Importance of Yield - Updates: DRG, NVU, CRR, RUF, MRT, Preferred Share
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The transition from nearly 45 years of steadily declining interest rates and an extended period of interest rates hanging around at close to all-time lows is the new normal. Having interest rates bounce along at the low end of the long term range could be the status quo for quite a while. The range bound trend for interest rates began in 2011 and is still present 7 years later in 2018. The tail wind provided from declining interest rates that has been adding extra oomph to valuations is waning, while demographic trends are creating the strongest demand for income ever. Evidence of the size of this change is apparent in the US political landscape, where the incumbent President is becoming almost desperately irrational trying to fight the economic forces that come along with this next phase for interest rates and demographics. Going forward, earning reliable yields will be at least as important as growth for valuations.
Comments this week include comparison of price changes for the three main categories of preferred shares, for the S&P/TSX Capped REIT Index and the Dow Jones and S&P TSX Composite Index. This is to highlight the relative performance for each and to reinforce the importance regular income has on share price stability.
Earnings updates focus on the REIT sector and include Dream Global REIT(DRG.UN), Northview Apartment REIT(NVU.UN), Crombie REIT(CRR.UN, CRR.DB.E), Pure Multi-Family REIT(RUF.U, RUF.UN, RUF.DB.U), and Morguard REIT(MRT, MRT.DB.B). Dream Global REIT was initially formed in 2011 to hold commercial real estate outside of Canada. Their initial single tenant portfolio established a presence primarily in the German real estate market. Over the past eight years the portfolio has grown, the initial single tenant portfolio now contributes just 10% of revenues. Acquisitions during 2017 were transformative, growing assets by more than 50% with the addition of commercial space in Holland that includes industrial properties. The upside in the deal was evident in both Q4 and 2017 results with more expected as they improve on the low property occupancy rates. It took six years for Dream Global to fully achieve the diversification goal set when they were initially formed. Their goal has not changed going forward, distributions presently returning 5.9% are due for an increase.
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