Investment Q&A

Q: Hi Team,
Can you comment on the current drop in price of Artis REIT (AX.un).
It's dropped another 5% recently, and I'm wondering what's up?
Thanks for all your great advice!

Q: all ..ATH has been on a tear ... is this the 1+ billion effect and where do you see it ending (crystal ball guess)

Q: volume of ESL, Enghouse, is very erratic and the trend is still up.
Can you comment?
When will you be updating the ESL report?
Thanks

Q: any chance you might be covering either element financial or enterprise group in the near future?

Q: Hi Peter & 5i:
(This may be too long and unwieldy for posting so I’ll leave it to you – please post away if you want to.)
Can you please check my thinking on this stuff. I hold several Canadian REITs and have done well with them but, after holding through the recent top, I am wondering if I should strip down my positions or even exit them entirely. Here is my thinking:
Over the years I’ve noticed that they tend to separate out into tiers based on perceived risk/quality. Occasionally one moves significantly relative to the rest of the REITs but not usually. Usually the REITs stay within their tiers, the tiers maintain their relative positions and the market tends to move the whole group up and down together. With the recent topping and pullback, I have been thinking about what is going on with bond interest rates, wondering about REITs’ present valuations and to what extent the REITs are discounting, or susceptible to, further movements in the bond markets.
It seems to me that it is useful to view REITs in terms of the spread between a REIT’s yield and a bond yield (eg. Cdn 10-yr). The market requires REITs to have a higher yield because they have equity risk, among other things. Taking REI.UN for example, right now its yield is about 5.8% and 10-yr Cdas are about 3% so you have a yield spread of 2.8%. During very turbulent times like the tech boom and bust or the 08-09 financial crisis the spreads get significantly wider – with REIT valuations compressed and very high yields available to investors who can be comfortable with the perceived risks amidst the turmoil. I tried to select a couple of “mid-points” in REI.UN’s unit value over the last 10 years and came to the view that the current spread of 2.8% is just about “normal” (not exactly “average”, but more like “reasonable for non-crisis times and potentially relatively stable”). It doesn’t matter if I have the “normal” number exactly right for what I am thinking, just so long as I am somewhere around right. So one suggestion is that you could look for REI.UN to find its way toward a 2.8% spread, if the broader markets aren’t either on a rocket ride or in a free-fall.
I kind of expect that over the next 3 to 5 years the 10-yr bond rates are going to rise. And it wouldn’t surprise me to see them moving back into the range of 4-6% . On the way down, the move from 6% to the 4% range spanned from mid 2000 to 2007. REITs, fueled in part by the ever lower interest rates, moved steadily higher over the same time span. As a touch point along the way, in January 2005, REI.UN’s spread over 10-yr Cdas was about 2.8%, but with the bond at about 4.2%, that meant REI.UN’s yield was 7%, with a unit value of about $18.00.
Today, with a spread of about 2.8% and a yield of 5.8%, REI.UN’s unit value is about $24.40. Now I know that not everything tracks its own history perfectly, REITs can kick in the odd small distribution increase, and endlessly many other variables may have some impact. However, based on the current distribution level, on the 2.8% spread metric, a move to a 10-yr Cda rate stabilizing at around 4.00% would imply a unit price of under 21.00 for REI.UN. Similarly, a 10-yr Cda rate stabilizing at around 6.00% would imply a REI.UN unit price of about $16 – a long, long way down from over $24. Moreover, because what I am considering has absolutely nothing to do with Riocan’s operational performance and because the market tends to move the group of REITs in tandem, it is likely that if REI.UN units trade lower on the yield spread over rising bond rates, then the rest of the REITs will do the same thing.
The conclusion seems to me to be that it would be prudent to underweight REITs now, if not exit them entirely. But it all depends on the interest rate call. If something happens to push 10-year Cdas back down to 1.6% (like ca. June 2012), REITs could provide another significant top, and a great exit point. If interest rates trend steadily higher from here, then we probably don’t see another top like the one we just recently had. Interest rate trends can be very long (and scary). With relatively few peaks and valleys along the way, the trend on 10-yr Cdas was down from 1982 to 2012 (30 years!).

Q: KBL K-Bro Linen (but only as an illustration)

Just sharing a little learning experience I recently had.

KBL do not have a DRIP. I am with a full-service broker (still, while I'm getting my feet wet as it were) who offers a synthetic drip -- but only full shares, no partial shares.

KBL pay a monthly dividend. My initial purchase was too small to allow the monthly KBL dividend to purchase an additional share under the synthetic DRIP.

I ended up adding to my holdings to get enough shares / monthly dividend to get at least the one additional share each month.

That problem typically doesn't arise with quarterly dividends.

Q: KBL K-Bro Linen

In an earlier question about K-Bro you mentioned they report next week. Where did you find that info? I figured it would likely be around that date based on past history, but there's no news release or mention of it on their investor website?

Q: I would appreciate your views on Bellatrix Exploration

Q: Hi Peter and Team,
My question is about the impact on equity valuation of the rise in treasury yield. In Today's Post, David Rosenberg opined that 10 year treasury may rise to 4% and recommends favoring companies that have exposure to hard assets, high fixed costs/low variable costs, high ratio of capital to labor and proven pricing power that protects margins. It appears that utilities and REITs have most of these attributes and yet are the most sensitive to the rise in interest rate. What am I not understanding? Please help.
Regards,
Danny

Q: Any reason for drop in KBL the last couple of days

Q: Hi 5i,

Dissapointed to have missed the SYZ run recently. There wasn't enough liquidity up until recently to buy a meaningful position. Your thoughts on getting in at current levels? Shoudl we wait for a pull back? Volumes have really picked up in the last few trading sesions. Your thoughts please

Q: CWT.UN/REI.UN Looking at the REITs I see a rather large yield of around 6% on these two blue chips. I own very few bonds at this point (or REITS for that matter - HLP.UN/HR.UN). The bonds I do own are of short duration with half the yield of the REITs. I do not see US 10 year going above 2.5% and this should hold back Canadian yields. Time to buy under that scenario?

Q: Are you at all concerned that many stocks in Canada that are popular right now (e.g. CSU, ESL, VRX, GIB.A, CGX, CMG) are way above their 200d mavg and have very high P/E's ? Although many are growing quite nicely are these stocks overbought in your opinion?
great service.

Q: What do you think about Major corporation (v.MCC)?
Do you think Amaya Gaming and Sodium Capital are still Buy or are they too expensive? What should be their buy prices?

Q: Good morning Peter and the 5i team, Another question about FCR. Would it be advisable to switch a 5% holding in Riocan (REI.UN) to FCR? The price of FCR appears to be at a good entry point. (I've held Riocan for several years, and am up about 12% with reinvested dividends). Thanks.

Q: peter, constellation(been in since 71.00) and sylogist(been in since 3.80), i am sitting on huge profits, would you sell into this strength or still hold. dave

Q: With Potash shares falling. Is this a good time to acquire POT

Q: I bought DND 4.25 it's trading today at 7.65 up.61 this morning.I'm thinking about buying more. This stock just keeps going up. But maybe it's reaching it's peek. Not sure what to do..

Q: Hi Peter and Team:

Could you please comment on Hudbay's (HBM) results/comments in their 2nd quarter report. With the reduction in dividend and other issues,do you expect the share price to be pretty stagnant for the foreseeable future & therefore wise to sell and move the money into something else ?
Thank you again for this great service.

Q: T:LIQ - LIQUOR STORES NA LTD
bought a little 2 months ago and am disappointed for it lost about 15%. I feel like selling but will consider your comments. I am prepared to wait if there is hope for some up side. your comments please
Thanks
Yossi