Financial Jungle

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My parents called the other day reminding me to cut back on dividend investing and start securing a house for our future. A house is a hard asset that always goes up, they reasoned, but stocks are just pieces of paper which can vapourize into thin air.

Predictably after the call, I was in no hurry to scamper to the real estate parade and satiate realtors with fat commissions. Contrary to the popular belief, hard assets do stand firm behind stock certificates: factories, equipments, pipelines, phone towers, cheese, hot water tanks, railways, trains, pills, hydroelectric plants, customers, revenues, profits, bank accounts and many more. Moreover, real estate doesn’t always go up. Suppose you bought a home in Vancouver during the peak of 1980, it would have taken 26 years to recover your money.

However, I must concede that our net worth is running dangerously low on real estate. What should we do? Perhaps we should buy stocks with real estate on the balance sheet. That’ll drive the parents crazy.

When it comes to real estate stocks, Riocan tends to balloon to the A list. That’s because Riocan is the de facto alternative for frugal investors wishing to save the 0.55% MER on the iShares CDN REIT sector index fund; Riocan commands 24.4% of the fund. The flip side of the coin is that this artificial inflated price premium is hard to justify considering Riocan’s 6.3% yield is well below the average (~7.6%), while their distribution growth hasn’t exactly raced ahead of the pack.

Rather than placing all my real estate eggs in Riocan, another option is to diversify the cash between Calloway REIT and Brookfield Properties. That way, I get exposure to both retail and office properties.

Calloway’s success is riding on the ferocious Walmart invasion into the Canadian retail market. Over 100 Calloway malls are anchored by Walmart who are contributing over 25% of Calloway’s total rent revenues. According to Andrew Guy of Sentry Select, Walmart is a tough negotiator. But having their presence serves as a super magnet attracting foot traffic and secondary tenants to the retail stores. With 125 retail properties under its belt, the trust isn’t that much smaller than rival Riocan’s 208. REIT expert, Dennis Mitchell, forecasts Calloway to surpass Riocan as the largest REIT in Canada within 2 years. There are many more reasons to like Calloway: it’s trading approximately 15% below NAV, the 6.7% yield is higher than Riocan’s 6.3%, and it’s been raising distributions at a vigorous pace. Expect more of the same from Calloway as it’s laying the foundation with 15 properties in the pipeline for development versus Riocan’s 10. Additionally, 92% of total properties are little babies, all of which younger than 13 years.

When you buy Brookfield Properties, you become a proud owner of trophy office assets around key metropolitans in North America, most notably New York. CEO Ric Clark projects a 50% increase to operating profit from the current development pipeline, but that’s before plowing their way to become the lead contender to win the Manhattan-based Hudson Yards project which should pad another 30% to 40%. The Hudson Yards project would be an image booster according to Sinclair Stewart, “[Brookfield Properties] is widely regarded as a formidable office landlord, with a portfolio of roughly 100 properties that punctuate the skylines of New York, Los Angelas, Toronto and Boston, … As a developer, however, its credentials are far less certain… The Hudson Yards would change that perception overnight, conferring instant credibility, nearly doubling the company’s development portfolio.” So far this year, the lingering concern over Merrill Lynch’s upcoming lease expiration sent the stock tumbling 50% from its peak in February. According to Dennis Mitchell, Brookfield is sporting a juicy 25% discount to NAV. BPO offers common shares yielding 2.8% of pure dividend.

Admittedly, real estate stocks are notoriously challenging to analyze due to the ever morphing balance sheets. What are you thoughts on these 2 real estate trust/stock? Do you have suggestions on how to approach real estate investing?

You can now check frequently asked questions and answers for mortgage basics information. The mortgage calculator and the amortization table help you to check the extra payments on mortgage. Several buy to let mortgages offers are very attractive for the landlords and others who are interested in real estate specially. Now banks easily provide home loans with out any home mortgage. Different kinds of credit cards are also available with loans.

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It’s true. The rumour is resonating well in the office. According to our supervisor during a departmental meeting, management has reserved the necessary budget to increase salaries next year. Word on the street is for an average hike of 5% - not bad considering the Core CPI is resting at 2.2% this quarter.

As uplifting as it is, it’s still no match against the slew of dividend increases ringing under our Christmas tree:

• Encana - 100% (100% from last year)
• Parkland Income Fund - 8.6% (50% from last year) + ~4.7% of special dividend
• Fortis - 19.0% (31.5% from last year)
• Reitmans - 12.5% (12.5% from last year)
• Scotia Bank - 4.4% (11.9% from last year)
• Pfizer - 10.3% (10.3% from last year)

Not only that, most of these increases are tax-free, while about a third of salary increases goes to taxes.

Related post: Dividend Increase: Devoted Friend In A Stormy Market.

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I have a confession to make. I’m a pretty nosey fellow. If you’re an over-achiever flourishing in an unforgiving world, you better watch out. Financial Jungle just might drag you into an interview, grilling you on all your financial philosophies.

Yesterday, I had the pleasure to meet Mike through a mutual friend of ours. The tall, slim-built, self-employed software solution consultant from Britain was half-jokingly proclaiming to be retired at a tender age of 30. And why not? He has accumulated enough net worth to sustain a modest retirement, but more importantly, he’s living the job of his dream. You see, Mike has a knack for solving corporate pains and sufferings, and he loves it. Stories of process improvements flared the initial 20-minutes of the conversation. In particular, Mike rejoiced at the time when his simple Excel Spreadsheet consistently salvaged 10 unproductive hours each week in a client’s time-tracking process. His high spirit feeds off the gaping look on his clients’ face, and he enjoyed being a super hero in the business world, so to speak. All that, and Mike still gets to choose his hours, projects and “get out of bed” rates.

Life hasn’t been always been honky-dory from day one. Like many of us, Mike was a prisoner with a salaried position in a corporate rat race for 12 years. But he concocted an escape plan: live within his means, and invest the difference - the tried and true method. He is a habitual analytical consumer. It doesn’t matter if he’s pondering on a bigger house or a trivial anti-glare feature upgrade on a laptop. If he can imagine living without them, he walks. And invest the money into real estate. Oh yes, he has a more ambitious plan to tackle on.

The Robert Kiyosaki (Rich Dad Poor Dad) inspired Mike has been on a string of real estate acquisitions. Four years ago, he immigrated to Vancouver while hanging on to his lone property in UK. His timing was impeccable as the Vancouver real estate boom was just at its infancy. After much research, Mike snapped up a condo in the prestigious neighborhood of Kitsilano. With his real estate holdings roaring over the past few years, he took another plunge by selling both his properties and leveraging up the proceeds to acquire 3 condos in Downtown Vancouver. Quite impressive for a 30-year old bachelor. If he keeps this up, his real estate portfolio just might multiply to 4, 5 or 6 properties within the next decade.

In addition to his consulting business and real estate, Mike also hauled away a generous stock option with him after fleeing his 9-to-5 job. When I asked what else was in his investment portfolio, he was stumped, and later replaced “investment portfolio” with “wealth”, which is broader in scope. He quipped that his wealth included both hard assets - real estate and stocks - as well as the intangibles, such as intellect. After all, he did invest countless hours and dollars to foster qualifications to become the heart-and-soul of his consulting firm. That should count for something. So much so he pegged his consulting know-how as an equal one-third weighting against his stock and real estate holdings.

I will summarize some of Mike’s key lessons contributing to his hat-trick performance:

1. Live within your means. Know the difference between needs and wants.
2. Invest, but only in something you understand. (E.g. real estate.) Collecting interests off a saving account is not investing.
3. Don’t abandon an investment too easily unless you have a more compelling alternative.
4. Take your time on key financial decisions. Leave your cheque book at home.
5. Have a 5- and 10-year financial blueprints.

I want to thank Mike for sharing his lessons with us. Please feel free to post any questions that you might have.