Happy to present an updated due diligence video on Rio-Can Real Estate Investment Trust. Rio-Can is one of Canada’s largest commercial landlords. Units of the trust can currently be purchased at a discount to NAV (net asset value). Rio-Can REIT closed today at $22.83 /unit on the Toronto Exchange (REI.UN). That ‘s about a 12% discount to book value of $25.90 as reported at the end of Q3-22.
Their future looks bright and there best days are still yet to come. It’s a good deal.
Real estate investors can go at it alone developing projects – completing zoning applications, appeasing bankers, paying for legal work, etc. Or, they can purchase units, become unitholders of Rio-Can, own a pro-rata share in some of the best placed properties in the country and ride on the coat tails of some of the country’s top real estate minds.
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.
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%.”
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.”
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 the three months ended March 31, 2022, First Capital recognized net income attributable to Unitholders of $44.5 million or $0.20 per diluted unit compared to $38.0 million or $0.17 per unit for the same prior year period. The increase was primarily due to an increase in the fair value of investment property of $8.8 million.
FFO per unit remained unchanged primarily due to a $3.1 million increase in interest and other income, and interest expense savings of $2.8 million, which were offset by other losses primarily related to unrealized losses on marketable securities, totaling $6.8 million, or $0.03 per unit.
SPNOI – Same Property NOI Growth increased 1.9%, despite a 20 basis point decline in occupancy. The growth was primarily due to a $2.2 million decrease in bad debt expense as well as rent escalations, partially offset by lower occupancy and a $0.6 million decrease in lease termination fees over the prior year period.
Portfolio Occupancy: March 31, 2022 portfolio occupancy of 95.5% decreased 0.6% on a quarter-over-quarter basis from 96.1% at December 31, 2021 primarily due to net closures (which primarily related to closures for redevelopment). On a year-over-year basis, total portfolio occupancy declined 0.3% from 95.8% at March 31, 2021 to 95.5% at March 31, 2022.
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
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.”
Highlights
30.9% decrease in net operating income as compared to Q1-2021 primarily due to the spin‐off of Primaris REIT and property dispositions throughout 2021;
$19.88 unitholders’ equity per Unit, an increase of $3.33 from December 31, 2021;
$21.06 Net Asset Value (“NAV”) per Unit(2), an increase of $3.36 from December 31, 2021;
Sold 33.3% non‐managing interest in The Pearl, in Austin, Texas for approximately U.S. $45.8 million, generating a gain of $20.7 million over construction cost, and a return on equity invested of approximately 221.5%;
13,715,500 Units repurchased year to date, at a weighted average price of $12.97 per Unit, for a total cost of $177.8 million as at May 10, 2022;
19.1% Same‐Property net operating income (SPNOI) (cash basis)(1) growth driven by strong residential and office rental growth together with industrial and retail property lease‐ups
“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.”
Killam earned net income of $60.0 million in Q1-2022, compared to $27.4 million in Q1-2021. The increase in net income is primarily attributable to fair value gains on investment properties, growth through acquisitions, completed developments, and increased earnings from the existing portfolio.
Killam generated FFO per unit of $0.24 in Q1-2022, a 4.3% increase from $0.23 per unit in Q1-2021. AFFO per unit increased 5.3% to $0.20, compared to $0.19 in Q1-2021. The growth in FFO and AFFO was primarily attributable to increased NOI from Killam’s same property portfolio and incremental contributions from over $400 million in recent acquisitions. This growth was partially offset by a 9.4% increase in the weighted average number of units outstanding.
Despite inflationary pressures, Killam achieved 3.1% growth in same property consolidated NOI during the quarter. This improvement was driven by 5.1% growth in revenue, partially offset by an 8.2% increase in operating expenses.
On May 11, SmartCentres REIT reported, “substantive improvement in retail leasing momentum across the portfolio with growth from both existing and new tenants;”
Highlights:
Progress in zoning approvals on strategic projects, together with improved market conditions, contributed to $237.7 million in incremental property values, leading to net income and comprehensive income for Q1 2022 increasing to $370.1 million compared to $60.6 million for the same period in 2021; from an increase of $1.71 per Unit;
FFO per Unit(1) for Q1 2022 increased by $0.02 or 4.1% as compared to the same period in 2021;
Total unencumbered assets(1) increased from $5.9 billion at March 31, 2021 to $8.4 billion at quarter end; and
Continued advancement of non-retail pipeline of 283 projects representing approximately 59 million square feet across the network (41 million square feet at the Trust’s share)
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.
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.
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/
Think-Income.com 