# RioCan: Is the yield sustainable?



## CFR (Apr 18, 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 (Apr 4, 2009)

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 !
> 
> ...


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?


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## CanadianCapitalist (Mar 31, 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.


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## steve41 (Apr 18, 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.


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## ethos1 (Apr 4, 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 (Apr 7, 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?
> 
> ...


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.


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## CanadianCapitalist (Mar 31, 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?
> 
> ...


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.


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## CFR (Apr 18, 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 (Apr 18, 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.


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## ethos1 (Apr 4, 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 (Apr 18, 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 (Apr 4, 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


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## ethos1 (Apr 4, 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?
> 
> ...


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


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## archanfel (Apr 7, 2009)

CFR said:


> Hi Ethos1
> 
> Congratulations on what I consider the best question so far.
> 
> ...


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.


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## CFR (Apr 18, 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
> 
> ...



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 (Apr 4, 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


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## ethos1 (Apr 4, 2009)

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.
> ...


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## archanfel (Apr 7, 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.


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## ethos1 (Apr 4, 2009)

*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


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## steve41 (Apr 18, 2009)

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


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## CFR (Apr 18, 2009)

*A Very Tough Audience, But I Love It !*



ethos1 said:


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



Hi Ethos1

Am I an expert on how people interpret what I write ?

Above, you ask if I had the retired couple "buying Riocan on margin".

However, even further above, I clearly stated that margin buying should be severly limited for working people, and ZERO for retired people.

So, although I am not an expert on how people interpret what I write, in your case I can quite confidently say that you have mis-interpreted my comments.

Sorry if it sounds too harsh, but please do consider re-reading my above comments, including maybe having a calculator close by.

Let's review some other points:

-too expensive ? my fees range from $500/year to $1,500 per year for most clients, generally a fraction of what pedlars charge

-what is Bob buying today - Riocan ! sorry, with clients paying me for investment research, I can't give away more for free

-AFFO v ROC - Adjusted Funds From Operations (AFFO) is similar to free cash flow, and the main metric for REIT's in judging distribution sustainability
-ROC, Sorry Archanfel, has absolutely NOTHING to do with distributions, and is simply the REIT passing onto unitholders the Capital Cost Allowance (CCA) , similar to depreciation, that REIT's can't claim themselves
(as anybody with an accounting brain would know ?)

-Neil Downey CA, CFA, of RBC is generally ranked as Canada's top REIT analyst (although my clients and I beg to differ!) - Neil has calculated Riocan's estimated 2009 AFFO at approx same as distribution, therefore distribution cut risk is minor
(Neil also calculated the Riocan liquidation value at $20)

-Archanfel - how is your Nortel & Citibank ? if anybody remembers, at the start of all of this, I stated that only 7 of 30 publicly traded REIT's pass my strict investment criteria
-my primary investment criteria is my "CEO - Leader v Looter" analysis, which basically examines in detail the alignment of interests between managment and unitholder, ie how many units of the REIT does the CEO own, related party transactions, no tolerance for dual class voting shares, etc, etc
-using this and other criteria described on my website, I significantly reduce my risk on REIT's , and any other investments
-so please don't compare my stocks with yours !


Is the divorce final , or can we start dating again ?


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


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## ethos1 (Apr 4, 2009)

CFR said:


> Is the divorce final , or can we start dating again ?
> 
> Bob Novoselac B.Admin., C.A.
> www.cfrca.com


That was fun & thanks for sustaining it as well as all of the responses

I'll leave it be to let others read & respond

You are not rehired

All the best Bob


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## CFR (Apr 18, 2009)

*Who's Going Quiet Now ?*



ethos1 said:


> That was fun & thanks for sustaining it as well as all of the responses
> 
> I'll leave it be to let others read & respond
> 
> ...



Hi Ethos1

Despite my title to this reply, I have also had enough fun today !

It's hard to find a great audience like this to debate 8% sustainable rate, REIT's, investment criteria, margin, no accounting brain, etc, etc. 

Seriously, I do enjoy such debates, and have a hard time finding others who share my interests.

Whenever I try discussing any of these topics with my wife, she leaves the room ?

Of course, I also get no thanks from her when she receives her monthly Riocan cash distribution !

So, unless anybody else has any more accounting/tax/investment tips that they would like to educate me on, like ROC, I too will say goodbye for now.

All the best to you also !

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

(p.s. Buy Riocan up to $17.25 max for an 8% + sustainable rate)


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## CanadianCapitalist (Mar 31, 2009)

CFR said:


> Sorry Archanfel, has absolutely NOTHING to do with distributions, and is simply the REIT passing onto unitholders the Capital Cost Allowance (CCA) , similar to depreciation, that REIT's can't claim themselves
> (as anybody with an accounting brain would know ?)


If you think that shareowners are not paying for depreciation you are kidding yourself. Over the long-term a reasonable assumption would be that depreciation equals capital expenditures. Yeah, you can play games with accounting and defer capital expenses but sooner or later you have to pay the piper and refurbish the buildings, repave the parking lot etc.

I should also point out that calculating NAV of REITs is not an exact science, though it is usually a good time to buy when the units are trading at a discount to NAV.


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## archanfel (Apr 7, 2009)

CFR said:


> Hi Ethos1
> 
> Am I an expert on how people interpret what I write ?
> 
> ...


Huh? You apparently don't read English since I never said I own those stocks. Only that they fit your criteria of being cheap vs. their peak prices. 

Hopefully you can read numbers. Here you go:

http://www.google.ca/url?sa=t&sourc...NgyqzAe8Y8K2T_jlg&sig2=ew_djK95wlfRJ8pk9l6-Hg


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## ethos1 (Apr 4, 2009)

archanfel said:


> Huh? You apparently don't read English since I never said I own those stocks. Only that they fit your criteria of being cheap vs. their peak prices.
> 
> Hopefully you can read numbers. Here you go:
> 
> http://www.google.ca/url?sa=t&sourc...NgyqzAe8Y8K2T_jlg&sig2=ew_djK95wlfRJ8pk9l6-Hg


interesting was that

In period one on that chart on 1/31/2008 REI-UN was at $21.35, paying $0.1125 x 12 = $1.35/$21.35 = 6.3% annualized

Bloody hell, I would be shitting my pants if I was on margin through 2008

Never mind the tax, the margin (which would be more than 5.5% at that time) or the cap gain - where was the 8% return Bob spoke about


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## CFR (Apr 18, 2009)

*Bob Returns !*



ethos1 said:


> interesting was that
> 
> In period one on that chart on 1/31/2008 REI-UN was at $21.35, paying $0.1125 x 12 = $1.35/$21.35 = 6.3% annualized
> 
> ...



Hi Ethos1

Thought you had made your last post on this debate ?

Anyway, let's have more fun with the last 3 posts :

1) Canadian Capitalist
You should know the definition of AFFO before making more comments about repaving the parking lot !
-Funds From Operations (FFO) is cash flow BEFORE maintenance capital expenditures such as repaving the parking lot
-Adjusted Funds From Operations (AFFO), is basically, FFO minus maintenance capital expenditures such as repaving the parking lot
-Therefore, ROC remains totally irrelevant, and so does depreciation for that matter, which is based on amortization of often irrelevant historical cost
-Net Asset Value (NAV) and AFFO remain the most important financial criteria for REIT's
-although I will agree with you that NAV and AFFO , like all financial statment / valuation results are more of an art form, and not an exact science
-so, when Neil Downey CA,CFA of RBC , and I, use AFFO to determine payout ratio's, we are NOT kidding ourselves
-further , while NAV estimates can vary, generally Neil/RBC, in his extensive research, is usually lower than most other bank/security firm REIT analysts, like he is also conservative in his 2009 AFFO forecasts
-depsite my love of AFFO/NAV, I should conclude that qualitative factors such as management/unitholder alignment are much more important than quantative factors

2) Archanfel
-from what I could see, your link goes to Riocan's CCA/ROC schedule, So What ?
-if you have read all of my above posts, and still believe that being "cheap" is my only criteria for buying stocks, you need more help reading than Ethos1

3) Ethos1
-was Bob on margin thru 2008 ?
-if , as I have requested twice already, you had correctly read all of my above posts, I have only bought Riocan twice in the last 7 years :
a) 2002 at $13/unit
b) Feb/09 at $12.15 (on margin for SOME of this buy only)
-in fact, my clients and I did not make any margin buys until Oct/08, as prices before that time were too high on almost all stocks
-the Feb/09 $12.15 purchase, $1.38 distribution = 11.4% cash yield, actually much higher considering SOME of the buy was financed at 5.5%
-although the $12.15 price may not return, my clients and I will continue to buy Riocan up to $17.25 / 8.0%+ sustainable yield, with SOME clients buying using LIMITED margin
-beyond $17.25, we'll leave it to Archanfel/others to jump back on, and we will instead turn our steady cash flows to margin reduction 


Riocan closed today at $14.60, up $.40 !


Can't disclose how many Riocan units my clients and myself own, but let's just say that today was a VERY GOOD day !


Are there any more financial/tax/investment tips for Bob ?


I'm going to tell my wife that I had a very exciting debut day on Canadian Money Forum !

As usual, she will leave the room if I provide any more detail !

Please don't go quiet on me !


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


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## archanfel (Apr 7, 2009)

A retirement financial adviser getting excited about day to day price fluctuations? Never a good sign. 

Sorry man, I think you are wasting your time here if your goal is to sign up more customers. And to be honest, the attitude does not help either. If you can't take a few jabs (fairly or unfairly) without getting testy, you are in the wrong line of business. Good luck though. We certainly don't have enough FAs that aren't funds sale people.


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## CFR (Apr 18, 2009)

*Who's getting testy now ?*



archanfel said:


> A retirement financial adviser getting excited about day to day price fluctuations? Never a good sign.
> 
> Sorry man, I think you are wasting your time here if your goal is to sign up more customers. And to be honest, the attitude does not help either. If you can't take a few jabs (fairly or unfairly) without getting testy, you are in the wrong line of business. Good luck though. We certainly don't have enough FAs that aren't funds sale people.



Hi Archanfel

What's the difference between a "few jabs" or "getting testy" ?

Does it depend on which one of us is responding ?

Compared to a comment like "anybody with an accounting brain would know" directed to a CA ?

Misinterpreted again ? Did I say that I was "excited" about yesterday's Riocan gain ? Obviously, the market can take it all back, and then some on Monday. Given that my first Riocan purchase was in 2002 , do I appear like a day trader to you ?

As stated before, my goal is two fold, one to get more business, and two, to try at least to open the eyes of fellow investors to some of the common misconceptions that cause serious harm to investment portfolio's.
(is the 4% sustainable myth, when 8% is EASILY attainable !)

Obviously, I don't expect everybody to agree with me instantly, and become clients/helped, otherwise, who will buy Riocan back from me at $27 in 3 years from now ?

Bob's Bottom Line

"Good luck though. We certainly don't have enough FA's that aren't funds sales people."

Archanfel, I truly do appreciate this constructive comment, and if it is the only thing that we will agree upon , after my 12 posts, it's a great start !


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


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## CFR (Apr 18, 2009)

*Sustainable Rate of Return is Critical Issue to "Enough"*



Ben said:


> Can I be the only one wondering what all this talk about REIT's, NAV's, AFFO's (surely UFO's cannot be far off next..) has to do with the topic of the thread, "How much do you need to retire?"
> 
> It's good theatre, I have to admit, but the troupe could create a new thread for a playhouse...


Hi Ben

Maybe Archanfel and I should take this play on the road ?

However, although we have all suffered thru a detailed and painful detour off from the main path, don't let it distract you from the main issue.

The main issue is what is a reasonable sustainable rate of investment return, and the correct answer to this is the most critical input into the calculation of How Much Is Enough to retire on.

If your desired retirement income is $40,000, you will need to accumulate $1Million using 4%.

However, dividing the same $40,000 by 8% results in an accumulation goal of only $500,000, which will result in you reaching "Findependence Day" years, and even decades sooner.

Eliminating high pedlar commission/wrap fees, and getting better investment returns are the 2 ways to move from 4% to 8%.

While I do believe, and have tried to demonstrate in great detail, including the current buy of Riocan tip, that 8% is both reasonable and easily attainable, you must decide for yourself.

Even if I can convince people to challenge the 4%, and try for 6%, it will be a great improvement. The worst possible situation is that gullible investors continue to swallow the 4% myth pushed by pedlars, without questioning it at all.

Again, my apologies for the painful indepth epistles, and I promise no more UFO teachings.


Bob Novoselac
www.cfrca.com


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## ethos1 (Apr 4, 2009)

*back to the original OP*

I challenge whether anyone (FA's or pedlars) flogging one particular security can stick their necks out and say to their clients today, one year from now and beyond that 8% is guaranteed forever

The problem as I see it with one particular poster on here who plugs a particular REIT is that some guillible reader may think the 8% is forever (Archanfel excluded).

OK, some may bite and some may switch from the current bonds or dividend holdings to the REIT all in one shot, giving up $500k.

What about tomorrow, the next day, next month, next year - what-if the REIT goes down in value for the $500k which the retirees invested in - will they be asking questions, will they get nervous and bail

Are FA's like the one who posted the 8% REIT advise his clients to put all of their eggs into one basket

CANROY's are special investments, they may not be for everyone & as for having 100% as a portfolio, I dont think that is wise.

There are no guarantees in life, especially when someone tries to propose to you that one particular REIT (with some margin trading) is absolutely the reason to switch from what you have today at 4% over to his pick


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## CFR (Apr 18, 2009)

*Why I am continually misinterpreted ?*



ethos1 said:


> I challenge whether anyone (FA's or peddlers) flogging one particular security can stick their necks out and say to their clients today, one year from now and beyond that 8% is guaranteed forever
> 
> The problem as I see it with one particular poster on here who plugs a particular REIT is that some guillible reader may think the 8% is forever (Archanfel excluded).
> 
> ...



Hi Ethos1

Didn't you promise both FT and CC that you would stop posting on this issue 2 posts ago ?

While I don't mind if people disagree with me, as investing is an art form, and not a precise science where investors will always disagree, I would at least appreciate not having my comments mis-interpreted.

Did I "guarantee" an 8% sustainable yield ?

Does Buffett only invest in "guaranteed" investments, or does he take extremely well calculated risks, such that his wins exceed his mistakes ?

Using my strict investment criteria, I have eliminated 23 of the 30 publicly traded REIT's on the TSX. Even for the remaining 7 "quality" REIT's, like Riocan, I set strict price maximums. Yet, does all of this provide my clients and myself any kind of "guarantee" ? Obviously not, but instead, like Buffett, investment risk is significantly reduced with such indepth due diligence, such that winners will exceed mistakes.

If you want absolute "guarantees", invest all of your money into the Canada 10 year bond, and get a 3% gross return ! (Note that even if Riocan cuts their distribution in half, you would still be ahead of this guaranteed 3%, this is what they call a risk premium !)

Further, did I ever suggest in any of my many posts to put all of your money into any one single investment ? As I stated many posts ago, similar to Buffett, while I don't believe in the crazy overdiversification that pedlars push, I do promote a concentrated portfolio with maybe 10 investments, with no one single investment being more than 20% of your total portfolio.

Does having a significant portion of your investment portfolio in real estate make any sense ? Does having all of your investment portfolio invested in only 1 stock, Berkshire Hathaway, make any sense ?

Ask Donald Trump and Warren Buffett ! 

Maybe $500k is too much for some investors to agree with, maybe $1Million is ridiculous, but if just one reader of all of these epistles wakes up and considers that maybe $750K is possible if they reduce fees / increase investment returns, then I will be happy.

So, I'm just trying to stir up some debate to challenge the 4% myth, and not necessarily trying to get everybody to agree with the 8%+ sustainable rate that my clients and I are getting.


Yes, Ethos1, there are only 2 things guaranteed in life - death and taxes !


Bob Novoselac
www.cfrca.com


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## CFR (Apr 18, 2009)

*Yes, Inflation does matter !*



steve41 said:


> I am sure this has been pointed out before, but this 'how much' question has to be qualified. For the 30 yearold shooting for a $40K retirement lifestyle, the required nest egg needs to be 1.9M (RRSP) or 1.6M nonreg. (Using a 4% ror and 2% inflation, living in BC)
> 
> For a current 65 yr old retiree, that number is 650K rrsp and just 570K nonreg.
> 
> (This is assuming the nonreg is taxed as interest. For a dividend and/or capgains content, the required nonreg asset would be lower yet)



Hi Steve41

Thank you for the first post that moves the debate forward.

Yes, you are absolutely correct that inflation matters and must be considered in any more detailed calculation.

$40K of retirement investment income might be OK today, but it will not buy much in 30 years from now, and therefore this must be taken into account.

However, for a person who is retired today, that wants $40K of retirement income, if they receive a sustainable 8% rate, all they need is the $500K. By definition, "sustainable rate" means AFTER inflation. ie if you get a 5% GIC interest rate, and you deduct 2% to allow for inflation, your result is a 3% sustainable rate (pre-tax) 

In the case of Riocan, you can spend the 8% cash yield, and look to both distribution increases (Riocan has increased their distribution EVERY year since 1993 inception, but this year CEO Ed Sonshine has indicated that the 16 year record will be broken as their will be no 2009 increase, however he also stated that a decrease is "not a consideration".) and also unit price appreciation for an additional 2%-3% to cover inflation.

Inflation , even at supposed lower inflation rates of 2%-3% can significantly eat into your investment return, especially if your gross investment rate of return is low.


Bob Novoselac
www.cfrca.com


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## Sampson (Apr 3, 2009)

Bob, you've certainly irked my interest.

So with my $500k, you would suggest I retire now at 30yrs old, and that would allow me to live off a sustainable $40k (preferentially taxed).

And I should be able to do this for the next 55-60 years of my life?

If this is the case, I think I'm may decide to send in my notice this Monday. Do you have any info/data suggesting that whether REITs or other industries with large distributions can managed to increase distributions at or above inflationary rates?


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## CFR (Apr 18, 2009)

*Is Sampson serious or just kidding Bob ?*



Sampson said:


> Bob, you've certainly irked my interest.
> 
> So with my $500k, you would suggest I retire now at 30yrs old, and that would allow me to live off a sustainable $40k (preferentially taxed).
> 
> ...



Hi Sampson

Lifestyle, or qualitative considerations always outweigh quantative considerations.

A current investment portfolio of $500K, invested at an 8% sustainable rate, spread over approx 10 quality investments will yield you a $40,000 cash passive income. Between both distribution increases and unit price appreciation, you can earn another 2%-3% to allow for inflation.

So, this would put you in a position to give notice on Monday, and live off the $40K indefinitely.

However, the much more important qualitative question is that what you really want to do ? Factors to consider :

-do you love or hate your job ?
-Buffett says that he "skips" to work each day as he loves it ?
-maybe instead you could use the $40K annual passive income support to try your own business, or something else that you are passionate about
-maybe you would prefer (like Bob) to not stop working, even though you can afford to, but instead continue working at a lower pace/stress and allow your passive income to further increase your portfolio ?
-would you be happy with only $40K passive income, or maybe you would rather work for several more years in order to reach $80K annual passive income ?
-what does your wife/family think ?
-etc, etc, etc

By moving my clients and myself from 4% to 8%+, more lifestyle options become available, but what clients decide to do with such options is best decided by the clients themselves based on their own specific circumstances.

Do I have any info regarding REIT's/other industries with a history of distribution increases above the rate of inflation. Yes, I do ! With respect to REIT's, I will throw out my previously mentioned Riocan 16 year history since 1993 inception, although other quality REIT's have similar records.
With respect to other industries, although somewhat hard to come by, I will throw out the Cdn banks/financial institutions as having good dividend increase records. When the Cdn banks stocks crashed, such that my investment criteria of min 5% cash yield was reached, it triggered one of my "client buy alerts".

Unfortunately, most public companies have swallowed what I call the "growth Kool-aid", ie squander shareholder money and pay zero/little dividends.

Finding high quality investments that also have a 5% min cash yield was extremely difficult, however, since Oct/08, in the words of Buffett, "we are now like hungry misquitios in a nudist colony", ie lots of great buys now available.


Drop by Monday afternoon if you quit, and we'll go fishing !


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


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## Sampson (Apr 3, 2009)

Bob, past performance.

I mean is there any data that shows RioCan, or any other company (Canadian bank) can manage to always increase distributions by a rate ABOVE inflation.

I see that for 15 yrs, RioCan has - but I'm not talking 15 years, I'd have to count on that for 60. In assessing a company's potential to increase their distribution, are their indicators (aside from 3rd party and internal analysts projections for growth?) that are concrete enough to base such an important decision?

I personally don't hold much merit in 'past performance'. Chrysler was once one of the largest companies in the world.

RioCan has a similar strangle hold on retail real estate in Canada, but will they continue to do so in 45 years?


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## CFR (Apr 18, 2009)

*Yes, Future matters much more than Past History !*



Sampson said:


> Bob, past performance.
> 
> I mean is there any data that shows RioCan, or any other company (Canadian bank) can manage to always increase distributions by a rate ABOVE inflation.
> 
> ...



Hi Sampson

EXCELLENT POINT !

Intrinsic value, as defined by Buffett and other great investors, is the net present value of all FUTURE cash flows from an investment.

Past history, while it can provide useful guidance, should never take the place of focusing on the investments future prospects.

With respect to Riocan, or any other investment, in order to protect your investment for the next 20 years or more you can :

1) Do indepth research, ie go far beyond reading the same 3rd party reports that everybody else does, ie participate on conference calls, directly call CEO/CFO (although some don't like to get calls from Bob ?), dig deep on all financial statement / securities circular/other filings, visit various malls/properties and talk to both tenants/mall managers, etc, etc - see the Investment Research section of my website for more )
-such indepth due diligence will help, not guarantee, your ability to predict future prospects for the business/investment

2) Re-Evaluate Constantly
-although only 7 of Canada's 30 REIT's pass my strict investment criteria, the 7 do NOT get a pass for life
-I constantly re-evaluate both my 7 quality REIT's, and also the other 23 REIT's to see if any changes are warranted


Riocan, as with any other currently good investment, can't be purchased and than forgot about for 50 years. However, by following the above 2 steps, you can get some early warning signals if it becomes necessary to move on.

Between constantly re-evaluating existing investments, and also constantly seeking new investments that pass my strict investment criteria, Bob stays busy !

Unless, of course, I get sidetracked for hours on internet forums ?

Thanks again for the great future v past history point !

Bob Novoselac B.Admin., C.A.
wwwcfrca.com


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## CanadianCapitalist (Mar 31, 2009)

CFR said:


> 1) Canadian Capitalist
> You should know the definition of AFFO before making more comments about repaving the parking lot !
> -Funds From Operations (FFO) is cash flow BEFORE maintenance capital expenditures such as repaving the parking lot
> -Adjusted Funds From Operations (AFFO), is basically, FFO minus maintenance capital expenditures such as repaving the parking lot
> ...


I don't think you understood my point, so I'll try again. ROC distributions come from capital expenditures incurred in the past i.e. they came out of shareholders pockets. If you are a long-term RioCan shareholder, your current ROC is truly return of capital.

By postponing capital expenditures, REITs and other income trusts can temporarily boost AFFO but the piper has to be paid eventually. So many investors were burned by Income Trusts that played this accounting game. 

It is certainly possible that depreciation is much greater than capital expenses during certain time periods. But it is not a wise to assume that the happy state will last over the long term. Buildings do deteriorate over time and over the long term, depreciation will more or less equal capital expenses.


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## ethos1 (Apr 4, 2009)

for some reason CFR or the person posting here seems to me as though he is pushing only Riocan (REI-UN.TO), stating the 8% sustainable income when REI-UN.TO is below $17 & I do not disagree with that whatsoever, until & unless the stock pops or the stock drops or the dividend amount changes or the REIT is collapsed & converted to a regular stock.

REI-UN.TO is not forever - IMO its a very short hold (less than 2-years), after that who knows where it will be. And what of that, what happens then to the 8% sustainable income cash yield on that particular REIT

The question is why the emphasis on this particular REIT - This is the single most important question that I would like answered by anyone, including CFR?

The thread on Riocan IMO has degenerated to bashing CFR with CFR constantly trying to defend (or plugging) that particular REIT 

For some reason CFR continues to quote buffet & others - why & who really cares

Would CFR please tell us what if any other high return sustainable income trusts (those 7/23 mentioned elsewhere up thread) it is that he follows if any, since I for one am always interested to hear the views and opinions of those investing who are getting high sustainable ROR or ROI 

I dont really care that CFR compares his firm to the pedlars, since I'm sure that there must be other FA's and/or pedlars that compare themselves to CFR.

CFR can say whatever he wants about the returns, I have no way to confirm or check on the claims he says that he or his clients get or how much they have made or lost with CFR - for all I know CFR could be blowing wind out of his backside


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## CFR (Apr 18, 2009)

*Let's Talk AFFO Again !*



CanadianCapitalist said:


> I don't think you understood my point, so I'll try again. ROC distributions come from capital expenditures incurred in the past i.e. they came out of shareholders pockets. If you are a long-term RioCan shareholder, your current ROC is truly return of capital.
> 
> By postponing capital expenditures, REITs and other income trusts can temporarily boost AFFO but the piper has to be paid eventually. So many investors were burned by Income Trusts that played this accounting game.
> 
> It is certainly possible that depreciation is much greater than capital expenses during certain time periods. But it is not a wise to assume that the happy state will last over the long term. Buildings do deteriorate over time and over the long term, depreciation will more or less equal capital expenses.



Hi CC

Let me try again. ROC is NOT truly a return of capital, but instead , as I stated before, it is simply the REIT passing onto individual unitholders capital cost allowance (CCA) that the REIT isn't claiming, so that the CCA can be claimed by the unitholders.

However, I would definitely agree with your point that AFFO can be artificially boosted by a REIT deferring necessary maintenance capital expenditures.

To your final point, yes, buildings will deteriorate over time, but that can be 50 years, meanwhile rents and land values will increase over time, providing some offset.

Bob 
www.cfrca.com


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## CFR (Apr 18, 2009)

*CFR Is Misinterpreted Again ?*



ethos1 said:


> for some reason CFR or the person posting here seems to me as though he is pushing only Riocan (REI-UN.TO), stating the 8% sustainable income when REI-UN.TO is below $17 & I do not disagree with that whatsoever, until & unless the stock pops or the stock drops or the dividend amount changes or the REIT is collapsed & converted to a regular stock.
> 
> REI-UN.TO is not forever - IMO its a very short hold (less than 2-years), after that who knows where it will be. And what of that, what happens then to the 8% sustainable income cash yield on that particular REIT
> 
> ...



Hi Ethos1

Riocan, like any investment, is not forever, and must be continually evaluated, as I have stated before.

My original point, many posts ago, was that an 8% sustainable investment rate of return was possible. When this was considered to be "astonishing", and I was asked for specific support, I provided Riocan as just one of many current investment opportunities available that provide an 8% sustainable rate.

Riocan was also provided as an example of the type of returns that my clients and I have been getting over the past several years.

Out of the 30 TSX REIT's, yes, using my strict investment criteria , I only consider 7 (including Riocan) of the 30 as quality REIT's. However , since my clients pay for my ongoing research, I don't believe that it is fair to give more than Riocan away for free. (You could always buy the REIT index funds, and have the same experience as Jon Chevreau describes on the REIT thread)

Previously, I stated that my clients and I will continue to buy Riocan up to $17, and then afterwards stop buying it, focus on margin paydown, and in 3-5 years when it hits $27 again, we will sell it. Obviously, I don't expect everybody to agree with this strategy, but I just toss it out there as an example of just 1 strategy that my clients and I are doing. Instead of taking my word for it, just follow Riocan for the next few years, and see for yourself if this April/09 recommendation was a good one.


Bob
www.cfrca.com


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## RI.ca (Apr 28, 2009)

*REITinvestor.ca cautiously believes RioCan distribution to be safe for 2009*

REITinvestor.ca cautiously believes RioCan distribution to be safe for 2009.
RioCan REIT (REI.UN - TSX) 
March 24, 2009 
REITinvestor.ca cautiously believes RioCan distribution to be safe for 2009. REITinvestor.ca, a private subscriber based independent rating & ranking service has completed its review of RioCan REIT and is of the opinion the current distribution is safe for 2009. Following a detailed analysis of RioCan 2008 Q4 Report and Annual Financial Statement, REITinvestor.ca is of the opinion that management can navigate the stormy waters of retail and office leasing in the near term. REITinvestor.ca is maintaining its neutral #3 rating for REI.UN for 2009. In the opinion of REITinvestor.ca, the distribution payout of $0.115 per month ($1.38 annualized) is secure for the next 12 months assuming the financial and economic does not weaken substantially over the rest of the year. Of particular note to REITinvestor.ca: - RioCan REIT reported occupancy rates (96%) while lease renewals/new leasing have remained strong into the close of 2008 due to quality of assets, quality tenants and excellent management. - However, certain risks remain for REI.UN should commercial real estate values continue to fall. o Namely, termination of its $200M credit line if loan to value for pledged properties exceed 60%. REITinvestor estimates the REI.UN entire portfolio is currently levered to 52.2%. o S&P and DBRS maintained their credit rating for REI.UN at BBB or investment grade as of 12/31/09. This rating could be affected by further weakening of financial & economic conditions triggering further difficulties including replacing debentures coming due. - Additional line of credit for $90M has been approved but yet to be completely finalized. This additional restores liquidity to an industry average of near 7%. - During the 1st 45 days of 2009, REI.UN reported that the area of unexpected vacancies (bankruptcies etc.) were double the area realized during the same period in 2008. This rate of increase is of concern and will need to be monitored for the rest of Q1 & Q2 2009. - REI.UN is focusing an effort to expand its 3rd party asset management services which would provide for additional risk free revenue. REI.UN units closed on Tuesday March 23rd at $12.25 per unit and are yielding 11.1% at that price. RioCan REIT is Canada’s largest REIT with more than 32M square feet and $2.6B in market cap. For more information, visit REITinvestor.ca 


DISCLOSURE: REITinvestor.ca maintains its own investment fund and currently is not holding units of REI.UN. REITinvestor.ca does not provide investment advice nor does it recommend the purchase or sale of securities including any REIT units it covers. Please consult your personal professional advisor before investing.


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## CanadianCapitalist (Mar 31, 2009)

CFR said:


> Let me try again. ROC is NOT truly a return of capital, but instead , as I stated before, it is simply the REIT passing onto individual unitholders capital cost allowance (CCA) that the REIT isn't claiming, so that the CCA can be claimed by the unitholders.


Okay. Here's my last try why CCA is simply ROC. Say RioCan buys a property and the buildings are worth $100m. It doesn't really matter how the capital is raised. It could be raised from shareholders by issuing new units or borrowed from a third party. We'll assume it is borrowed from a bank. The building is capitalized on RioCan's balancesheet and CRA allows a CCA in future years for the loss in value of the capital asset due to wear and tear. 

Now, let's do the accounting for Year 2. Assume the building nets $8m in rent. Assume money was borrowed with an interest-only loan at 4%. Interest expense is $4m. Guess what? CCA is $4m based on 4% CCA rate for buildings. RioCan can distribute the entire $4m to unit holders as ROC!

Now this is ROC because the building is worth $96m on the books and RioCan owes $100m to its lenders. End of story.


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## pantograph (Apr 6, 2009)

All I want to know is where to find Bob when Riocan's distributions don't keep up with inflation, like he's promising.

My thinking is --- Run away from any one who says he has a sure thing.


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## ethos1 (Apr 4, 2009)

pantograph said:


> All I want to know is where to find Bob when Riocan's distributions don't keep up with inflation, like he's promising.
> 
> My thinking is --- Run away from any one who says he has a sure thing.




Bob did say up to $17 its 8%, after that he repositions, which too my mind is good logic.

Possible things that could happen

If the stock drops below current levels and the distributions also drop - then its time to sell.

However if the stock drops & the distributions remain the same, then wouldn't the yield go up & those at $17 average would begin to loose capital

If the stock stays between $17 - $20 and the distributions drop - then it could be the time to sell off, take a profit or bury your head in the sand


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## stephenheath (Apr 3, 2009)

> Okay. Here's my last try why CCA is simply ROC. Say RioCan buys a property and the buildings are worth $100m. It doesn't really matter how the capital is raised. It could be raised from shareholders by issuing new units or borrowed from a third party. We'll assume it is borrowed from a bank. The building is capitalized on RioCan's balancesheet and CRA allows a CCA in future years for the loss in value of the capital asset due to wear and tear.
> 
> Now, let's do the accounting for Year 2. Assume the building nets $8m in rent. Assume money was borrowed with an interest-only loan at 4%. Interest expense is $4m. Guess what? CCA is $4m based on 4% CCA rate for buildings. RioCan can distribute the entire $4m to unit holders as ROC!
> 
> Now this is ROC because the building is worth $96m on the books and RioCan owes $100m to its lenders. End of story.


In a case like this where all "excess" funds have to be returned to unitholders, why on earth would a bank provide an interest only loan? On top of that, why wouldn't they insist on debt:equity ratios that prevented the company from distributing all the cash without paying down the loan balance? Otherwise, many years down the road when the building is 99.999% written off, no maintenance has been done so the building no longer generates significant revenue since it's a hole, and it's market value is way less than the outstanding 100m loan, the bank takes a big hit.

I'm not saying it couldn't happen... but if it does, I'd like to know which banks are stupid enough to do it so I can stay away from them! They're probably the same banks that think subprime is a great way to make money since houses can only go up....


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## CanadianCapitalist (Mar 31, 2009)

stephenheath said:


> In a case like this where all "excess" funds have to be returned to unitholders, why on earth would a bank provide an interest only loan?


This scenario is simply for illustration purposes but let's say RioCan owns all its properties free and clear. If it has $5B in assets, banks don't have much risk in giving a $100m line of credit secured by some of the properties. After all, they do this all the time for homeowners with significant equity in their homes.


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## stephenheath (Apr 3, 2009)

Sorry, one more question, although this one has to assume they have other stuff other than 100% financing through interest only bank loans.

Say there are 1m shares outstanding of the reit @ $10.00 per share. If it generates 40 cents per share (as expected) entirely from operations (no RoC), then you would presume the share price remains the same. If they distribute 60 cents per share, of which 40 cents is operations and 20 cents is RoC (say from selling a building) then I would assume the share price would go down by 20 cents to maintain the exact same yield (as that building will no longer be generating operational income).

But say it's a responsible company and sets aside money for maintenance/repairs, but that the CCA rates in the initial years are too high (since 4% of 100m is 4m, but 20 years down the road it will only be 1.8m), so it returns 2m of the amount and spends/sets aside 2m for maintenace. In this case the building has returned that cash, but we would not expect it to impact operating income at all, since it has been maintained... therefore, for the yield to remain the same, the share price would need to stay the same during this period. Later on, when the CCA is less than the actual cost for maintenance, operating profit would be reduced due to the additional expense, and therefore at that time the share price would start going down to maintain the same yield.

This RoC/share price disconnect might be explained because the CCA, and therefore the expenses related to it, are likely too high for buildings. Using 4%, the book value of a building is less than half the purchase price in 20 years, but how many buildings under normal circumstances have a market value that goes down when they are properly maintained (which the company is presumably doing)? Therefore it might be possible to say that if you accept the theory that under normal circumstances the building holds it's market value regardless of the book value, then giving back the CCA is not a return of capital, but a distribution of unrealized capital gains?

And I should stress I'm not arguing for or against Reits or Riocan, although I have been happy holding XRE so far, I'm just trying to understand them better to make sure I don't have a ticking time bomb in my portfolio.


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## stephenheath (Apr 3, 2009)

> This scenario is simply for illustration purposes but let's say RioCan owns all its properties free and clear. If it has $5B in assets, banks don't have much risk in giving a $100m line of credit secured by some of the properties. After all, they do this all the time for homeowners with significant equity in their homes.


But by doing this, the bank has given itself priority on the assets so that it gets paid before the funds are distributed to unitholders, and has presumably selected properties worth more than $100m. If we apply that to your example from your post, then even though the REIT is returning CCA cash, the value of the building remains equal to the amount of the bank loan, or they would forclose. 

That seems to support the contention actually that the CCA is not necessarily a true return of capital. Going back to your original example, year one balance sheet is:

Building 100m Loan 100m 
Equity 0

After Year 2 (before distribution) it is:

Cash 4m Loan 100m
Building 96m Equity 0

BUT if we were to sell the building, assuming there was only price stability, we'd have:

Cash 104m Loan 100m
Equity 4m

Then when we paid off the loan and distributed the 4m it would be profit, not RoC... the only difference being the recording of the building at book instead of market.

I realize this isn't a universal case, depends on the building, the reit actually maintaining things properly, how old the building is (ie, is that the construction price or the purchase price of a 100 year old building)... but at least it explains to me why there is so much argument about whether it is a true RoC or not (with the not seeming to be unrealized gains).


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## CanadianCapitalist (Mar 31, 2009)

stephenheath said:


> But by doing this, the bank has given itself priority on the assets so that it gets paid before the funds are distributed to unitholders, and has presumably selected properties worth more than $100m. If we apply that to your example from your post, then even though the REIT is returning CCA cash, the value of the building remains equal to the amount of the bank loan, or they would forclose.


You are assuming that the loan is secured by the exact building the loan was used to purchase. It may not be true. Let's say I have a $25K secured LOC against my home, which is worth $250K. I can draw down the $25K credit line for buying stocks. As long as my interest payments are current, the bank doesn't care what I do with the $25K drawdown. My stocks could go to zero but as long as the terms of the loan are met, the bank wouldn't foreclose.



> That seems to support the contention actually that the CCA is not necessarily a true return of capital. Going back to your original example, year one balance sheet is:
> 
> Building 100m Loan 100m
> Equity 0
> ...


After Year2, you have Cash 4m, Loan 100m, Building 96m and equity -4m (not 0). The negative equity is why I'm arguing that CCA is ROC. 

I'm not sure what happens when the building is sold in the 2nd year for $100m. You have $4m capital gains, $4m CCA but only $4m in cash to distribute. Any accountants want to weigh in?


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## stephenheath (Apr 3, 2009)

> You are assuming that the loan is secured by the exact building the loan was used to purchase. It may not be true. Let's say I have a $25K secured LOC against my home, which is worth $250K. I can draw down the $25K credit line for buying stocks. As long as my interest payments are current, the bank doesn't care what I do with the $25K drawdown. My stocks could go to zero but as long as the terms of the loan are met, the bank wouldn't foreclose.


Your stocks could go to zero, but not your house. The bank wouldn't let you give anyone else a higher priority on the funds from your house when you sell after they secure it, so overall, as an entity, you couldn't have a truly negative equity.



> After Year2, you have Cash 4m, Loan 100m, Building 96m and equity -4m (not 0). The negative equity is why I'm arguing that CCA is ROC.


That's wrong, because assets+liabilities do not equal equity. I believe you meant you have -4m equity after distributing the 4m cash, in which case you would have, after Year 2, Cash 0, Building 96m, Loan 100m, Equity -4m. That's entirely based on book value though. If the building is worth 100m or more, then using actual market values, you still have => 0 Equity.

So in essence, using only book value, it is a RoC, but one that doesn't affect the yield because CCA is a non cash expense. If you use market value, however, which is what the bank would use when determining if it's loan were still properly secured, you'd still have 0 equity and thus it is the gain in the value of the building that you are returning instead of capital... which also would not affect the yield.



> I'm not sure what happens when the building is sold in the 2nd year for $100m. You have $4m capital gains, $4m CCA but only $4m in cash to distribute. Any accountants want to weigh in?
> 
> 
> > I am an accountant, just not a tax accountant (although we all have to get at least a rudimentary understanding of normal tax laws)... and reits are all about weird tax treatment, or at least they were. Under normal circumstances, assuming the corrected balance sheet numbers above, after the distribution you have cash 0, building 96, loan 100, equity -4. You sell the building and now have cash 100, building 0, loan 100, gain on sale of assets 4, equity -4. You pay off the loan and now have cash 0, building 0, loan 0, equity 0 (gain = net income = equity).
> ...


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## CanadianCapitalist (Mar 31, 2009)

stephenheath said:


> That's wrong, because assets+liabilities do not equal equity. I believe you meant you have -4m equity after distributing the 4m cash, in which case you would have, after Year 2, Cash 0, Building 96m, Loan 100m, Equity -4m. That's entirely based on book value though.


I stand corrected. I did mean to say equity -4m after the cash is distributed.

The CCA might be much higher than true depreciation, so some of the ROC yield is income that is classified as ROC due to tax treatment. That's a fair point.

The reverse is also true. The ROC portion can easily be boosted by delaying much needed repairs. Many income trusts played this game and investors eventually paid the price through lower unit prices.


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## DrStan (Apr 5, 2009)

stephenheath said:


> The more I think about it, the more I can see how easily it would be to play games with this structure, which makes me nervous about holding XRE


Actually, what should make you nervous about holding XRE is that, depending on the value of your investment, you could easily purchase the four main components of the index as a proxy for the ETF and avoid paying the MER. That would be ideal, of course, if you plan on holding this investment for a long time...


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## CFR (Apr 18, 2009)

*Is REIT ROC Really A ROC ? What Does Bob Say ?*



CanadianCapitalist said:


> I stand corrected. I did mean to say equity -4m after the cash is distributed.
> 
> The CCA might be much higher than true depreciation, so some of the ROC yield is income that is classified as ROC due to tax treatment. That's a fair point.
> 
> The reverse is also true. The ROC portion can easily be boosted by delaying much needed repairs. Many income trusts played this game and investors eventually paid the price through lower unit prices.



Hi CC

You have come a long way, thanks to some fine analysis by StephenHeath, in your REIT ROC awareness, compared to your above post which purported to be the "end of story" concerning the REIT ROC issue.

As you correctly state, many business income trusts over inflated their cash distribution/yield by deferring maintenance capex, which in the end usually blows up in the face of unitholders. Most such business income trusts had no tangible/real estate assets, but instead owned only rapidly depreciable vehicles and equipment.

What about REIT's, which own tangible / long lived real estate rental property assets ? Do REIT distributions consitute true income only from an overall economic view point, with CCA "classified as ROC due to tax treatment", or do REIT distributions include some real economic ROC ?

This issue has been debated ever since REIT's were first introduced into Canada more than 15 years ago, and will likely continue to be debated for many years. Many subjective factors are involved, as already identified in StephenHeath's analysis, such as real estate location/quality, real estate property and rent inflation rates, how well the properties are maintained with capex expenditures, distribution payout ratio compared to AFFO, etc,etc,etc.

So what does Bob say ?

Is REIT ROC Really A ROC ?

In the case of the 7 quality REIT's that I believe only exist of the 30 TSX publicly traded REIT's, ie managment/unitholder alignment of interests, top tier well maintained properties, distributions less than AFFO, etc,etc, I believe that the distributions of these REIT's , from an overall economic viewpoint, do NOT include a ROC.

In the case of the remaining 23 poor quality REIT's on the TSX, ie management/unitholder conflict of interests, poor located/maintained properties, distributions exceeding AFFO, etc, etc, , I believe that the distributions of these lousy REIT's, from an overall economic viewpoint, DO include ROC.

In my opinion, Riocan should be included as one of the 7 quality REIT's, with its distributions therefore, from an overall economic viewpoint, NOT including a ROC.

Which, of course, brings me way back to my original point that Riocan's distribution is one of many examples of where you can achieve a 8%+ sustainable yield.

An "astonishing" journey ! 

Bob
www.cfrca.com


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## CanadianCapitalist (Mar 31, 2009)

CanadianCapitalist said:


> The CCA might be much higher than true depreciation, so *some of the ROC yield* is income that is classified as ROC due to tax treatment. That's a fair point.


Cherry picking your points must be part of Bob's analysis. "Some of the ROC distributions" suddenly transformed into "the entire distribution has NO ROC". Nice.


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## CFR (Apr 18, 2009)

*Bob Stands Corrected Regarding "Some"*



CanadianCapitalist said:


> Cherry picking your points must be part of Bob's analysis. "Some of the ROC distributions" suddenly transformed into "the entire distribution has NO ROC". Nice.



Sorry CC, this was not intentional, as I should have also put a "some" in my sentance above.

However, this minor point does not change my major points that :

1) You have come a long way, thanks to StephenHeath, since your "end of story" ROC post, where there was NO "some", and 

2) My conclusion that Riocan's 8+% yield is sustainable.

Unlike some, I have no need to "cherry pick" or misinterpret somebody's else's words in order to make my analysis. However, I do stand corrected for not including "some" when referring to your quote.


Bob
www.cfrca.com


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## stephenheath (Apr 3, 2009)

> Actually, what should make you nervous about holding XRE is that, depending on the value of your investment, you could easily purchase the four main components of the index as a proxy for the ETF and avoid paying the MER. That would be ideal, of course, if you plan on holding this investment for a long time...


That is the long term plan, at the moment my investments are still too small to do that considering fees (XRE is allocated to only be 10% of my total equities part of the portfolio), but eventually when that portion hits... I think I worked it out to be about 15,000 or so (I'd better double check that number now since I've forgotten) it would be time to split it up.



> thanks to some fine analysis by StephenHeath


While I appreciate the compliment, the reality is that I was posing questions to better understand it. I tend to be the kind of learner that has to understand how things work to get it. And while perhaps it did show that CC's original statement may have been a tad too definitive, the spirit of his statement, that some distributions could be hidden RoC, making the yield look better than it is, seems to be 100% true, as I have now learned how, if I ran a REIT, I could play the numbers any way I wanted to.

(Disclosure: I've learned everything I know about investing from CC, and developed my portfolio, asset allocation, etc... based on his techniques. I respect his opinion highly enough that anything he had significant worries about I'd stay well away from, so in this case, even if it weren't my natural inclination to be more conservative and plan for the worst case scenario, I'd hesitate to jump on the "8% returns in retirement" bandwagon.)


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## CanadianCapitalist (Mar 31, 2009)

stephenheath said:


> I've learned everything I know about investing from CC, and developed my portfolio, asset allocation, etc... based on his techniques. I respect his opinion highly enough that anything he had significant worries about I'd stay well away from, so in this case, even if it weren't my natural inclination to be more conservative and plan for the worst case scenario, I'd hesitate to jump on the "8% returns in retirement" bandwagon.


Thanks for the kind words. I have posted before that I like RioCan myself and hold it as a proxy for the Canadian REIT sector. I've written on the blog that my interest was piqued when analyst estimates of NAV indicated a discount to market value. Also, at that time (around $20) the spread over then bond yields were slightly more than average. My average price is between $17-$18 and REI.UN makes up 5% of my portfolio. Of course, the discount to NAV and spreads are even higher now, suggesting that investors are handsomely compensated for risk. T

However, there is a world of difference between saying that RioCan's risk-reward profile is attractive to making claims that the yield is "sustainable" far into the future. Equities are always about probabilities; there are many ways in which the future can play out. It is one thing to say the odds are in your favour; quite another to make blanket statements.


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## CFR (Apr 18, 2009)

*Who's your investment teacher ?*



stephenheath said:


> That is the long term plan, at the moment my investments are still too small to do that considering fees (XRE is allocated to only be 10% of my total equities part of the portfolio), but eventually when that portion hits... I think I worked it out to be about 15,000 or so (I'd better double check that number now since I've forgotten) it would be time to split it up.
> 
> 
> 
> ...



Hi Stephen

I have learned almost everything that I know about investing from Benjamin Graham and Warren Buffett.

You state that you have learned everything that you know about investing from CC.

One of us is severely lacking ?


Bob
www.cfrca.com


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## CFR (Apr 18, 2009)

*CC Finally Makes Full Riocan Disclosure ?*



CanadianCapitalist said:


> Thanks for the kind words. I have posted before that I like RioCan myself and hold it as a proxy for the Canadian REIT sector. I've written on the blog that my interest was piqued when analyst estimates of NAV indicated a discount to market value. Also, at that time (around $20) the spread over then bond yields were slightly more than average. My average price is between $17-$18 and REI.UN makes up 5% of my portfolio. Of course, the discount to NAV and spreads are even higher now, suggesting that investors are handsomely compensated for risk. T
> 
> However, there is a world of difference between saying that RioCan's risk-reward profile is attractive to making claims that the yield is "sustainable" far into the future. Equities are always about probabilities; there are many ways in which the future can play out. It is one thing to say the odds are in your favour; quite another to make blanket statements.



Hello CC

Although better late than never, it's nice to see you finally make full Riocan disclosure.

You state that your average Riocan price is $17/$18. Between my 2002 $13 Riocan purchase, and my much more recent Feb/09 $12.15 Riocan purchase, my average Riocan cost is approx $12.50.

You state that Riocan makes up 5% of your portfolio. Quite interesting, and does Archanfel know about this ? Riocan makes up approx 10% of my portfolio.

You even state that at current Riocan prices, investors are handsomely compensated for risk. Which is exactly what I have been trying to say for almost one week ! Better late than never, thank you !

Aside from some better timing, and a willingness to take a larger position, our Riocan investing actions are not that different.

However, you go way off track by misinterpreting me again when you say that I made "blanket statements" that Riocan's distribution is sustainable "far into the future". Where did you dream this up from ? Have I not stated several times that Riocan, like any currently good investment, must be continually evaluated ? Why is your late Riocan disclosure and positive Riocan comments labelled odds in your favour stance, while my similar positive Riocan comments for some reason labelled blanket statements ?

If Riocan's ROC is such a major issue/risk, why is it 5% of your portfolio ?

There is no "world of difference" between what we are both saying about Riocan.

Riocan is simply a good investment where we are both getting a 8%+ sustainable return.

The only "world of difference" is the timing of when we each disclosed our Riocan positive opinions and positions.


Bob
www.cfrca.com


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## Sampson (Apr 3, 2009)

Bob, I feel your either not fully realizing what most of us are trying to say, or perhaps intentionally redirecting the conversation.

I'm sure most of us own RioCan. No one here has ever debated whether they felt it was a good investment.

What has largely been argued is the single word "sustainable". If I recall correctly, when I mentioned if you thought I could retire at the ripe age of 30 and count on an 8% return from RioCan for 55-60yrs, you suggested I could.

There has been no evidence presented in all these pages and pages of how RioCan's distribution is guaranteed. You yourself mention that you have to reevaluate this on a semi-regular basis.

If anything, perhaps one question we should be asking is why should anyone settle on an 8% yield when historically, the S&P500 has returned roughly 11.5% to investors.


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## CFR (Apr 18, 2009)

*"Sustainable" Defined*



Sampson said:


> Bob, I feel your either not fully realizing what most of us are trying to say, or perhaps intentionally redirecting the conversation.
> 
> I'm sure most of us own RioCan. No one here has ever debated whether they felt it was a good investment.
> 
> ...



Hi Sampson

Thank you for this constructive comment, as I believe that maybe there has been some unintentional , but differing interpretations of the word "sustainable" that has resulted in much un-necessary debate.

What I mean by stating that Riocan's cash yield is sustainable is primarily that it can be considered as an after inflation yield, due to other positive factors such as distributions/unit price increases over time. Similar to the GIC nominal 5% yield less 2% inflation = 3% "sustainable" yield.

Secondly, by "sustainable", I also mean that I believe that Riocan's cash distribution is safe for the foreseeable future.

However, at NO time did I ever intend to suggest that Riocan's distribution is guaranteed for 50 years.

Although continual portfolio evaluation is absolutely necessary, I still believe that you can achieve a 8% overall "sustainable" cash yield on your portfolio, and retire now, if that is really your wish.

I'm not sure where you get this S&P 11.5% yield from, as I believe that the last 10 year S&P yield is much closer to ZERO. While it is another completely different issue, I further believe that all portfolio's should be focused primarily on monthly cash flow income, and less on growth for total return.

Again, the only things in life that are guaranteed are death and taxes.

Thanks again for your good point, and hopefully I have better explained what I mean by the word "sustainable".

Bob
www.cfrca.com


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## CanadianCapitalist (Mar 31, 2009)

There are no secrets Bob. Here they are, including the dates in which they were published:

*Canadian Capitalist posts on REITs*

You simply don't get my point. When you say a 8% sustainable yield I take it to mean the traditional discussion of portfolio withdrawal rates (which is where this conversation started). The thumb rule is a traditional retiree can withdraw 4% from their portfolio (including capital drawdown) with a high degree of certainty that they won't outlive the capital. They then adjust it for inflation increases every year. I simply don't think RioCan's distributions fall in the same category. In the past ten years RioCan has boosted distribution at a better than 3% annual growth rate. This happy state won't last forever.


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## Sampson (Apr 3, 2009)

Hi Bob,

Over the past 60 years, this looks like a pretty decent growth rate.
http://en.wikipedia.org/wiki/File:SP500FF.svg

Of course, a strong argument can be made than the American economy will NOT produce this amount of growth in the coming future.


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## Ben (Apr 3, 2009)

CFR said:


> Hi Sampson
> 
> Thank you for this constructive comment, as I believe that maybe there has been some unintentional , but differing interpretations of the word "sustainable" that has resulted in much un-necessary debate.
> 
> ...


I've watched this debate silently from the sidelines, and drawn some amusement from the battle of words. With written words as weapons, and combatants far removed in time and space, meaning and nuance can be lost, in the hands of even the most skilled debater.

While I know absolutely nothing about REIT's and RioCan, it does seem clear that the fundamental issue in this debate is the meaning of sustainable.

Per Wikipedia, "Sustainability, in general terms, is the ability to maintain balance of a certain process or state in any system". It is almost explicitly implied that this balance is not one that can end in 1 year or 5 years or 50 years, but rather one that is perpetual, without end. If this state of balance could be less than forever, one would have to qualify this by stating, "The balance is expected to be sustainable for 50 years, but somewhere in that period an imbalance may occur, and a sustainable situation may no longer be possible." 

The word sustainable, when used alone, means forever.

If you wish to state that a yield is sustainable for 5 years, then you may be able to argue that point convincingly enough. If one were to state a yield is sustainable forever, which you had done, knowingly or not, by using sustainable without temporal qualification, then you have yourself admitted that this is an untenable position.

This definition is the key theme the others have been trying to debate. 

And to conclude, Bob, you entirely diminish yourself, your argument, and your credibility when you write, "One of us is severely lacking?". On this forum we discuss _*ideas*_, whether they be good or bad, and render opinions on same ideas. We do not pass value judgements on those with the audacity to post. It is within bounds to express opinion counter to those posted, but without bounds to belittle the author of said opinion.


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## CFR (Apr 18, 2009)

*Appears That "Sustainable" Has Too Many Meanings ?*



CanadianCapitalist said:


> There are no secrets Bob. Here they are, including the dates in which they were published:
> 
> *Canadian Capitalist posts on REITs*
> 
> You simply don't get my point. When you say a 8% sustainable yield I take it to mean the traditional discussion of portfolio withdrawal rates (which is where this conversation started). The thumb rule is a traditional retiree can withdraw 4% from their portfolio (including capital drawdown) with a high degree of certainty that they won't outlive the capital. They then adjust it for inflation increases every year. I simply don't think RioCan's distributions fall in the same category. In the past ten years RioCan has boosted distribution at a better than 3% annual growth rate. This happy state won't last forever.



Hi CC

It appears that Sampson has made the best point of all of us so far by stating that the focus has been on what does "sustainable" mean.

Neither one of us has been getting the others point, but thanks to Sampson, we are much closer.

The thumb rule that you state above, ie a retiree can withdraw 4% from their portfolio (although I thought it excluded capital drawdown) with a high degree of certainty that they won't outlive their capital does relate to my original point. Maybe we have different interpretations of this thumb rule, but I also thought that it was 4% after inflation adjustment.

Despite some interpretation differences about this 4% thumb rule, my position is that it is far too low. This is mostly due to pedlars who push a low 4% rule in order to cover up both their high fees and poor performance.
Personally, I stand by my position that the thumb rule should be 8%, ie a retiree or anybody else for that matter, can spend up to 8% of their portfolio without worrying about outliving their capital. Of course, this requires them to earn a 8% sustainable rate (as I have defined sustainable above) on their overall portfolio.

Personally, between using some LIMITED leverage, and purchasing investments with a higher yield/risk than Riocan, my own sustainable rate is much higher than 8%. However, I don't want to expand on this point too much, less I get attacked again by another dozen forum members.

However, as I have stated before, I don't expect everybody to agree with me on this, but if I can at least get investors debating the issue (which has been a resounding success for far !), maybe they will move from 4% to 6%, which would still be a significant improvement. 

Although we are both Riocan unitholders, it appears that I believe that Riocan's distributions provide an example of an 8% sustainable rate, while you believe it might be closer to 4%. While I still would disagree with you about this, I do understand your position. As you have correctly pointed out before, nobody knows the future, maybe we are both wrong about Riocan and its future 20 year sustainable rate will be 6% ? 

Truly now a better debate, after we have spent some time explaining to each other what each of us means by "sustainable".


Bob
www.cfrca.com


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## CFR (Apr 18, 2009)

*Out Of Bounds ?*



Ben said:


> I've watched this debate silently from the sidelines, and drawn some amusement from the battle of words. With written words as weapons, and combatants far removed in time and space, meaning and nuance can be lost, in the hands of even the most skilled debater.
> 
> While I know absolutely nothing about REIT's and RioCan, it does seem clear that the fundamental issue in this debate is the meaning of sustainable.
> 
> ...



Hi Ben

You make some valid points.

The word sustainable , used alone, likely is generally interpreted to mean forever. When I use the word sustainable, I should include that while a 8% sustainable yield is possible, it definitely requires continual portfolio evaluation. This is in addition to my other comments on the word sustainable.

My intention was never to belittle anybody, and if my reply about severly lacking came accross as such, I do sincerely apologize. My intention was only to state that the poster has overly limited themselves in who they consider investment teachers.

With respect to belitting posters, have you read some of the comments that were directed my way ? Why not jump in off the sidelines then with your noble purpose ?

Anyway, thank you for your valid points.

Bob
www.cfrca.com


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## Ben (Apr 3, 2009)

Hi Bob,

I have not been diligent in following this thread, nor reading all posts and comments, but if in fact there were disparaging comments directed at you rather than at your ideas, then quite rightly my last comment would apply in your defense as well. We all know better, and can be forgiven when our guard slips for a minute.

Consider then my comment to be a reminder to the community at large on what should constitute respectful dialogue. This financial forum is a gift and a privilege to us all, and with a little respect and a dose of good humour, we'll all continue to reap the rewards from sharing our views in public discussion. 

That's all from me on this thread...if there's more to be said on an 8% sustainable yield from RioCan, have at it!


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## CFR (Apr 18, 2009)

*Thanks Ben*



Ben said:


> Hi Bob,
> 
> I have not been diligent in following this thread, nor reading all posts and comments, but if in fact there were disparaging comments directed at you rather than at your ideas, then quite rightly my last comment would apply in your defense as well. We all know better, and can be forgiven when our guard slips for a minute.
> 
> ...



Hi Ben

Thanks for your comments, as I believe that a reminder to respect each other was definitely needed by all of us in this thread !

Sadly, unlike your fortunate self, I suppose it would be bad manners for me to leave my own thread ?

However, despite my occasional complaint, I have truly enjoyed taking on all comers defending a 8% sustainable (as previously defined) yield position !

Thanks again.

Bob 
www.cfrca.com


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## stephenheath (Apr 3, 2009)

> I have learned almost everything that I know about investing from Benjamin Graham and Warren Buffett.
> 
> You state that you have learned everything that you know about investing from CC.
> 
> One of us is severely lacking ?


And this is why people have got their back up and are refuting your points with some malice, because you're coming across as a jerk, Bob. Someone gives a hat tip to the person who first awakened them to investing and taught them the basics and you ASSUME that is the entire breadth of their knowledge??? First of all, you can say you learned everything you know from them, but since I would find it hard to believe the premise that you are either old enough to have worked with Graham or been the apprentice of Omaha, what you REALLY mean is that you've read what they have written and said "ok, sounds good to me"... guess what, other people have managed to do that too. The reality is that while you can learn a bit and be successful at investing, there is always, ALWAYS more you can learn because the environment changes constantly... if not, then you're a leech and should just tell your clients to read Graham and Buffet and do it themselves. So the person lacking is the one who thinks he knows it all, not the one who respects his first guru while still continuing to learn.

Now on to your point. As you say, forget Riocan and the RoC diversion, it's only one example of your super secret squirrel picks. The bottom line is that you have now redefined it to mean that "When I use the word sustainable, I should include that while a 8% sustainable yield is possible, it definitely requires continual portfolio evaluation." ... in other words, Riocan ITSELF may not have an 8% sustainable yield, but you feel there will always be something that can be jumped to in the portfolio to replace it if it drops, and therefore the PORTFOLIO can have an 8% sustainable yield.

I'm not saying that's not possible, but what I am saying is that for that to occur, you are relying on:

1) A financial advisor that can always spot the opportunities that will not result in losses that will pull the overall yield below 8%, who will not embezzle funds, and who will be there for your entire retirement (or will be replaced by someone equally capable). You may be one of these people, which is why you feel confident that it can be done in general, but analysis of active managers has shown they cannot always beat the market, incidents of fraud from the most unlikely advisors are well documented, and there is no guarantee that if you get hit by a bus tomorrow your replacement will be as good as you are. I have no idea what the odds of getting a good advisor for the entire time you need them is, but I CAN guarantee you it is less than 100%.

2) If you lower your required savings at the time of retirement because you can acheive an overall yield of 8% on your retirement savings, and you are expecting to live to 95 since that's how long most of your family lived, that means you are expecting an 8% yield in your 90's... but to acheive this sustainable yield you are investing in equities, which are not only vulnerable to correction (both systemic and company risks), but are also not guaranteed cash flow... a one-two punch of a market correction and a dividend reduction as we have just experienced could derail your plan. Again, considering we have JUST experienced one, I think it's safe to say that the odds of the market going *** backwards at a terrible time for the plan is > 0%.

3) You are assuming there are always buying opportunities with good yields, but during boom times (such as the height of the market) every asset class was overvalued, and there was almost nothing you could buy that would yield 8% sustainable, nor was cash providing that return. Presumably another high performing asset would not fail during that time, so during the booms you shouldn't need to be hunting for an investment, but since company risk cannot be permanently eliminated, nor can the possibility of LBO's, it could happen. Bell Canada, a long time blue chip dividend stock almost got bought out, and there was a chorus of "where will we be able to get good returns now". Again, no clue on the actual chances, but greater than 0%.

So what does it mean in the end? Well, for someone retired, or nearing retirement without enough funds for a 4% return, you are giving a message of hope, and that's a good thing. For others, you are laying out another possibility that they can think about if they want to take a little more risk in their life, and chance eating cat food at 90 to tour the world at 40, and some people may be fine with it, some might not.

In fact, I had taken your message as a very good positive one until you tried to shove it down everyone's throat as a universal truth and not recognize that there ARE risks. A continuous 8% yield is POSSIBLE and SOME people may choose to lower their retirement goal because of it, but it is not, and never can be, guaranteed, and the only people that sell absolutes are con men and priests.


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## CanadianCapitalist (Mar 31, 2009)

CFR said:


> Despite some interpretation differences about this 4% thumb rule, my position is that it is far too low. This is mostly due to pedlars who push a low 4% rule in order to cover up both their high fees and poor performance.
> Personally, I stand by my position that the thumb rule should be 8%, ie a retiree or anybody else for that matter, can spend up to 8% of their portfolio without worrying about outliving their capital. Of course, this requires them to earn a 8% sustainable rate (as I have defined sustainable above) on their overall portfolio.


I'm a DIY investor as are most people on this forum. We have little interest in uncritically parroting "research" from vested interests. The 4% withdrawal rule doesn't come from peddlers of financial advice. It comes from heavy duty research, initially by William Bengen in the FPA Journal. Here it is:

*Determining Withdrawal Rates Using Historical Data*

Also, check out this article in the Financial Analysts Journal by Rob Arnott:

*Sustainable Spending in a Lower-Return World*



> For the long-term investor, return expectations of 8–9 percent cannot be justified in a world of stock yields below 2 percent and bond yields of 5 percent. If a person’s intended spending rises with inflation, as it often does, then sustainable spending will fall well short of 5 percent without more contributions to the portfolio.
> 
> None of this analysis is comforting to those who would like to rely on lofty return assumptions to justify chunky spending or skinny contributions. But planning for the future on the basis of sound assumptions is far better than relying on hope as a strategy for the future.


Today, S&P dividend yield is about 3%; TSX dividend yield is about 4%; bonds yield about 3%. A traditional 60/40 portfolio has a 3.6% portfolio yield. Spending the income from such a portfolio is probably sustainable (again there are no guarantees; dividends haven't always kept pace with inflation in the past) for a long time.


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## FinancialJungle (Apr 22, 2009)

An 8% yield is no less sustainable than a 4% yield depending on when the denominator was acquired. Back in the happy days in 2007, few investors would challenge the sustainability of Manulife's tiny 2.2% dividend yield. Shareholders were congradulated for investing within the 4% speed limit instead of chaising yields.

Happy days disappeared when the financial tornado spun MFC's yield to over 10%, but the 10% today is no less sustainable than the 2.2% from before. Of course Manulife can easily regain to $40/share as markets recover, thus lowering the yield to 2.6%. Again, the new shares aren't any safer than the previously purchased shares.

A similar story can be told for riocan. Yield was 4.9% in 2007, and 12% this March. You might buy half a position in 2007 and average down in March, but both halves share the same yield sustainability.


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## CFR (Apr 18, 2009)

*Bob's Replies*

Hi

Some quick replies/thoughts :

-StephenHeath - as I stated yesterday to Ben, I do sincerely apologize if my comment came accross the wrong way, as it was not my intention
-again, I'm being misinterpreted, as I never said that an 8% sustainable portfolio yield is guaranteed - actually quite the opposite as a 4% sustainable yield could likely be guaranteed, but 8% definitely does involve accepting some risk


-CC - Sorry, but I consider Bergen as just another wrapper/pedlar, and his work is not what I would call "heavy duty" research


-Financial Jungle - very good point that price paid makes a significant difference in the sustainable yield that you will receive - price paid effects both your initial cash yield percentage, and what you might get in future price appreciation - ie anybody who bought Riocan at its 2007 $27 high will likely NEVER get a 8% sustainable yield over many years


Challenging the 4% sustainable myth is unbelievably more difficult than I could have ever imagined ! Maybe 8% sustainable is crazy, but why not believe that better than 4% is not unrealistic, even if you achieve 6% ?


Bob
www.cfrca.com


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## RI.ca (Apr 28, 2009)

*REITinvestor.ca reiterates #3 Ranking & cautiously believes RioCan distribution....*

RioCan REIT (REI.UN - TSX)

April 30, 2009

REITinvestor.ca reiterates #3 Ranking & cautiously believes RioCan distribution to be safe for 2009. Maintains target $13.25/ unit.


REITinvestor.ca, a private subscriber-based independent rating & ranking service, believes that the current distribution of $0.115 per month ($1.38 annualized) is secure for the next 12 months, assuming financial and economic conditions do not weaken substantially over the rest of the year.

Following a review of RioCan’s Q1-0 Report, REITinvestor.ca believes that management is working hard to manage the current difficulties in retail- and office-leasing markets. REITinvestor.ca is maintaining its neutral #3 rating for REI.UN for 2009. 

Of particular note to REITinvestor.ca:

-	RioCan REIT continues to maintain high occupancy rates (97%) despite a spike in the number of unbudgeted vacancies;

-	While same-property NOI declined by 4.3% from Q4-08 to Q1-09 (and will likely remain under pressure going forward), third-party management fees and a reduction of internal administration expenses are offsetting much of the NOI decline;

-	RioCan management is committed to not proceed with any future developments unless the project is substantially preleased to credit-worthy tenants;

-	REI.UN was successful in issuing $180M in new unsecured debentures in Q1 (of which approximately $56M was used to repurchase other maturing debentures);

-	RioCan added net new financing in Q1-09 of $104M;

-	RioCan secured an additional $90M credit facility in Q1-09;

-	REITinvestor estimates that RioCan’s total liquidity to total debt has improved to approximately 11%, and that its current Loan-to-Value ratio is at a low 54%;


-	Management reports that approximately 12% of its properties are unencumbered by debt, providing for potential access to additional mortgage funds;


-	However, REITinvestor.ca notes that other serious risks remain:

o	Namely, its $200M credit line may be terminated if loan-to-value for pledged properties exceeds 60%. REITinvestor estimates the REI.UN entire portfolio is currently leveraged to 52.2%.
o	S&P and DBRS maintained their credit rating for REI.UN at BBB, or investment grade, as of 12/31/09. This rating could be affected by further weakening of financial and economic conditions, which could trigger replacing debentures coming due.
o	RioCan has a number of joint venture partnerships which expose the REIT to external risk, in case of default by a partner.
o	RioCan will need to implement a Qualification Plan for REIT Exemption, according to SIFT legislation, by December 31, 2010, the failure of which would have a material and adverse affect. 





REI.UN units closed on Tuesday, April 29 at $14.44 per unit. For more information, visit REITinvestor.ca


DISCLOSURE: REITinvestor.ca maintains its own investment fund and is not currently holding units of REI.UN.

REITinvestor.ca does not provide investment advice, nor does it recommend the purchase or sale of securities including any REIT units it covers. Please consult your personal professional advisor before investing.


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## CanadianCapitalist (Mar 31, 2009)

CFR said:


> Hi
> CC - Sorry, but I consider Bergen as just another wrapper/pedlar, and his work is not what I would call "heavy duty" research


Well, all I hear from you is unsubstantiated claims and individual names and beliefs that 8% withdrawal rates are sustainable. In comparison, Bergen's paper at least has facts and inferences that can be debated.


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## CanadianCapitalist (Mar 31, 2009)

FinancialJungle said:


> An 8% yield is no less sustainable than a 4% yield depending on when the denominator was acquired. Back in the happy days in 2007, few investors would challenge the sustainability of Manulife's tiny 2.2% dividend yield. Shareholders were congradulated for investing within the 4% speed limit instead of chaising yields.
> 
> Happy days disappeared when the financial tornado spun MFC's yield to over 10%, but the 10% today is no less sustainable than the 2.2% from before. Of course Manulife can easily regain to $40/share as markets recover, thus lowering the yield to 2.6%. Again, the new shares aren't any safer than the previously purchased shares.
> 
> A similar story can be told for riocan. Yield was 4.9% in 2007, and 12% this March. You might buy half a position in 2007 and average down in March, but both halves share the same yield sustainability.


Yields on RioCan and Manulife were lower then because investors weren't worried about the sustainability of distributions / dividends. Now they are, which is why prices are lower and yields are higher. Investors were underpricing risk then and they are overpricing it now. Fair enough.

Even if an investor waited in cash and scooped up stocks at or near the March lows, they still don't have a 8% dividend yield they can live forever on. The yields hit slightly more than 4% on the TSX and slightly more than 3% on the S&P 500. In the past, dividends have more or less kept pace with inflation and if the future looks like the past, investors can consume the dividends safely.

The other 4% has to come from alpha, either superior stock picking skills or market timing. Maybe some are smart enough to attain that. I would bet that most investors can't. In fact, average investors won't even get the market yields due to performance chasing and expenses.

Even for the smart ones who waited patiently in cash for stock yields to go up, how did they meet their 8% sustainable withdrawals prior to market lows? By consuming capital! Bond and stock yields stayed low for a long time, so that is a lot of capital already consumed even while waiting. And the wait may have turned out to be such a long one that by the time stock prices were low enough, the capital would have been consumed.


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## FinancialJungle (Apr 22, 2009)

CanadianCapitalist said:


> Even if an investor waited in cash and scooped up stocks at or near the March lows, they still don't have a 8% dividend yield they can live forever on. The yields hit slightly more than 4% on the TSX and slightly more than 3% on the S&P 500. In the past, dividends have more or less kept pace with inflation and if the future looks like the past, investors can consume the dividends safely.


I'm lost at the part where 4% was sustainable before the crash, while 8% isn't today.

XIU was yielding 2% just 18 months ago. If the 4% withdrawal was sustainable on 2% yield (+ capital gains?), then why not 8% today when the yield is twice as high? After all, the "relative" sustainability of these XIU units shouldn't change despite being 50% cheaper today.




CanadianCapitalist said:


> Even for the smart ones who waited patiently in cash for stock yields to go up, how did they meet their 8% sustainable withdrawals prior to market lows? By consuming capital! Bond and stock yields stayed low for a long time, so that is a lot of capital already consumed even while waiting. And the wait may have turned out to be such a long one that by the time stock prices were low enough, the capital would have been consumed.


I can't speak for others, but I'm still in the accumulation phase.


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## CanadianCapitalist (Mar 31, 2009)

FinancialJungle said:


> I'm lost at the part where 4% was sustainable before the crash, while 8% isn't today.
> 
> XIU was yielding 2% just 18 months ago. If the 4% withdrawal was sustainable on 2% yield (+ capital gains?), then why not 8% today when the yield is twice as high? After all, the "relative" sustainability of these XIU units shouldn't change despite being 50% cheaper today.


Say 2% was the dividend yield on the TSX. 4% was the yields on bonds. A blended 60/40 portfolio would have provided a 2.8% yield pre-crash. The rest will have to come from capital consumption. Since capital is consumed, this yield won't last forever. But it will last long enough for traditional retirees.

Today, dividend yield on the TSX is 4%. Bonds yield 3%. The same blended 60/40 portfolio will yield 3.6%. The rest again has to come from capital consumption. 

My guess is if capital isn't touched the 2.8% yield pre-crash and 3.6% today can be safely spent for a long time. i.e. they are probably sustainable. Neither is anywhere close to 8%. Someone who wants to spend 8% will be depleting capital at a fast pace then and now. That's why I think 8% isn't sustainable.


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## stephenheath (Apr 3, 2009)

Bob, I'm having trouble understanding your point then. You said



> -again, I'm being misinterpreted, as I never said that an 8% sustainable portfolio yield is guaranteed - actually quite the opposite as a 4% sustainable yield could likely be guaranteed, but 8% definitely does involve accepting some risk
> ...
> Challenging the 4% sustainable myth is unbelievably more difficult than I could have ever imagined ! Maybe 8% sustainable is crazy, but why not believe that better than 4% is not unrealistic, even if you achieve 6% ?


Now, I could be wrong about where the 4% really comes from, but where I use that figure to calculate the return on investments from age 65 on for my personal planning, it is the assumption of 2% inflation and 2% interest, based on my historical observation that laddering 5 year GIC's at the best rate you can get tends to get you those results. In other words, that's the risk free baseline, or as close as I can get to it for estimation purposes. (I know in the past you mentioned the 8% being comprised of inflation + returns as well so we're on the same page there).

So... what is the benefit in 8% or 6%? I mean, I can see your point that because it is higher than 4%, it means less money needs to be stockpiled at 65, but that is because you are boosting risk and reward compared to an all GIC portfolio, and that's pretty much common sense. Especially since you agree that it's not a risk free scenario. (And admittedly, nothing in life is risk free, even that 4% could get hit with new taxes, or banks closing and CIDC not covering what they promised, or other problems).

I guess it just seems like this thread has gone on so long, and everyone has softened their position from absolutes, that we're no longer talking about a big shocking thing, but simple risk vs. return exactly according to textbook?

(PS: One bit of disclosure, I just double checked my retirement spreadsheet, which is what I used to calculate my retirement principle targets and my future income targets (with inflation assumptions)... My Retirement to Death phase is calculated assuming a 6% return (including inflation, which boosts the principle, of 2.5% and profit to live on of 3.5%, since I'm aiming to leave a big inheritence if possible).


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## FinancialJungle (Apr 22, 2009)

Somewhere in the thread, we switched from a dividend-stock-picking portfolio to an index/bond portfolio. Personally I use bonds and cash as a temporary place to park money. If bonds are thrown into the mix, then 8% is pushing it.

Added: Also want to add that long-term, both dividend yield and capital are indexed to inflation, but bond yield is norminal. Assuming long-term inflation is 3%, investors should consume only 1% of the 4% bond yield to maintain real purchasing power. 1% on bonds adds a lot of pressure to equities. That means prior to the crash, investors must've assumed a safe 6% withdrawal on the equity portion in order to raise overall portfolio withdrawal to 4%. 

Not all TSX stocks pay dividends. For an experienced full-time dividend investor like Bob, it's possible to focus only on the dividend-paying, high quality (e.g. best 7 REITs) TSX constituents, but only invest when they're cheap. If Bob did acquire his Riocan at 12+% yield (twice!), he can afford 4% yield on his next purchase, or 6% on his next 2 purchases to average 8%.


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## CFR (Apr 18, 2009)

*Bob's Never Ending Thread*



CanadianCapitalist said:


> Well, all I hear from you is unsubstantiated claims and individual names and beliefs that 8% withdrawal rates are sustainable. In comparison, Bergen's paper at least has facts and inferences that can be debated.



Hi 

I provided Riocan as a specific name for 2 reasons :
-example of an investment/investment return that my clients and I held for several years
-example of how an investor can achieve a 8% sustainable (as defined) in the future (No guarantee, but the only/best suggestion made so far)
-note that buying Riocan using LIMITED margin can increase return to 20%+
-while there are several more specific examples that I could provide of how to earn 8% sustainable (as defined), and even higher, I am only offering one since it would be unfair otherwise to my clients who are paying to know
-however, the future is uncertain, risk is necessary, continual evaluating necessary, so there is NO guarantee that Riocan will continue to provide 8% indefinitely

Therefore, both my past and future claims are substantiated.

Again, while I don't expect everybody to agree with me, the worst possible outcome is that investors just swallow Bergen's pedlar position that only 4% is possible as a sustainable yield, and don't even challenge / try to achieve better

Great point earlier by somebody that with everybody having different definitions of the word "sustainable", this debate is made impossible.

Consider somebody who has $1,000,000 at retirement, and he asks you how much annual inflation adjusted pension income should he expect, without encroaching on his $1,000,000 capital
-ie both the $1,000,000 capital and the $40,000 annual income would have to grow by the inflation rate
-to me , an answer of only $40,000 is ridiculous, and I would be more than happy to take a $1,000,000 from anybody , and provide them $40,000 inflation adjusted annual income, with me being able to keep the excess !
-to me, as stated before, sustainable means both after inflation, and relatively safe for the foreseeable future

Riocan's Q1 Results
-despite repeating lots of facts, the above IR post doesn't address some critical issues
-Q1 was slightly lower compared to expectations, such that most analysts have now reduced their 2009 AFFO estimate to below the annual $1.38 distribution, such that Riocan is now estimated to distribute apporx 110% of AFFO for 2009
-on the conference call, management stated that they have absolutely no plans to reduce the distribution
-most analyts believe this, since the operational issues leading to this over distribution are believed to be temporary, ie 2010 AFFO payout ratio should be back to 100%, plus the fact that Riocan has low debt leverage
-most analysts still have Riocan's NAV at $18-$20, after adjusting for Q1
-the Q1 slight disappointment has sent many unitholders running, which explains the selloff in the last few days
-As usual, going the opposite way of the herd, and buying Riocan now represents great 10%+ yield value, plus significant capital gains potential
-Should you make the buy order, tell them Bob sent you !

Your Choice :

a) Buy Riocan at today's closing $13.45 price / 10.3% cash yield / plus future distribution / unit price increases / tax advantaged income / etc, and have very good probability of earning an 8% sustainable (as defined) yield, OR

b) Asking Bill Bergen how you can earn 4%


Bob
www.cfrca.com


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## CanadianCapitalist (Mar 31, 2009)

FinancialJungle said:


> Somewhere in the thread, we switched from a dividend-stock-picking portfolio to an index/bond portfolio. Personally I use bonds and cash as a temporary place to park money. If bonds are thrown into the mix, then 8% is pushing it.
> 
> Not all TSX stocks pay dividends. For an experienced full-time dividend investor like Bob, it's possible to focus only on the dividend-paying, high quality (e.g. best 7 REITs) TSX constituents, but only invest when they're cheap. If Bob did acquire his Riocan at 12+% yield (twice!), he can afford 4% yield on his next purchase, or 6% on his next 2 purchases to average 8%.


Fine. Compare with a 100% indexed stock portfolio. Unless you or Bob never invested from 2000 to late 2008/early 2009, stayed in cash, and purchased your MFC or REI.UN at absolute bottoms, you don't have a 8% yield on your portfolio. And even if you do, you are assuming that today's 8% yield will keep pace with inflation forever, whereas past evidence suggests that even the dividends on broad market has not grown in real terms for meaningfully long periods. Not to mention, if you have 10 stocks and one blows up in the future, you don't have anything close to sustainable.


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## CanadianCapitalist (Mar 31, 2009)

CFR said:


> Your Choice :
> 
> a) Buy Riocan at today's closing $13.45 price / 10.3% cash yield / plus future distribution / unit price increases / tax advantaged income / etc, and have very good probability of earning an 8% sustainable (as defined) yield, OR
> 
> b) Asking Bill Bergen how you can earn 4%


RioCan does not a portfolio make. The broad market yields 4% or less and investors, on average, can earn that on their portfolio. (and even that if they had waited until late 2008/early 2009 to invest in the stock market. If they invested earlier, their yields are even less). And even then past market history suggests that there will be long stretches when dividends don't keep pace with inflation.

The rest has to come from alpha -- either stock picking skills or market timing. I have doubts that most investors can do either successfully.


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## FinancialJungle (Apr 22, 2009)

CanadianCapitalist said:


> Unless you or Bob never invested from 2000 to late 2008/early 2009, stayed in cash, and purchased your MFC or REI.UN at absolute bottoms, ...


If Bob's yield-on-cost was 8+% prior to 2000, it's not necessary for him to trade in and out of equities to continue reaping the 8+% yield. He could hold his existing positions and plow new savings into cash until the next opportunities come along. From what I read, this is a very common practice for traditional dividend-based investors. 

And no one says anything about timing the absolute bottoms to achieve 8% yield.



> you are assuming that today's 8% yield will keep pace with inflation forever


It's irrelevant what I'm assumed, since if today's 8% can't keep up inflation, neither was the 4% from prior to the crash.



> Not to mention, if you have 10 stocks and one blows up in the future, you don't have anything close to sustainable.


Don't know where the 10 stocks came from. I have way more than 10. 

Year-to-date, excluding dividend-reinvestment and new money, my dividends are down 8%. This is not ideal, but compare that to XIU, SPY and VTI, whose dividends are slashed 16.7%, 22.2% and 17.6% respectively this quarter. I may not have as many stocks, but my sector diversification is better than the index. Most of the index dividend cuts likely resulted from over-concentration in resource and financial stocks.


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## CanadianCapitalist (Mar 31, 2009)

FinancialJungle said:


> If Bob's yield-on-cost was 8+% prior to 2000, it's not necessary for him to trade in and out of equities to continue reaping the 8+% yield. He could hold his existing positions and plow new savings into cash until the next opportunities come along. From what I read, this is a very common practice for traditional dividend-based investors.
> 
> And no one says anything about timing the absolute bottoms to achieve 8% yield.
> 
> ...


This discussion is fast degenerating into a passive / active debate and we're mixing Bob's arguments with yours (which is really mostly my fault). So, I'll clarify my points. I'm using the index as a convenient shorthand for equity holdings because data on it is relatively easily available. An index is made up of dividend payers and non-payers. The non-payers don't pay a dividend, so if you exclude every non-payer, the dollar amounts of dividends from an index is a proxy for the dividend flow from a portfolio made up exclusively of dividend stocks. The difference is that the yield on a dividend portfolio will be higher than for an index. I readily concede this point. The market now yields 3% on the S&P 500 and 4% on the TSX. 

1. Not much is known about Bob's portfolio. The only thing we know is he purchased RioCan in 2002 at $13, recently at $12.15 and was buying Royal Bank at $25 (it never hit that price but what is a little data mining between friends). He has said he holds 10 stocks but we don't even know what his yield-on-cost is. I'm very skeptical that Bob (or anyone else's) yield-on-cost on the total portfolio is 8% when the best the broad market has yielded in the 9 nine years I've been investing is 4%. 

2. I've never said the 4% withdrawal rate is sustainable, in the sense that it will last for all practical purposes forever. In fact, the 4% rule is for a traditional retiree and assumes capital consumption to make up for any shortfall. The only thing I'm certain of is that the lower the withdrawal rate from a portfolio, the more certain an investor can be on its sustainability. 

3. The fact that the dividends are lower on indexes than last year supports my point that investors can hope for dividends to keep pace with inflation but it is far from certain. Past market history has shown that markets can go a long time without keeping pace with inflation.

4. XIU paid out $0.10101 in 1Q-2008 and $0.10315 this year. That doesn't seem like a 16.7% cut in dividends to me. S&P estimates dividends will be lower by 13% this year on the S&P 500. Unless I know your Canada/US equity split, I have no idea whether 8% lower dividends is better on the benchmark or not. In any case, I don't know what relevance dividend cuts on indexes being higher or lower than your personal holdings over a 1 year period has on any discussion on considering dividend yields of any portfolio as sustainable over the long term.


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## CanadianCapitalist (Mar 31, 2009)

I took a look at the top 30 holdings of XIU. They make up over 82% of XIU's total value. Out of the 30 holdings, 9 either don't pay a dividend or pay a nominal dividend (less than 1%). These 9 holdings make up 21% of XIU. If you consider roughly 25% of an index as a dead weight in terms of dividends, only the dividend payers will yield about 5.3% (assuming 4% yield on XIU) and that is if you assume the buying was done at the best yields of the decade. It is still far less than 8%.


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## ethos1 (Apr 4, 2009)

CanadianCapitalist said:


> I took a look at the top 30 holdings of XIU. They make up over 82% of XIU's total value. Out of the 30 holdings, 9 either don't pay a dividend or pay a nominal dividend (less than 1%). These 9 holdings make up 21% of XIU. If you consider roughly 25% of an index as a dead weight in terms of dividends, only the dividend payers will yield about 5.3% (assuming 4% yield on XIU) and that is if you assume the buying was done at the best yields of the decade. It is still far less than 8%.


there is one way & why others dont discuss this strategy more is beyond me

Whenever I buy a (what a call a decent) Canadian dividend paying stock such as BMO, then selling a long Covered call ATM or close to it, I can usually get better than 10%

So for XIU today trading about $14.89, assuming its paying a 4% yield, I would sell the $16 covered call Mar 2010 and receive as premium $1.30, giving me a yield of ??? without reinvesting the option money to buy more stock, plus the upside should the stock get to $16

http://www.m-x.ca/nego_cotes_en.php?symbol=xiu


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## CanadianCapitalist (Mar 31, 2009)

ethos1 said:


> there is one way & why others dont discuss this strategy more is beyond me
> 
> Whenever I buy a (what a call a decent) Canadian dividend paying stock such as BMO, then selling a long Covered call ATM or close to it, I can usually get better than 10%
> 
> ...


Buy-and-hold is a gold standard against which all other investing strategies should be compared. I haven't seen many studies comparing covered-call writing with plain vanilla buy-and-hold. The one that I glanced at some time back claimed that gross risk-adjusted returns from writing covered calls is better than buy-and-hold. It didn't say anything about net returns, which I assumed would be worse.


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## Arcaneind (Apr 3, 2009)

At the start, I think I was following this thread. Forget it now; I'm retaining nothing!

I was at a RioCan plaza on the weekend and it did bring a smile to my face...


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## ethos1 (Apr 4, 2009)

CanadianCapitalist said:


> Buy-and-hold is a gold standard against which all other investing strategies should be compared. I haven't seen many studies comparing covered-call writing with plain vanilla buy-and-hold. The one that I glanced at some time back claimed that gross risk-adjusted returns from writing covered calls is better than buy-and-hold. It didn't say anything about net returns, which I assumed would be worse.


I was using XIU as a medium term buy & hold with a long covered call tagged to it

I could have said $16 contract March 2011 to pick up $2.00+/share on that option

It would not matter if you weren't called because you'd be in the same position as if you just bought & held, however with writing (selling a CC long) and getting the $2.00, that money could go to buying more stock which you would simply buy & hold & not option

Using this strategy the yield goes up over 8% even if you were called immediately or short term

OK, so on the option if the stock popped you'd have been called & lost the stock at $1.00 profit over what you paid at today's price (timing is everything) as well as on the selling the covered call & getting the $2.00

REI-UN is not a true sustainable 8% even up to $17, a we all know its monthly payouts are return of capital

My simple explanation on XIU wrting the CC was an example of doing better than 4% or 8% annually over the medium term of 2-5 years over the straight buy & hold

The BMO example posted earlier was another

_*Disclaimer: The example I gave is not a recommendation to go do, it was posted for information purposes only*_


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## CFR (Apr 18, 2009)

*Bob's Thread Lives On ! What's The Topic Now ?*

Hi

While life is too short to reply to all of the continuing mis-interpretations of my original point, here are some comments :

-CC
-never said that I bought Royal Bank at $25 during Feb/09, instead I bought Riocan during Feb/09 at $12.15
-looking back now, Royal Bank would have been the better Feb/09 buy
-Bob's cash yield on cost ? since I usually focus on cash yield on market value, I didn't know the answer to this myself ! so, after looking it up, my cash yield on cost is 12.8% (using SOME leverage) - What is your cash yield on cost ?
-what is Bill Bergen's cash yield on cost ?
-note that my clients and I focus only on high cash yield investments with growth a secondary objective (ie no Google or RIM ! or Nortel !)

-FinancialJungle 
-Thank you for your kind comments, quite a refreshing read compared to the attacks that I continually am bombarded with, after just trying to help fellow forum members challenge the pedlar 4% sustainable myth !

-Riocan Q1 - Further Update
-further to my Q1 comments above, and my earlier comment that my clients and I are buying Riocan up to $17, and my continual evaluation point, I would like to inform fellow readers that the Q1 fundamental results have caused a revision in my clients and my future Riocan buying strategy - while I still believe that Riocan is a good buy, my maximum price point is now reduced from $17/8% to $15/9%, in order to maintain the necessary margin of safety
-at $15 or higher, unless fundamentals improve, funds are better invested elsewhere, such as margin paydown
-Riocan revealed that during Q1, it was buying back its own units at an average price of $11.83 - so, if you want to be an "extreme" value investor, and should there be more price pullback, consider waiting to try and buy Riocan at $12 or less, which will likely put your buy next to one of Riocan's buy orders

-Arcaneid - Even though I was the one that started this thread, I totally agree with you that I can't follow this thread either !

-Bob's Bottom Line - Again
-an overall 8% sustainable (as defined to be after inflation and reasonably secure for the near term, subject to continual evaluation,etc) portfolio yield is possible
-with LIMITED leverage, it's actually EASY !


Bob
www.cfrca.com


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## ethos1 (Apr 4, 2009)

CFR said:


> -Riocan Q1 - Further Update
> -further to my Q1 comments above, and my earlier comment that my clients and I are buying Riocan up to $17, and my continual evaluation point, _*I would like to inform fellow readers that the Q1 fundamental results have caused a revision in my clients and my future Riocan buying strategy*_ - while I still believe that Riocan is a good buy, my maximum price point is now reduced from $17/8% to $15/9%, in order to maintain the necessary margin of safety
> -at $15 or higher, unless fundamentals improve, funds are better invested elsewhere, such as margin paydown
> ]


wow, now thats a quick change from a week ago, then again re-evaluate & readjust, just like normal folks

I wonder if Bob will be changing again when REI-UN drops to $12 or lower

sustainable 8%, I dont think so


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## FinancialJungle (Apr 22, 2009)

I'm going to step back from this thread because these discussions, while interesting, are only productive up to a point. I still owe CC a response on the index dividend cuts. I was comparing 4Q-2008 and 1Q-2009. I picked QoQ instead of YoY because unlike earnings, dividends aren't seasonal.


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## CFR (Apr 18, 2009)

*Riocan - Only 81 Cents Left !*



ethos1 said:


> wow, now thats a quick change from a week ago, then again re-evaluate & readjust, just like normal folks
> 
> I wonder if Bob will be changing again when REI-UN drops to $12 or lower
> 
> sustainable 8%, I dont think so



Hi Ethos1

Can't believe that your reply is the only comment/attack after my above post ?

As I have always maintained, constant evaluation is necessary for all investments, including Riocan.

Further, as my above post states, should Riocan drop to $12 or lower, instead of changing my opinion, "extreme" value investors should be buying Riocan, just as Riocan would likely make further re-purchases of their own units at $12.

You should further note that my updated opinion on Riocan was based on 2009 Q1 fundamentals, and NOT based on any Riocan price move.

Riocan closed yesterday at $14.19, so there is only 81 cents left before it reaches my $15.00 / 9.0% cash yield maximum price point.

Beyond $15.00, attaining an 8% sustainable yield on Riocan is too much more of a risk, and other investments/margin paydown make better sense. While too early to predict precisely, my $15 max price target will likely be revised back to $17, as I do expect future quarterly fundamentals to improve. But, I am a "show me" type, so for now the $15 price max stands.

However, at $15.00 or less, attaining an 8% sustainable yield on Riocan has a high probability.

Therefore, sustainable (as defined) 8% at $15.00 or less, I DO think so. With LIMITED leverage, actually easy.

Maybe I should not have provided my $17 to $15 revised price maximum, but that might have resulted in some $17/$18 Riocan purchases, like CC ?

Only 81 cents left !

Bob
www.cfrca.com


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## ethos1 (Apr 4, 2009)

CFR said:


> Hi Ethos1
> 
> Can't believe that your reply is the only comment/attack after my above post ?


did not realize we were at war - "attack you said", blimey, what has happened to this thread!

CFR needs to get a life IMO




> However, at $15.00 or less, attaining an 8% sustainable yield on Riocan has a high probability.
> 
> Therefore, sustainable (as defined) 8% at $15.00 or less, I DO think so. With LIMITED leverage, actually easy


Yawn



> Maybe I should not have provided my $17 to $15 revised price maximum, but that might have resulted in some $17/$18 Riocan purchases, like CC ?


Has CFR looked at other REIT's or considered putting himself and or his clients into something such as Whiterock (WRK.UN) which is one that I do not hold, nor have held or know anyone who is in it

Is CFR in WRK.UN?

Then again, what does an old timer like me know


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## like_to_retire (Oct 9, 2016)

Interesting interview with Amanda Lang and RioCan, where RioCan CEO guarantees distribution amid COVID-19 turmoil.

The chief executive officer of RioCan Real Estate Investment Trust has a message for investors: The company’s distributions are safe.

_“Either the market has way overreacted on the downside, or there’s this feeling that the world is so awful that they’re all going to be cut,” RioCan CEO Ed Sonshine said about payouts to investors in an interview with BNN Bloomberg Tuesday.
“I can assure you that’s not the case for RioCan.”
Investors have punished the TSX’s real estate subgroup, sending it down 28 per cent so far this year, amid the economic uncertainty caused by COVID-19. RioCan’s units have plunged 43 per cent since the end of February; and, as of Tuesday, the company’s yield was sitting at 10.11 per cent.
The current yield is “probably the highest we’ve ever traded at in history, and our portfolio is the best it’s ever been in history,” Sonshine said.
His comments come one day after the federal government unveiled its latest relief measure – the Large Employer Emergency Financing Facility (LEEFF) – which will offer bridge loans to companies unable to secure traditional financing amid the pandemic._

ltr


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## doctrine (Sep 30, 2011)

RIOCAN is probably good value, and the distribution probably should be cut. Both can be true statements. It will take years to rebuild their tenancies and collect what they can in back-rent as companies go bankrupt and then build occupancy back up. Their properties aren't going to be worth as much until the economy is roaring again, and it doesn't really make sense to borrow to pay it for several years.

It's not like their balance sheet was that clean to begin with. They always pay out 90%+ of the earnings and only grow through raising new capital or through price appreciation of their properties; both of those are off the table now.


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