Chinese Buyers Real Estate Platform Says Otherwise

The government of Ontario was early to claim victory over the rising cost of housing. According to a digital real estate platform for Chinese buyers, the non-resident speculation tax will not hurt foreign investors as it is still advantageous to invest in pre-construction condominiums, whose prices are expected to go up over the construction period and offset the tax.

The government of Ontario recently put in place a levy on foreign buyer transaction that consequently caused home sales to drop. Nonetheless, Chinese investors continue to show strong interest in real estate in Canada and the US. The reason is due to safe and stable markets. The investors also consider sending their kids to Canada or US top universities.

It’s not in the best interest of the governments of both Canada and the US to stop these investments which strengthen their revenue. In fact, any measures that may be targeted at weakening this trend are only likely to come from the Chinese side. Canada and the US will continue leading real estate investment markets for Chinese investors.

Source: BNN, Juwai, @byronburley

The Current Situation of Real Estate in Canada

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Real estate has always been perceived as safe and a potential way to make money for many investors. Perhaps that is why many foreign investors, particularly Chinese, see Canada’s real estate industry attractive despite the high prices and government regulations. The proof is in the increased home prices in Vancouver and Toronto in recent years.

However, since Ontario put in place a fifteen percent tax on home purchases by foreigners this April (Non-Resident Speculation Tax), the percentage of foreign buyers in Toronto fell from 7.2 to 5.6 percent. In general, the number of new listings has fallen and so have home sales. Vancouver implemented the same tax last year and went through some sort of similar accommodation.

Foreigners will continue to turn to Canada due to the state of vagueness in the US and also the UK. Canada acts as a good alternative especially due to its diplomatic and stable economy. In a recent report from expats community, the political climate of the US and UK has led to a significant drop in their ranking.

In contrast, a further appreciation of the loonie might be a driving force to put off new foreign capital flooding. For instance, the US dollar experienced more than a 10% depreciation when it traded at C$1.23 on average in September 2017, as opposed to C$1.42 in January 2016.

Source: Toronto Real Estate Board, Ontario Ministry of Finance, Real Estate Board of Great Vancouver, InterNations, Bank of Canada

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Canada Going Strong

q2-17 canada gdp

In the last few weeks, Canada has shown economic strength. The GDP in the second quarter of the year 2017 has risen by an annual rate of 4.5 percent. Another piece of good news is that the unemployment rate in August decreased to 6.2 percent, the lowest since 2008.

This led to the announcement of increased interest rates by the Bank of Canada early September. The new Canadian rates of 1.0 percent pairs with the recent increase in the U.S interest rates to 1.25 percent. This way, Canada retains the toonie in competing position with the U.S dollar.

The foreign view of Canada continues relatively strong, vis-a-vis the ones of the U.S and UK. Expat community Internations announced a significant drop of the U.S and U.K in their annual ranking. The U.S ranking fell from position 26 to 43 while U.K dropped from the previous position of 33 to 54. Conversely, Canada ranked 16 among 65 studied nations.

Source: Trading Economics, Bank of Canada, Federal Reserve, InterNations

Written on 18 Sep 2016

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Best Thing About This REIT is Close to Completion

  1. The share price of Lexington Realty Trust, a net lease REIT that is primarily concentrated in office/ industrial, has surged in the wave of other net lease REITs, such as Realty Income and National Properties Retail.
  1. The multiple at 10 times AFFO remains below that of office, industrial, and net lease sectors.
  1. Despite cutting dividends in 2008 in order to accelerate deleveraging, Lexington is known for being a good dividend payer, accumulating 23 years of consecutive dividends.
  1. Massive asset sales helped the company become investment grade in June.
  1. The dispositions, the best thing happening to the stock, is almost complete, possibly slowing their stock performance.

chart01Lexington Realty Trust, a net lease REIT that is primarily concentrated in office/ industrial, has surfed the hype of net lease REITs this year. The share price has surged by 31% this year, which is in line with its other net lease peers, such as Realty Income’s 33% and National Properties Retail’s 27%.

Lexington stocks are currently trading at around 10 times 2016 projected AFFO, which is certainly lower than the average multiple for office and industrial, which has been in the mid-twenties. Also, it has been lower than Realty Income (24x) and National Properties Retail (21x).

When we last featured the stock in March (click here), we highlighted its great dividend record. Lexington has been paying dividends for 23 consecutive years. Also, the stock is yielding a great 6.5%, well above the REIT average. Since the payout ratio is around 58% and their AFFO per share continues to grow, chances are low they will cut the dividend.

Last June, Standard & Poor’s rewarded their deleveraging efforts with an investment grade corporate rating. The management has carried out an aggressive disposition plan, which helped to lower their debt to EBITDA to below 7x and fixed charge coverage to 2.7x. Most recently, the company sold parcels of land in New York City.

Unfortunately, their disposition plan of about $600 million, which might be the best thing to happen to the company, is close to completion. We wonder whether they will continue creating internal catalysts to keep investors excited.

In summary, the completion of their disposition program might slow Lexington’s stock performance. Of course, if nothing at all, it will remain a good dividend payer.

Source: Lexington Realty Trust(NYSE:LXP), Standard&Poor’s, Fast Graphs

Written on 11 Aug 2016

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author is long FCH, XHR, CLDT, and PEB.

Despite Disappointing Q2, WPC Remains Safe

 

As usual, we keep our eyes open for the most potentially profitable REITs. W.P. Carey fell on our radar. Let’s take a quick look at what we discovered.

  1. Despite having poor Q2 results, W. P. Carey (WPC) appears to be solid choice amid several overvalued REITs.
  2. The stock has performed better than Vanguard REIT ETF and is in sync with the FTSE NAREIT All Equity REITs.
  3. The portfolio is geared towards traditional REIT sectors (self-storage, industrial, retail, and office).
  4. The company continues to move forward with their full year guidance.
  5. This diverse portfolio has overseas ties.

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Unlike June and July, when REITs were performing well, the month of August has not been that kind to REITs. More popular sectors such as self-storage, net lease retail, and data centers have begun to fall off. Yet, it has been difficult to spot good buying opportunities. This has encouraged us to showcase a fairly valued stock that may be a good choice for a REIT.

W.P. Carey (WPC) has generated an 18% return at this point. This is better than the more popular Vanguard REIT ETF (VNQ). Also, Vanguard’s dividend yield was 3.2%, while the dividend yield for W.P. Carey was 5.6%. The stocks we monitor from the FTSE NAREIT All Equity REITs have returned on average 18%.

It is clear that WPC is not as diversified as those indices (which totals more than 150 stocks), but it is important to point out that they are diversified. The REIT has split its investments in conventional sectors such as office, retail, self-storage, and industrial. U-Haul is one of their top customers and their lease terms can go as far as twenty-five years.

This portfolio has a two-thirds stake in domestic investments (spread evenly across U.S. regions) and a third in international. They have a small stake in the United Kingdom so Brexit should not be a big deal for the REIT. The management does not believe the currency fluctuations will have an impact on the company’s success. Most of the company’s earnings come from owned properties, but they also manage REITs for other entities.

During the anticipated release of their Q2 results this month, the firm revealed that their AFFO per share dropped 5% year over year. They indicated that the managed REIT segment generated a smaller amount of investment and debt placement transactions, reducing structuring revenues. Despite this drop in activity, their owned REIT segment performance continues to stay strong. They also revealed that their full year AFFO guidance is at an acceptable midpoint of $5.10 per share. This gives us a multiple of 14 times AFFO, which is on pace with the REIT’s historic multiple.

Despite its recent disappointing results, WPC remains a safe choice.

Source: W. P. Carey Inc.(NYSE:WPC)

Written on 11 Aug 2016

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author is long FCH, XHR, CLDT, and PEB.

 

Our Attitude Toward REITs

  1. After an average share price appreciation of 25% over the last twelve months, U.S. equity REITs now seem to be fairly valued or even overvalued.
  2. In anticipation of creating a real estate group within the S&P 500, there’s discussion as to whether REITs will reach a new multiple level.
  3. However, there is a chance Janet Yellen will increase interest rates by a quarter of a percentage point again, prompting new selloffs.
  4. If there is enough of a dip to make this a buying opportunity, we will open a position.

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We are definitely in any different a situation than we were at this time last year. In August 2015, the market was debating whether or not the Fed would initiate the interest hike, which have prompted a selloff later in the month. Following an average share price appreciation of 25% over the last twelve months, U.S. equity REITs now seem to be fairly valued or even overvalued.

In anticipation of creating a real estate sector within the S&P 500, there’s discussion as to whether REITs will reach a new multiple level. Some argue that the inclusion will make fund managers and institutions inch up their REIT stake in portfolios benchmarked by S&P 500. However, the more we look at it, the more we are convinced that this is a moment to evaluate positions and possibly take profits or hold.

However, there’s always the chance Janet Yellen will increase interest rates by a quarter of a percentage point again, competing with REIT yields and prompting new selloffs. REIT specialists might complain that REITs offer more than the yield, but this is how a significant portion of investors see REITs. While it’s not possible to go against the market reaction, we might take advantage of a potential selloff to buy new positions.

So, here’s what we are doing right now. We’re examining Q2 results, checking prospects and multiples, and if there is enough of a dip to make this a buying opportunity, we will open a position.

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author is long FCH, XHR, CLDT, and PEB.

Another Hotel REIT Hit by the Unpredictable Economy

For being in general undervalued and having good dividend yields, hotel REITs are a sound path investors might choose if they want to see potential good returns on their long-term investment. However, it is imperative for investors to understand that all hotel REITs are affected by the economy. Let’s take a close look at what is taking place with Chatham Lodging Trust.

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  1. Due to a decline in business travel, Chatham Lodging Trust has lowered its guidance for 2016.
  1. For two trading days following the announcement, the share price dropped by 13%.
  1. Chatham joins the ranks of other hotel REITs that are being affected by macroeconomic factors.
  1. We felt it, but we are still optimistic about the sector and the stock.

Due to the decline of business travel, the hotel REIT Chatham Business Lodging Trust has lowered its annual guidance for revenue per available room (RevPAR) and AFFO per share. Despite the average daily rate (ADR) and occupancy remaining strong, the RevPAR figure did not meet the company’s expectations. During the Q2 conference call last week, the company revealed that it believes this pattern will continue for the rest of the year. The management stated that business travel is declining due to poor GDP growth. Until they see more GDP growth, business travel should be restricted.

After the release of the Q2 results, the share price has dropped by 13%, offsetting all of July’s return. However, the year to date return is still positive since the stock is yielding close to 6%. If nothing dramatic takes place by the end of the year (except a possible Federal hike in September), Chatham investors should be pleased with the stock performance.

Pebblebrook, FelCor Lodging Trust, and Hilton Worldwide have been some of the hotel REITs that reported restrain on Q2 growth for the same reason as Chatham. Besides poor business demand, Chatham has pointed out that discounted rates from online travel agents and increased supply in some gateway markets are two factors that are influencing their performance.

Despite the overall results, we still feel good about the stock. During the call, Chatham stated that numbers for July were not impressive, but they expect them to get better in August and September. The REIT has a solid portfolio that is supported by a sound investment strategy and multiple catalysts. It is also important to point out the following: stock has traded at a mid-range level over the previous twelve months, multiple is in line with peers, and dividend has been covered well.

In short, despite the negative impact on our REIT portfolio, we are not panicking. Our due diligence leads us to believe they can weather through.

Source: Chatham Lodging Trust(NYSE:CLDT)

Written on 04 Aug 2016

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author is long FCH, XHR, CLDT, and PEB.