board increase in the cost of needed goods and services
  9. Long Term Care – the risk that a senior will require years of costly palliative care
  10. Mortality – the risk of a premature death

Of all the risks he highlighted, “longevity risk” was the most critical. It’s what he called the “Retirement Risk Multiplier.” IF that risk was not addressed first, the other risks could easily become more acute.

Life expectancy is a bit of a moving target and a tough concept for most. Most people see that life expectancy is around 84 for males and around 87 for females. What people miss is that notion that these numbers represent “averages.” They shouldn’t necessarily be used for planning purposes.

There’s a 50/50 chance (i.e. 1 in 2) that one member of a 65 year old couple will live to age 92 and a 25% (i.e. 1 in 4) that one member will live to age 97.

Hegna also noted, of all the risks retirees are exposed to, longevity risk is the easiest to take “off the table.” He advises retirees to calculate their basic human needs (food, clothing, shelter, utilities, etc.), see how much is covered by CCP and OAS and to top up income with an annuity – which guarantees retirees will never run out of income nor ever take a cut in pay (recent rates can be viewed here: https://think-income.com/annuity-info/ ).

Finally, Hegna noted how most brokers and financial planners run “Monte Carlo” analysis as a means of measuring and managing “risk.” Yet, their proposals always have a  disclaimer on the bottom of the page their retirement illustrations that reads, “63% of plans fail to provide income at or after age 90.”

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4% Retirement Rule Now Obsolete

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/