Canadian Capitalist

25 responses so far ↓

• 1 FinancialJungle.com // Jan 9, 2008 at 10:31 pm

  Picked up half a position in Calloway REIT today at just under $21. 7.4% yield! Yeah, baby. The market must love me very much. Oh behave…

  Seriously though, let’s not celebrate too early. Bellwether REIT, Riocan, was yielding 8.4% exactly 5 years ago today. Dipping in with one toe is fine, but probably prudent to conserve some cash for the real bargains down the road.

• 2 FourPillars // Jan 10, 2008 at 12:22 am

  Thanks for the heads up - this might get me to get into the REIT asset class finally.

  I’ll start looking closer at RioCan tomorrow.

  Mike

• 3 Canadian Capitalist // Jan 10, 2008 at 8:40 am

  FJ: Yes, RioCan could get cheaper from here. But, one of the valuation metrics for REITs is the spread over bonds. Five years back, bonds were yielding 5%, so the spread would have been 3.4% compared to the 3% spread today. That’s why I think this may be a good buying opportunity. That said, I still have some powder dry to come up to my 5% allocation to this asset class.

• 4 Phil S // Jan 10, 2008 at 9:24 am

  I’ve been watching the yield of H&R go up to around 7.25% right now. Outside of my RSP, I mainly only make leveraged transactions and right now that only represents a 1% spread over my cost of capital (interest rate on an investment loan). To me, that is my most important unit of measure as I generally require my leveraged investments to be able to carry themselves (the distributions need to cover the interest paid on the investment loan). As a result, I think I can afford to continue to wait and see if the price of H&R drops even further.

• 5 FourPillars // Jan 10, 2008 at 9:57 am

  Phil - do you not consider the tax rebate as part of the ability of investments to “carry themselves”?

  For my leveraged investments I calculate the dividends (minus income tax) + tax rebate when I consider the cash flow.

  As CC has mentioned before, if those dividends are partly ROC then you lose that part of the deductibility of the loan.

  Mike

• 6 Canadian Capitalist // Jan 10, 2008 at 10:27 am

  Mike: Since REITs are flow-through entities, the distributions don’t get favourable tax treatment like dividends do. So, assuming the entire distribution of HR.UN is taxable, the tax rebate on the loan is cancelled by the tax on the distribution at the marginal rate.

  Phil: My personal opinion is that a 1.25% spread at a time when interest rates are predicted to fall is pretty good. That said, REITs could fall even more from here and better bargains may be had.

• 7 FourPillars // Jan 10, 2008 at 10:51 am

  CC- thanks for the clarification - I forgot about that.

  According to their webpage for 2006 about 45% of their dividends were ROC.

  http://www.hr-reit.com/finance/history.asp

  Assuming I’m reading it correctly.

  Mike

• 8 Canadian Capitalist // Jan 10, 2008 at 11:16 am

  Mike: RioCan isn’t very different either. 30% to 60% of distributions has been ROC over the past nine years:

  https://riocan.com/_bin/tax/taxInfo.cfm

• 9 Bryce // Jan 10, 2008 at 12:17 pm

  I’m not really familiar with REITs. So, with the ROC does that mean that there will come a time when your initial investment could be entirely returned to you? And you would have to pay capital gains on your entire holding if you cashed it in?

• 10 venter // Jan 10, 2008 at 12:46 pm

  XRE showing a div of $1.37 for a yield of 10.6% today, bought some at $12.99 a share.

• 11 Canadian Capitalist // Jan 10, 2008 at 12:59 pm

  Bryce: Yes, it is possible. The ROC is used to reduce the Adjusted Cost Base. I’m not sure what happens when ACB becomes zero. You may have to pay capital gains on the ROC portion thereafter.

  venter: According to iShares (Link) XRE had a cash distribution of 0.87728, which would imply a yield of 6.75%.

• 12 Bryce // Jan 10, 2008 at 1:55 pm

  I’m interested in setting up a portfolio that will be used for charitable giving in the future. Since giving means paying no capital gains on the donated security it would be in my best interest to make as much of the donated security be capital gains. I wonder if REITs would be a good candidate for that?

• 13 Phil S // Jan 10, 2008 at 1:59 pm

  To FourPillars. The problem is that my bank requires me to pay at least the interest on my investment loan each month. As a result, I need all of my leveraged investments to carry themselves in absolute terms, not just on an after-tax basis because I only file my taxes once a year (thankfully). So for me, this also generally excludes any investments which do NOT distribute monthly (most banks and such distribute quarterly).

  CC. I don’t like to hang my hat on betting what the Bank of Canada is going to do with interest rates in the future. Generally speaking, I don’t want to dive in when the spread between the investment yield and my cost of capital is only 1% or 1.25%. At 1%, it would theoretically take 100 yrs for that investment to become mine. The higher the spread, the higher the return, but I would think that 2% (a 50-yr amortization) should be the MINIMUM acceptable. Is H&R’s unit price or is my cost of capital going to drop to the point where I will get a 2% spread? I have no idea, but I can afford to wait for now.

• 14 time to buy REITs? — award tour // Jan 10, 2008 at 2:32 pm

  [...] Time to buy Canadian REITs?. REITs have gotten hammered this year but XRE is now yielding 6.8%. interesting. [...]

• 15 Canadian Capitalist // Jan 10, 2008 at 3:06 pm

  Phil: That’s probably a smart route for a leveraged investor. I keep forgetting that your leverage strategy is different than mine - I simply use leverage as a liquidity tool and plan on paying down the loan within a year.

  Bryce: The capital gains from just the ROC portion is likely to be relatively small. If you figure 50% of distributions is ROC, it is only 3.5%. You may also get a capital gain from the increase in unit values but that’s an iffy proposition.

• 16 FourPillars // Jan 10, 2008 at 3:40 pm

  Phil - from an immediate cash flow perspective it makes a lot of sense to look for a dividend that matches the interest cost.

  My point about losing the deductibility of part of the loan is valid though. Gettin ROC in a dividend is equivalent to selling shares which means the loan covering the amount that you have “sold” is no longer eligible for interest deductibility.

  Mike

• 17 Bryce // Jan 10, 2008 at 4:31 pm

  CC - good point. I guess for this format I should probably just have a diversified strategy and donate the better performing securities when I’m rebalancing.

• 18 venter // Jan 10, 2008 at 5:47 pm

  I checked the ishares site, the 10.6% I saw on stockchase is based on the Q4 distribution of $0.34247 (annualized gives the $1.37). Why is the Q4 dist. so much larger than Q1-3?

• 19 Canadian Capitalist // Jan 10, 2008 at 8:49 pm

  venter: Not sure why there is a significant spike towards the end of the year. It doesn’t look sustainable and in any case a 6.75% yield sounds about right.

• 20 Phil S // Jan 10, 2008 at 9:03 pm

  CC. Actually, I have paid down my leverage using my earnings in the past as well. The thing is, I prefer to be in the “driver’s seat”, so to speak, meaning that I will pay down my leverage with my earned income if I have extra money sitting around after my regular bills are paid, have already maxed out my RSP, etc. So, if I am using my earned income for major purchases or for taking vacations or whatever, then at least I will rest assured knowing that my investments can carry themselves against my cost of capital.

• 21 Steve // Jan 23, 2008 at 11:33 am

  I was hoping to get some advice from those of you that are used to making leveraged investments. I’m a relative newbie to this so forgive me if this is a silly question. What do some of you consider a good CC for the money borrowed to fund an investment? Is prime too high? What are the best institutions to get good rates? Also, do the rates fluctuate as time goes on? I had called one of the big banks to ask about taking money out from my line of credit and they said that the rate did not fluctuate and would stay at the rate I originally borrowed at. Meanwhile, a discount brokerage told me that the interest charged on the money borrowed in a margin account would fluctuate with the prime rate. I’m surprised that they would have different policies. Any insight?

• 22 Canadian Capitalist // Jan 23, 2008 at 11:46 am

  Steve: What does CC in your comment refer to?

  When I borrow to invest, it is from a secured line of credit at prime, which fluctuates. Margin loans are typically more expensive (usually prime + 1%). Some of the smaller brokers currently have attractive margin rates but I have no personal experience with them.

• 23 Steve // Jan 23, 2008 at 12:05 pm

  That was a typo. I meant COC (cost of capital).

• 24 Steve // Jan 23, 2008 at 12:07 pm

  So perhaps the bank representative was wrong when she told me that the interest rate I was borrowing at would not change? I was finding it a little too good to be true.

• 25 Connecting News, Commentaries and Blogs at NineReports.com - // Jan 30, 2008 at 2:06 pm

  [...] is an … millionaire now! - Last Updated - Sunday January 27  Request a Trackback Time to buy REITs? Not too long ago, investors couldn’t get enough of Real Estate Investment Trusts (REITs) [...]

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