RioCan: Is the yield sustainable?

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CFR

Discussion Starter · Apr 24, 2009

CanadianCapitalist said:
I'd like to know how a 8% withdrawal rate is "sustainable". I'd like to see Monte-Carlo simulation results if you have them because you are making a truly astonishing claim here.

Forget Monte-Carlo simulations !

Let's talk real money !

My favourite investment is Real Estate Investment Trusts (REIT's). However, of the approx 30 REIT's that trade on the TSX, 23 of them fail my extremely strick investment criteria, and I only buy from the remaining 7 quality REIT's.

Riocan, Canada's largest REIT, with major tenants such as Walmart, Tim Horton's, TD Bank, etc is one of my 7 quality REIT's.

Back in 2002, I first purchased Riocan units at $13, which were paying approx $1/unit in distributions, ie approx 8% yield. By 2007, Riocan units hit a high of approx $27/unit, and realizing that they were over-priced, my clients and I simply held our Riocan units and put new money into cash.

Recently, during Feb/09, I increased my Riocan position buying more at $12.15/unit, which based on their current $1.38 annual distribution equals a 11.4% cash (sustainable) yield.

Like my hero Warren Buffett, I am not perfect and have made many mistakes along my investing way. Looking back now, I regret not selling Riocan during 2007 at $27.

However, if you go back to my 2002 $13 Riocan purchase, the last 7 years, even though there has been very little price appreciation, my sustainable cash rate of return, just based on the annual distribution has been over 8%, during the worst 7 years since the 1930's.

Should I mention that some of my recent Feb/09 Riocan $12.15 purchase was funded by a 5.5% margin loan, thereby increasing my actual cash return on equity from 11.4% to almost 20 % ? What will be my final return on all of this when Riocan goes back to $27 in 3 - 5 years from now ?

I'm astonished that you're astonished with a 8% sustainable return !

Better investment research does exist.

Bob Novoselac B.Admin., C.A.
www.cfrca.com

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ethos1

· #2 · Apr 24, 2009 (Edited)

CFR said:
Should I mention that some of my recent Feb/09 Riocan $12.15 purchase was funded by a 5.5% margin loan, thereby increasing my actual cash return on equity from 11.4% to almost 20 % ? What will be my final return on all of this when Riocan goes back to $27 in 3 - 5 years from now ?

I'm astonished that you're astonished with a 8% sustainable return !

Better investment research does exist.

Bob Novoselac B.Admin., C.A.
www.cfrca.com

what will you do (or would you do) when the margin loan rate = the distribution return rate, or when the stock drops in price more than what is being topped up by the distribution income?

CanadianCapitalist

· #3 · Apr 24, 2009

CFR said:
Or, lets consider the stock of the Royal Bank, trading a year ago at $50 with a $2 dividend, ie 4% yield. However, recently during Feb/09, with investors acting on exaggerated fears, Royal Bank shares hit a low of approx $25, ie now 8% yield on the same $2 dividend. Using very simple common sense, my clients and I were buying during Feb/09. Would you consider buying Royal Bank at $25 risky ? Or, was buying it at $50 risky when the stock market was at a high and investors had warm/fuzzy feelings ?

So, what you are telling us is that you have a perfect crystal ball that lets you pick stocks at the precise bottom, whether it is Royal Bank or RioCan. Sorry Bob, nobody's that good, not even Buffett. And BTW, care to share some of your bad calls? I somehow get the feeling there are none.

And sorry, your math still doesn't work out. Even if your clients were completely in cash and bought into the market precisely when these stocks were hitting bottom and put all their money in Royal Bank and RioCan, they don't have a 8% sustainable yield. For all I know, one of these could blow up in the future leaving you with a permanent capital loss.

steve41

· #4 · Apr 24, 2009

I see a lot of financial plans created by financial planners, and I can't remember the last time I saw anything in excess of 6% as a market rate of return. Most of the good ones go with 4 or 5%. Any time your advisor starts injecting 'leverage' into the conversation, or 8-10-12% rates of growth, be afraid... be very afraid.

Most monte carlo simulations examine investments in a vacuum. To get a better feel, you need to include all the non-investment entities in the MC... CPP, OAS, loans, salary, real estate, and of course, income tax.

ethos1

· #5 · Apr 24, 2009

what is Bob recommending to his clients this week?

Would Bob be buying Riocan today as well as advising his clients to buy it on margin?

What is Bob buying today?

It assumes Bob charges for his advice, therefore CC he will not be giving any on here, only discussing historical scenario's in which he or his clients may or may not have invested in

I could say that I bought Ford, BMO & YLO.UN at rock bottom - how would anyone know

Bob are you looking for new business

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archanfel

· #6 · Apr 24, 2009

ethos1 said:
what is Bob recommending to his clients this week?

Would Bob be buying Riocan today as well as advising his clients to buy it on margin?

What is Bob buying today?

It assumes Bob charges for his advice, therefore CC he will not be giving any on here, only discussing historical scenario's in which he or his clients may or may not have invested in

I could say that I bought Ford, BMO & YLO.UN at rock bottom - how would anyone know

Bob are you looking for new business

LOL. I'd say it's a bad idea for a financial adviser to look for business in any financial forums. You will just get knocked around left and right.

CanadianCapitalist

· #7 · Apr 24, 2009

ethos1 said:
what is Bob recommending to his clients this week?

Would Bob be buying Riocan today as well as advising his clients to buy it on margin?

What is Bob buying today?

It assumes Bob charges for his advice, therefore CC he will not be giving any on here, only discussing historical scenario's in which he or his clients may or may not have invested in

Not that I'll be investing based on his advice. He's lost me as soon as he mentioned a 8% withdrawal rate. I mean why stop there? At a 20% withdrawal rate, all of us could retire in a few short years.

CFR

Discussion Starter · #8 · Apr 24, 2009

Debt - Two Edged Sword !

ethos1 said:
what will you do (or would you do) when the margin loan rate = the distribution return rate, or when the stock drops in price more than what is being topped up by the distribution income?

Hi Ethos1

Congratulations on what I consider the best question so far.

Let's consider some debt/margin points :

1) Limit Margin
-although my broker allows me 70% margin, I work with a self imposed 40% limit
-Buffett advises to have either little or no margin, in order to avoid a forced sale at a temporary low price
-investors that are retired with no working income should have zero margin (which is NOT what I have seen in some retired clients who came to me from pedlars !)
-consider buying Riocan at $27 using 70% margin which is the typical investor strategy - compare that high risk to the significantly lower risk of buying at $12.15 using 40% margin
-low price combined with low margin = LOW risk

2) Monthly Cash Flow Portfolio's
-one of my primary investment criteria is to only buy investments that yield a minimum of 5%, ideally higher, ie pure growth investments such as RIM will never be found in my portfolio
-such a strategy over time, results in a portfolio throwing off significant cash every month
-during opportunities such as now, this cash is directed to low price / low margin buying
-as stock prices rise, monthy cash flow no longer goes to buying, but instead goes 100% to margin reduction
-ie by using limited margin, you are "pre-buying" stocks ahead of what you can afford today in cash, but getting today's prices

3) 8% Cutoff Point
-8%, which is my sustainable rate point that started this debate, also happens to be my cutoff point on Riocan (cut off points can vary by specific REIT)
-at $1.38 divided by 8% = $17.25, my clients and I will stop buying Riocan on margin, and instead focus 100% monthly cash flow on margin repayment
-even if my margin rate is still 5.5%, buying Riocan at less than 8% cash yield just does not provide enough "margin of safety" (key principle of Benjamin Graham who taught Buffett everything he knows)
-obviously, interest rates can rise, and even 40% margin buying involves some risk
-however, Mark Carney advised this week that short term rates are stable for more than 1 year ?

Great questions, great debate !

Bob Novoselac B.Admin., C.A.
www.cfrca.com

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steve41

· #9 · Apr 24, 2009

However, my feeling is that if you put too many variables into the equation, the conclusion become useless since there are too many assumptions

The problem with just concentrating on investments in a vacuum, is that these other entities... paying off a loan, bridging between retirement and age 65, planning for a large lump sum cash call, selling the family cottage in 15 years.... the cash flows these elements engender (both plus and minus) severely interrupt your investment and subsequant withdrawal strategy over time. Severely.

ethos1

· #10 · Apr 24, 2009

CFR said:
Hi Ethos1

Congratulations on what I consider the best question so far.

Let's consider some debt/margin points :

not so fast Bob

If I read that right & assuming your clients are at 50% margin buying at $27 a drop in the stock, even a penny they would have to top up

If they topped up fully when the stock dropped to $13.50, what would you have advised them to do & forget about cost averaging down

You posted up thread that we should have sold when the stock popped - so why did you not recommend this to your clients when there was a 40% increase in the price of Riocan?

You said earlier 5% margin rate today and an 8% return on Riocan - given what you have posted is not doable

Where is that "margin of safety" you mentioned, I did not see how you knew or would know when it hits

Understanding this is all without qualification & is free on this forum, you have failed to convince me that your investment advicer services are of any value.

Maybe its only me, but having read your posts on investing safely is poor to inadequate, besides being far too risky for my liking

You're fired Bob

Which reminds me since being one of the older forum members, I seem to forget things at times - could you tell us how many clients you have lost with the advice you have posted here and whether when people come to your office for tax related items you provide an up-sell on investing?

Do the CICA code of ethics and by-laws cover you for charging your clients when you provide investment advice that may go wrong.

What about the clients getting upset with you because they lost money based on the paid for services that you provide or have you got that covered in your disclaimer - what do you say to them?

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CFR

Discussion Starter · #11 · Apr 24, 2009

Bob Is Never Quiet !

ethos1 said:
we wouldn't do that would we

Bob has gone awfully quiet

Hey Bob are you there, what about it, answer some of my posts to you

Hi Ethos 1

While you were posting the above, I was typing my reply to your 1 st post conerning margin levels/prices.

Let me answer your points, and also some others.

Yes, I am always looking for new business, and am happy to be one of the very few planners who works on an unbiased low cost hourly only basis.
Most of my clients have given up on pedlars, and gone self directed, which I believe is a good strategy, and I support them with unbiased help.

However, I would also say that warning investors generally about the dangers of pedlars is also a primary motive of mine, even if the investor does not become a client. So, its both a business and a crusade !

From the replies that I am reading, and all of the misconceptions that seem to be accepted by most investors, people still have swallowed too much pedlar Koolaide.

Am I perfect, or have I made some bad investment calls ?

Just like my hero Warren Buffett, the answer is definitely YES, I have made some bad investment calls.

For example, when the market started crashing last Oct/08, with Helicopter Ben Bernake making emergency inter-meeting cuts, I started buying, and am continuing to buy. Unfortunately, some of my Oct/08-Dec/08 buys are currently underwater, however given that I intend to hold them, I believe that I will eventually have a profit. Mistake was buying too early.
Made me sad until I read that both Buffett and Prem Watsa admitted to doing the exact same lthing ast fall.

Lastly, I am NOT a market timer, but instead focus more on a value approach.

Definitely, I see that you guys would definitely beat up on any pedlar coming into this forum looking for business, and I heartily agree with that !

However, I see myself as an unbiased planner with my interests aligned with my clients, and all other fellow investors, whether they be clients or not.

Why else would I write an article exposing the 4% sustainable myth, and try to inform all investors that they should re-consider this 4% rate to maybe reduce wasted years of saving ?

Even throwing out a great Riocan detailed margin buying tip/strategy for FREE !

Don't turn quiet on me now !

Bob Novoselac B.Admin., C.A.
www.cfrca.com

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ethos1

· #12 · Apr 24, 2009

CFR said:
Even throwing out a great Riocan detailed margin buying tip/strategy for FREE !

screaming out loud

Don't turn quiet on me now !

For me, you have not got anything new to offer in investment advice & probably way too expensive & way too risky an advisor for a frugal guy like me

Unless you have a really smart team of FA & IA's working for you, I would suggest that you stick with accounting, corporate tax & auditing

all the best Bob - I'm watching your posts

ethos1

· #13 · Apr 24, 2009

Bob answer these directly

ethos1 said:
what is Bob recommending to his clients this week?

Would Bob be buying Riocan today as well as advising his clients to buy it on margin?

What is Bob buying today?

What has Bob put his clients into in the last 3-days

What exit or change strategy has Bob in place for his clients

Bob please answer these one-by-one - each point, short & sweet

archanfel

· #14 · Apr 24, 2009

CFR said:
Hi Ethos1

Congratulations on what I consider the best question so far.

Let's consider some debt/margin points :

1) Limit Margin
-although my broker allows me 70% margin, I work with a self imposed 40% limit
-Buffett advises to have either little or no margin, in order to avoid a forced sale at a temporary low price
-investors that are retired with no working income should have zero margin (which is NOT what I have seen in some retired clients who came to me from pedlars !)
-consider buying Riocan at $27 using 70% margin which is the typical investor strategy - compare that high risk to the significantly lower risk of buying at $12.15 using 40% margin
-low price combined with low margin = LOW risk

2) Monthly Cash Flow Portfolio's
-one of my primary investment criteria is to only buy investments that yield a minimum of 5%, ideally higher, ie pure growth investments such as RIM will never be found in my portfolio
-such a strategy over time, results in a portfolio throwing off significant cash every month
-during opportunities such as now, this cash is directed to low price / low margin buying
-as stock prices rise, monthy cash flow no longer goes to buying, but instead goes 100% to margin reduction
-ie by using limited margin, you are "pre-buying" stocks ahead of what you can afford today in cash, but getting today's prices

3) 8% Cutoff Point
-8%, which is my sustainable rate point that started this debate, also happens to be my cutoff point on Riocan (cut off points can vary by specific REIT)
-at $1.38 divided by 8% = $17.25, my clients and I will stop buying Riocan on margin, and instead focus 100% monthly cash flow on margin repayment
-even if my margin rate is still 5.5%, buying Riocan at less than 8% cash yield just does not provide enough "margin of safety" (key principle of Benjamin Graham who taught Buffett everything he knows)
-obviously, interest rates can rise, and even 40% margin buying involves some risk
-however, Mark Carney advised this week that short term rates are stable for more than 1 year ?

Great questions, great debate !

Bob Novoselac B.Admin., C.A.
www.cfrca.com

And people actually pay this guy? Anybody with half a brain knows a big part of the payout by income trusts were return of capitals. Take riocan for example, last year it distributed $1.36. Out of which $0.70 was ROC.

Not to mention high yield means the market expect the dividends to be cut. And $12.15 is less risky than $27? He must be telling everybody to buy Lehman Brothers and Citigroup last year. You want value, not cheaper price, or Nortel would be really safe with $0.1/share.

CFR

Discussion Starter · #15 · Apr 24, 2009

Can I Reapply ?

ethos1 said:
not so fast Bob

If I read that right & assuming your clients are at 50% margin buying at $27 a drop in the stock, even a penny they would have to top up

If they topped up fully when the stock dropped to $13.50, what would you have advised them to do & forget about cost averaging down

You posted up thread that we should have sold when the stock popped - so why did you not recommend this to your clients when there was a 40% increase in the price of Riocan?

You said earlier 5% margin rate today and an 8% return on Riocan - given what you have posted is not doable

Where is that "margin of safety" you mentioned, I did not see how you knew or would know when it hits

Understanding this is all without qualification & is free on this forum, you have failed to convince me that your investment advicer services are of any value.

Maybe its only me, but having read your posts on investing safely is poor to inadequate, besides being far too risky for my liking

You're fired Bob

Which reminds me since being one of the older forum members, I seem to forget things at times - could you tell us how many clients you have lost with the advice you have posted here and whether when people come to your office for tax related items you provide an up-sell on investing?

Do the CICA code of ethics and by-laws cover you for charging your clients when you provide investment advice that may go wrong.

What about the clients getting upset with you because they lost money based on the paid for services that you provide or have you got that covered in your disclaimer - what do you say to them?

Hi Ethos 1

Similar to Sampson, I believe that you have mis-interpreted my comments.

While I don't have the time to go thru each of your errors, I NEVER stated that either me or my clients would buy Riocan at $27. To the contrary, I stated that my clients and myself stayed away from Riocan at such high prices, and I have written 2007 research reports distributed to my clients to prove this point.

Currently, Riocan can easily be purchased at less than $17.25, ie more than 8% cash yield, while broker margin accounts are now generally charging 4% to 6%, so my current strategy DOES work.

Riocan, according to RBC research, has a liquidation value (ie sell all properties at todays prices , payoff all mortgages, distribute net proceeds on a pro rata basis) TODAY of approx $20. So, buying it at up to $17.25, even using margin that results in more cash flow, is definitely following a MARGIN OF SAFETY approach.

You should go back and carefully re-read all of my comments.

Would you like a list of all of my upset clients who lost money following my advice ? So would I, since there are NONE.

Recently, a retired couple came to me holding BMO dividend fund, ie cash yield 6% less 2% MER = 4%. After coming to me, they sold out this BMO dividnd fund, purchased Riocan and several other investments, that now results in a 10% cash yield, ie TWO AND ONE HALF time more monthly cash flow for them. No complaints yet.

Lastly, unlike most CA's , I don't provide regular public accounting work, ie tax returns and financial statements, and I am in full compliance with all my professional rules. Generally, since I am on a non compete basis, I contact CA firms for financial planning referrals, and most CA firms are glad to be able to offer their clients an unbiased financial planner choice.

Can I please be re-hired ?

Bob Novoselac B.Admin., C.A.
www.cfrca.com

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ethos1

· #16 · Apr 24, 2009

archanfel said:
And people actually pay this guy? Anybody with half a brain knows a big part of the payout by income trusts were return of capitals. Take riocan for example, last year it distributed $1.36. Out of which $0.70 was ROC.

Not to mention high yield means the market expect the dividends to be cut. And $12.15 is less risky than $27? He must be telling everybody to buy Lehman Brothers and Citigroup last year. You want value, not cheaper price, or Nortel would be really safe with $0.1/share.

If I may intervene Archanfel, you could leave Bob too me, you if you wish can deal with his maths related screw-up's

Oh, I forgot, I already fired him

ethos1

· #17 · Apr 24, 2009 (Edited)

CFR said:
Hi Ethos 1

Similar to Sampson, I believe that you have mis-interpreted my comments

are you an expert now on how people interpet things you write?

You should go back and carefully re-read all of my comments]

Bit of advice Bob, its not nice to tell people to go or to should do something, it may back fire on you

Do you also use the words "we should do this" to your clients"

What about 'suggest' or 'think about'

Would you like a list of all of my upset clients who lost money following my advice ? So would I, since there are NONE.

if you say so .. yawn

Recently, a retired couple came to me holding BMO dividend fund, ie cash yield 6% less 2% MER = 4%. After coming to me, they sold out this BMO dividnd fund, purchased Riocan and several other investments, that now results in a 10% cash yield, ie TWO AND ONE HALF time more monthly cash flow for them. No complaints yet.

How hard was it to convince them, what made them switch?

Did you get them buying Riocan on margin?

Can I please be re-hired ?

Bob Novoselac B.Admin., C.A.
www.cfrca.com[/url.[/QUOTE] no, once you're fired its over, like a divorce - no remarriage

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archanfel

· #18 · Apr 24, 2009

ethos1 said:
If I may intervene Archanfel, you could leave Bob too me, you if you wish can deal with his maths related screw-up's

Oh, I forgot, I already fired him

All yours. He lost my business through the very first post and I am usually pretty gullible to begin with. The irony was that I have been actually considering riocan for my TFSA since I got no REIT exposure right now.

ethos1

· #19 · Apr 24, 2009 (Edited)

Bob - come on answer please

CC & FT, I promise this is the last post to Bob

ethos1 said:
Bob please answer the following one-by-one - each point, short & sweet

What is Bob recommending to his clients this week?

Would Bob be buying Riocan today as well as advising his clients to buy it on margin?

What is Bob buying today?

What has Bob put his clients into in the last 3-days

What exit or change strategy has Bob in place for his clients

See less See more

steve41

· #20 · Apr 24, 2009

Better yet.... Has Bob kept his E&O insurance premiums up to date?

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