Advocis Presentation Edmonton, April 19, 2018 Jonathon A. L. Gold, B.Comm., CIM, FCSI, DMS, CFA President Gold Investment Management Ltd.
Income Investing: vs. the Traditional 60/40 Balanced Portfolio
Discussion Topics Introduction Jonathon s Professional History and Qualifications Disclaimer Traditional 60/40 Balanced Portfolio 60% Equities 40% Fixed Income Pros and Cons History Features & Benefits Public vs. Private Property Types Valuation Taxation
Discussion Topics Case Studies Ventas, Inc. (NYSE: VTR) Digital Realty Trust, Inc. (NYSE: DLR) RioCan REIT (TSX: REI.UN) Summit Industrial Income REIT (TSX: SMU.UN) Conclusion
Introduction Highlights of Jonathon Gold s professional history and qualifications Work History 1987 1993: Banking (RBC) 6 Years 1993 2001: Trading (TD, CT, TradeFreedom) 8 Years 2002 Present: PM (Global, GIM) 16 years Qualifications B. Comm., CIM, FCSI, DMS, CFA
Introduction Disclaimer Gold Investment Management ( GIM ) clients, employees and members of their families may at times have a long or short position in the securities mentioned herein. This presentation is provided to you for informational purposes only. The information contained herein should not be construed as investment advice. GIM does not assume any responsibility for advising the attendee or reader of any subsequent change of opinion.
60/40 Balanced Portfolio Equities Equities are Expensive Current S&P500 P/E is ~24 vs. Historical Average of ~15 Source: multipl
60/40 Balanced Portfolio Equities Equities are Expensive Current S&P500 Yield is 1.88% vs. Historical Average of ~4.35% Source: multipl
60/40 Balanced Portfolio Equities Flaws of the Cap Weighted Index Portfolios are typically constructed with capitalization or cap weighted indexes such as the S&P/TSX, S&P500 and MSCI EAFE as opposed to equal weight indexes Flaws of the Cap Weighted Index: Tend to be Backward-Looking Shape of Index today is based on past successes, E.g. iphone Prone to Risk of Concentration During the telecom bubble of 1999/2000, Nortel s market cap exceeded 30% S&P/TSX Today, the S&P500 is so concentrated that the top 20 constituents represent 30% of the index while the bottom 30% is spread across 385 names Prone to Mispricing / Asset Price Bubbles Market Cap = Shares O/S X Price
60/40 Balanced Portfolio Fixed Income Bonds are Expensive Current U.S. 10 Yr. T-Note Yield is 2.83% vs. Historical Average of ~4.50% Source: multipl
60/40 Balanced Portfolio Fixed Income Bonds are Expensive Bonds are expensive any way you slice it. The U.S. 10 Yr. T-Note yield of 2.83% is equivalent to a P/E ratio of 35.33. In other words, the bond holder is paying $35.33 for every dollar of bond coupon and the coupon is fixed for life. Risk/Reward of Short-Dated vs. Long-Dated Bonds: Short-Dated Historically low current yield Little duration risk but virtually nil real return (net of inflation) Duration Explained - Duration is an approximate measure of a bond's price sensitivity to changes in interest rates. Long-Dated Historically low current yield Relatively flat yield curve (2.83% 10yr. vs. 3.04% 30yr.) Significant duration risk/reward
60/40 Balanced Portfolio Pros and Cons Putting It All Together Pros (Equities) Expensive but not outrageously so Hedge against inflation No viable alternative - market is virtually impossible to time successfully; stay invested like Warren Buffet and buy great companies at a fair price Pros (Fixed Income) Still offers excellent protection from an equity market selloff; during equity downturns short bonds tend to remain flat while long bonds rally
60/40 Balanced Portfolio Pros and Cons Putting It All Together Cons (Equities) Historically expensive Low yield Concentrated Cons (Fixed Income) Historically expensive Low yield Nil expected real returns (net of inflation)
History What is a REIT? A REIT is a Real Estate Investment Trust History of U.S. On September 14, 1960, President Dwight Eisenhower signed into law the Cigar Excise Tax Act. Included in that law were the critical provisions for commercial Origin of Canadian Canadian had their origins in 1993. During the 90s recession, open-ended real estate mutual funds were unable to meet withdrawal requests and suspended redemptions; Instead, they converted to closed-end funds and listed on the TSX
Features & Benefits Flow-Through - A REIT is a flow-through entity Access - offer exposure to real estate that was previously only accessible to wealthy individuals and institutions High Yield - typically offer higher yields than traditional equities MoPay - Canadian REIT distributions are paid monthly vs. quarterly for equities
Features & Benefits Diversification According to a study by the National Association of Real Estate Investment Trusts (NAREIT), the S&P 500 Index s correlation with is only 14 percent over 60-month horizons Flow-Through Eliminates the double taxation found in corporations distribute 90% of their income to unitholders Not subject to tax; income is taxed in the hands of its unitholders This flow-through structure is a key advantage for over other forms of real estate as higher yields can flow to the investor
Features & Benefits Return of Capital ( ROC ) Significant tax advantage - return of capital vs. income REIT distributions typically contain a return of capital component which is tax-deferred until the year of disposition and then taxed at the lower capital gains tax rate E.g. for the 2017 tax year, Summit Industrial Income REIT confirmed that 100% of its distribution was return of capital. Accordingly, 100% of the tax obligation is deferred until the units are sold and is taxed at the lower capital gains tax rate
Public vs. Private Public are publicly traded - listed securities. This gives investors liquidity, transparency and "price discovery" Public are subject to strict corporate governance in order to meet TSX listing requirements. They typically have an independent board of trustees Public are subject to price fluctuations similar to equities. This means that Public may also trade at a discount or premium to their net asset value
Public vs. Private Private claim "no volatility" as a selling feature, however it also obscures the price discovery process. In other words, Private are subject to the same economic forces as their Public counterparts but appear fixed. Private have a limited or no secondary market. Investors buy and redeem units directly with the REIT. The GIM REIT Portfolio invests only in publicly traded
Property Types Retail Unenclosed supermarket-anchored retail properties Enclosed shopping centres New format retail centres Industrial Largest real estate asset class in Canada Stable tenant base Lower maintenance cost, capital improvements, tenant inducements Office buildings: High quality of tenancy Stable income stream Long weighted average lease terms ( WALT )
Property Types Multi-Family Apartment buildings are typically a very stable investment Demand is typically strong through all economic cycles Hotels Fragmented market is quickly consolidating Shortest lease term of all property types daily reset Health Care Senior living facilities Skilled nursing facilities Hospitals Medical office buildings
Property Types Data Centre / Cloud House servers and network equipment for cloud computing High security Critical power and cooling Other Diversified Self-storage Infrastructure (Cell Towers) Timberland Farmland Specialty (Movie theatres, Charter schools)
Valuation Canada Fairly Valued Source: BMO Capital Markets Note: AFFO Yield is the standard REIT equivalent of the Earnings Yield (EPS/Price).
Valuation USA Undervalued Source: Lazard Global Real Estate Securities After trading at discounts around a 4% 7% to underlying net asset value (NAV) since fall 2016, the further price decline in January has increased that discount to 15%. This is below the sector s 2% 3% long-term average premium and its close to zero average premium since 2005. It is also the largest discount to NAV in two years.
Valuation USA Undervalued Source: Lazard Global Real Estate Securities REIT P/FFO valuations have now fallen one multiple point below the long-term average of 16.5x P/FFO. Note: P/FFO is the standard REIT equivalent of the price-to earnings (P/E) ratio.
Taxation Return of Capital or ROC offers a significant tax advantage to REIT unitholders. In some cases distributions are 100% tax deferred! Source: BMO Capital Markets
Case Study Ventas, Inc. (NYSE: VTR) Data as at December 31, 2017 in MM except per share data FAD 1,317 Shares O/S 360 AFFO PS 3.66 Dividend 3.16 Current Price 48.11 P/AFFO 13.15 AFFO Payout 86.38% Yield 6.57% Ventas is a massive REIT 2 nd largest U.S. Health Care REIT 10 th largest U.S. REIT overall $17.5B USD 1 market cap = 28% of entire Canadian REIT Index 2 Stock price has declined by 33% over past 52 weeks P/AFFO: 13.15X AFFO Payout Ratio: 86.38% Dividend Yield: 6.57% 1. FX Rate: 1 USD = 1.2605 CAD 2. S&P/TSX Capped REIT Index Valued at $77.5B as at April 10, 2018 Source: https://www.ventasreit.com/
Case Study Ventas, Inc. (NYSE: VTR) Source: https://www.ventasreit.com/
Case Study Ventas, Inc. (NYSE: VTR) Source: https://www.ventasreit.com/
Case Study Digital Realty Trust, Inc. (NYSE: DLR) Digital Realty ( DLR ) owns, acquires, and operates a global network of data center properties. DLR leases its data center space to more than 2,000 customers, including major household names like Facebook, IBM, LinkedIn, AT&T, and JPMorgan Chase. Data center IP traffic is projected to grow at annualized rates of 31% for the foreseeable future. DLR is well positioned.
Case Study Digital Realty Trust, Inc. (NYSE: DLR) Key Financial Metrics - 2018 Current Cash dividend $ 4.0400 Core FFO Guidance 2018 (mid) $ 6.5250 Core FFO Payout E2018 61.92% Diluted AFFO Payout E3018 68.70% Source: https://www.digitalrealty.com/
Case Study Digital Realty Trust, Inc. (NYSE: DLR) Source: https://www.digitalrealty.com/
Case Study Digital Realty Trust, Inc. (NYSE: DLR) Source: https://www.digitalrealty.com/
Case Study Digital Realty Trust, Inc. (NYSE: DLR) Source: https://www.digitalrealty.com/
Case Study RioCan REIT (TSX: REI.UN) Source: https://riocan.com/
Case Study RioCan REIT (TSX: REI.UN) Source: https://riocan.com/
Case Study RioCan REIT (TSX: REI.UN)
Case Study RioCan REIT (TSX: REI.UN) The Well. This is not your father s RioCan. Source: http://www.thewelltoronto.com/
Case Study RioCan REIT (TSX: REI.UN) The Well. This is not your father s RioCan. Located in the heart of Toronto at Front, Wellington and Spadina, The Well is a mixed use development featuring 500,000 square feet of retail, 1.1 million square feet of office, and 1,800 residential units including The Well Rental Residence.
Case Study Summit Industrial Income REIT (TSX: SMU.UN) Source: http://www.summitiireit.com/
Case Study Summit Industrial Income REIT (TSX: SMU.UN) Source: http://www.summitiireit.com/
Case Study Summit Industrial Income REIT (TSX: SMU.UN) Source: http://www.summitiireit.com/
Case Study Summit Industrial Income REIT (TSX: SMU.UN) Source: http://www.summitiireit.com/
Case Study Summit Industrial Income REIT (TSX: SMU.UN) Demand for Data - One Minute On The Internet Source: http://www.summitiireit.com/
Conclusion Buy.
Questions?