Drive My CAR REIT

Sir Paul says Beep Beep, Beep Beep, Yeah!
Yes, a car is the worst investment you can ever make - guaranteed in most cases to depreciate to zero.  But CAR, Canadian Apartment Properties REIT, CAR-UN.TO, or "Cap" or "Cap REIT" shares are poised to drive higher.

Seeking Alpha recently suggested a 25% upside on the stock and cites these fundamentals:
  • Operating revenues up 22% year/year
  • Net operating income ("NOI") up 23.3% year/year (same property NOI up 5.5% year/year)
  • Funds from operations ("FFO") up 33.2% year/year (up 13.7% per unit year/year)
  • FFO payout ratio declined from 81% to 73.2%
The monthly dividend of 9.6 cents per share pays daddy every month, cruisin' all the way down Penny Lane.  That's a 5.4% annual yield.


Oooooooooooooooooooo !
Company report facts:

Cap REIT owns and operates a portfolio of multi-unit residential rental properties, including apartments, townhomes and manufactured home communities located in and near major urban centres. Cap REIT's concentration on the residential real estate market is aimed at solid year over year income growth in a portfolio with stable occupancy. In addition, Cap REIT mitigates risk through demographic diversification by operating properties across the affordable, mid-tier and luxury sectors as well as through geographic diversification across Canada. As at June 30, 2013, CAPREIT owned interests in 37,998 residential units, comprised of 34,628 residential suites and 14 manufactured home communities ("MHC"), comprising 3,370 land lease sites.



Like most Canadian REITs, Cap REIT has been on a slide since the summer.  Right now it sells for less than book value, giving some protection on the downside.

Talking Sharks and Floating Rate Income Funds

When I was as kid there was this annoying talking shark on TV called Jabberjaw.  He talked like Curly from The Three Stooges.  Luckily it was only on with the Saturday morning cartoons.

Today there is an annoying shark on TV called Kevin O'Leary ... his hair looks like Curly's from The Three Stooges. Unfortunately, he's all over the place on CBC, on CFRB 1010 for the morning and afternoon drive.

Both Jabberjaw and O'Leary are two-dimensional characters with some entertainment value but not always a whole lot of substance.  One exception may be the O'Leary Funds Floating Rate Income Fund.  It is described as a:

"a diversified portfolio comprised of senior secured floating rate loans, floating rate notes and other debt obligations of investment and non-investment grade global issuers"

The fund intends to generate income while protecting capital from the impact of increasing interest rates.  It does this by keeping a short portfolio duration (under one year), which limits impact when (not if) rates increase.  The target distribution is almost 5.9%.

Fund companies must smell blood and are now circling investors and pushing FRN's (floating rate notes).  Dynamic Funds is offering a similar fund and ING will be soon.  O'Leary Funds and others are squid-jiggin' investors by understating the risk of FRN's - the BMO FRN fund has not recovered from its credit crisis losses.  So look before you leap into these murky waters!


Turducken Investing Strategy This Thanksgiving

Apparently my local Sobey's isn't stocking turducken this year because they were all getting stolen!  So while I lament another turducken-less Thanksgiving - I still haven't tried it - I'll just have to be content to work on my Turducken Portfolio this weekend.
Inspiration for Turducken Portfolio ! Yum !!!

Just like turducken, as Turducken Portfolio is transparent in terms of what's in it.  Unlike other meats where its hard to relate the animal to the food (think pig - pork - ham, or cow - beef - steak), a turducken has a turkey's meat, a duck's meat, and a chicken's meat in it.  All stuffed in each other like those Russian nesting dolls.

If you can't tell what's in your portfolio and it has a fancy name like Allegro or Alto that doesn't tell you what's in it, like those from Investors Group, then sharpen the Ginsu blade and slide it open for a peek.  In the case of many Investors Group portfolio, they are stuffed with other managed funds that follow benchmark indices.

Investors Group management fees are to your investment as pan drippings are to a Thanksgiving meal: a slow and steady drip, drip, drip.  There is nothing worse than a dried up turkey or investment portfolio that has been drained dry by management fees.  As a turducken keeps the taste inside the layers, and a Turducken Portfolio keeps the earnings inside by keeping fee losses low.

A BMO Monthly Income ETF has a management fee of only 0.55%.  As they say, "ZMI is a fund of fund, the management fees charged are reduced by those accrued in the underlying funds."  Holding a range of bond, REIT, utility and financial ETFs it scores high on the Turducken-meter. It yields over 5%.  Compare this to Investors Group portfolios that add to the fees of the underlying funds.  It may be 0.15%, but in a conservative portfolio with low yields, that drip, drip drip adds up over time.

So forget about those starchy Couch Potato investing strategies!  Bury that Uber Tuber and dig into a Turducken Portfolio this year!

Rain Tax Developments and REIT Financial Impacts

More municipalities are signing on to a "rain tax" to fund stormwater management programs.  These programs include the ongoing operation and maintenance of drainage systems (storm sewers, ponds) and construction of new infrastructure to reduce flood risks, limit erosion and improve water quality in creeks and rivers.  With flood damages now surpassing fire as the largest cost to insurers, there is no wonder that stormwater management needs are front and centre.  The July 8, 2013 storm in the GTA was a not so gentle reminder of the infrastructure deficit facing municipalities.

Municipalities have adopted different fee structures to distribute costs  - each will affect REITs and other property owners differently.  In some cases, a flat fee to all property owners is chosen and this will benefit large properties (retail, industrial and commercial REIT).  For example, Richmond Hill's flat fee (starting October 2013) will keep the largest property fees low in proportion to the property size.  Essentially, smaller properties subsidize the larger ones.  In contrast, Mississauga's fee based on impervious land use will result in the highest fees for the largest, most-highly paved properties.  The same approach was followed in Kitchener and Waterloo who implemented their user fees 2 years ago.

Apartment REITs may get the most equitable fee allocation.  Vertical developments are the most sustainable, lowest runoff residential land use and several stormwater fee structures recognize that.  The Mississauga, Kitchener, Waterloo approach will reward compact development - high rise apartments will have a lower cost per unit compared to low rise apartments since you only pay once for the rooftop area, no matter how many floors.  In Richmond Hill, the flat rate will apply once to condo buildings and complexes, and "multi-residential" residential properties with one owner.  While multi-residential may be subsidizing larger malls and industrial properties in Richmond Hill what have the same flat fee, the fact that only 80% of costs are allocated to non-residential uses means the absolute fee is low.

Stay tuned for analysis on cost per property comparisons and cost per area impacts.  Also, what can REITs do to reduce the impact of fees by taking advantage of credit programs for property owners offered by some municipalities.


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