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  • U.S. real estate – no more “low hanging fruit”

    The U.S. real estate market is once again attracting investor interest and there is an abundance of mortgage money available to buyers. Investors in the commercial and multi-family housing sectors appear confident the market recovery is real and sustainable. As a result, prices for these types of properties have been rising.

    The multi-family sector (i.e. apartment buildings) has been one of the strongest performers for many reasons – not the least of which is that since the financial crisis many Americans have abandoned the dream of home ownership.

    MoodysChart PCS 2014 300x241 U.S. real estate – no more “low hanging fruit”We have been investing in the U.S. multi-family space since 2011 and our clients now have interests in apartment buildings in Texas, Georgia, Florida and Tennessee. Our goal was to build a diversified portfolio of properties that would capture an attractive yield and a meaningful capital gain. The capital gain would be the result of both a recovering real estate market and strong growth in rents. Our experience to date has been very positive and if anything, the market has recovered more quickly than we anticipated.

    Venterra Realty, a specialty real estate investment company investing in multi-family residential communities in the southern United States, has been an important partner for Newport Private Wealth in this program.

    John Foresi, CEO, co-founder and director of Venterra, was in our office recently to provide an investment update. He reviewed the changes in the U.S. real estate market in the five years following the financial crisis of 2008.

    In his view, the market was frozen in 2009-2010. There was little activity – mortgage money was scarce and buyers and sellers were paralyzed by the dramatic price declines. For many, it was a game of survival and there were few buyers with money and conviction. Venterra had both.

    By 2011, the market had stabilized and bargain hunters had returned. But only the “best-financed” buyers were in the game as mortgage money remained very scarce. The majority of U.S. lenders were reducing their balance sheets and most doors were shut for new borrowers. For well-financed buyers like Venterra, the 2011-12 period was, according to John, akin to “shooting fish in a barrel.”  In retrospect, he wished that they had been more aggressive, but hindsight is 20/20 and our view is that it is better to be conservatively opportunistic than take on too much risk.

    By 2013, investors of all kinds were back looking for yield and the supply of mortgage money had improved dramatically. The result? “Cap rates” for multi-family projects fell to 5.75% from 6.75%. While this may not seem like much, it means that prices increased 18%! (Note: commercial real estate is valued using a “capitalization rate” i.e. “cap rate”. The lower the cap rate, the higher the price.)

    In John’s view, there is now little left in the way of “low hanging fruit” in the multi-family sector. He reminded us that it is more essential than ever to “buy well, use moderate leverage and be prepared to wait it out if needed.”

    He also reminded us that Venterra has a number of meaningful competitive advantages. They have an unblemished record as a reliable buyer that can close quickly. Quite often, they have bought buildings after the winning bidder failed to close. They are also able to assume existing mortgages. Mortgage lenders are very reluctant to transfer mortgages to new buyers. As a result, an existing mortgage is often viewed as a “negative” and it eliminates many potential buyers from the bidding process; an advantage for well-capitalized buyers like Venterra.

    Finally, there continues to be “underperforming” properties for sale due to absentee ownership or deferred maintenance. In these cases, Venterra’s strategy is twofold. They believe that their operational expertise will improve occupancy and rental rates. In addition, they have the ability to raise enough money to upgrade the property. If successful, the result is increased annual income and a higher sale price in 5 to 6 years.

    WestoverOaks U.S. real estate – no more “low hanging fruit”

    Westover Oaks, San Antonio, TX, acquired Dec. 2012

    Overall, John remains confident that he and his team can continue to secure attractive opportunities for us to consider and invest in for our clients. Success will be less about falling cap rates and more about value-added strategies to increase the net income from each property.

    Why the deep freeze is good for your portfolio

    car in the snow21 150x150 Why the deep freeze is good for your portfolioApart from the Olympics, the most popular shared experience these days is talk about the weather. To be specific, the bitter cold that has hit most of Canada – and given rise to the new and now popular term, ‘polar vortex.’ However, there is a silver lining to these snow-filled clouds – and not just for those who enjoy winter sports.

    Demand for natural gas has risen appreciably with the decline in temperatures. And that’s good for investors like ourselves who took a contrary view back in 2011 when the commodity was deeply out of favour. At the time, in North America, natural gas was trading at approximately $1.80 per one million British Thermal Units (BTUs) and producers’ stock prices were depressed.

    But for investors who took a longer-term view, a different picture was emerging. One that held the potential for significant profit.

    That’s because natural gas enjoys attractive qualities as a clean, abundant and (relative to alternatives) cheap form of energy. In recent years, technological advancements and readiness of supply have increased its application for power generation, industrial use, transportation, drilling rigs, etc. In fact in 2013 and 2014 there are more than 350 projects completed or underway in North America that will create demand for more than 1 trillion cubic feet of supply per year.

    The wide and cheap availability of natural gas in North America has led to a mini-manufacturing boom or ‘re-shoring’ of manufacturing facilities back to the U.S. That’s because, unlike oil which is subject to global pricing, natural gas prices have regional differences. In Europe, for example, natural gas trades at approximately $11 per one million BTUs, and $16 in Asia.

    Not surprisingly, industry is moving to fill this void. In 2015, the U.S. will begin exporting LNG (liquefied natural gas) to Asia and Canada will have its program underway by 2017. The LNG export projects approved amount to 25% of annual supply in North America. It’s logical to expect increased demand and reduced supply will have a positive effect on pricing.

    It’s already being played out – with prices having moved up to their current level of $5 in North America. Many in the gas industry claim that to recover all the costs of buying land, drilling, building production facilities, etc. the industry needs a $5+ gas price. Clearly with gas in the $3 to $4 range over the past two years the number of rigs drilling for gas in the U.S. has remained depressed (down 60% from the peak). Industry has not yet allocated additional capital to drill more wells. We will see if the now $5 gas price leads to increased drilling in the year to come.

    Our approach since 2011 has been to overweight natural gas investments in our Newport North American Equity Fund, with our largest holding being Tourmaline (TSX:TOU), also the subject of previous blogs. Tourmaline has grown its gas production 50% a year for six straight years. Its share price has risen over this time reflecting this growth. To date, our thesis has played out as we had hoped and we believe there are a number of years of strong growth to come – albeit with likely some volatility along the way and we manage for that with a diversified portfolio of stable investments.


    Is the U.S. market due for a correction?

    Is the U.S. stock market poised for a correction? Is January’s decline of 4% the start of a bigger correction?

    These are perfectly understandable questions. In fact, we hear them repeatedly when meeting with our clients here at Newport Private Wealth. And they are being heavily debated within our Investment Committee and by investment experts whose opinions we value. After all, the S&P 500 has increased by almost 50% in the last two years including 30% in 2013.

    The pessimists are arguing that:

    • the S&P 500 has increased for five consecutive years and a six-year streak has only happened once before (1982-89); and
    • market returns after two consecutive years of double digit returns have typically been modest; and
    • the stock market is expensive at 16x earnings.

    (Source: BMO Nesbitt)

    The optimists have compelling points to make as well. They argue that:

    • stock markets can and have traded well above the current P/E multiple when inflation is under 2%. (inflation is currently less than 1%); and
    • private investors remain very “under-invested” in the stock market. They withdrew $451 billion from 2006-12 and only reinvested $60 billion last year.

    This is a very common dilemma in the life of an investment manager such as Newport Private Wealth. We are repeatedly faced with conflicting facts and viewpoints, most of which are persuasive and compelling on some level.

    Will there be a correction in 2014? We think it’s likely. But corrections are a normal part of the investment cycle and they are often part of a long-term bull market. In fact, corrections are seen by many as a healthy part of the journey. They even provide an opening for those investors who are late to the game to get invested.

    Take a quick look at the chart below. The S&P 500 has doubled in the last five years and there have been four pullbacks along the way, including one correction of almost 20%.

    large decline Jan20141 Is the U.S. market due for a correction?(Source: WSJ Data Group)

    The more important question, in our view, is “are U.S. stocks a good place to make money over the next three or more years?”  We have confidence in our positive view of this question. But we would not be surprised to see one or more corrections along the way.

    However, we do feel that different strategies are in order at this point in the cycle. From our perspective, further gains in the U.S. market will have to be driven more by earnings growth rather than a broad-based market rise. Therefore, we believe that the right approach is to be more selective by way of prudent “stock-picking” as opposed to just owning “the market”. Lastly, we are currently holding healthy cash balances in our equity funds with the hope that we will be able to put the money to work at more attractive prices.

    Risk management is a hard sell!

    Equity mutual funds are getting a late Christmas gift this month: they are finally able to drop return data from 2008  from the calculation of their five-year performance numbers. Why is that important?

    In 2008, global equity markets fell between 30-54% (as if we need reminding!). Given that mutual funds generally report one, three, five and ten year historical performance, dropping 2008 from their critical five-year returns will optically improve the numbers, no question. But what does it tell us about risk? Those better five-year numbers might attract some investors to a level of risk they don’t want — and perhaps don’t understand. Let’s look back for a moment.

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    Future looks bright for Vision Critical

    vc blog 150x150 Future looks bright for Vision Critical Rarely do we write about specific investments in this blog, however, a recent post by Wellington Financial about one of our private investments caught our attention and we thought to share it with our readers.

    Vision Critical’s $10.5M secondary clears the deck for potential IPO.

    Vision Critical is a fast-growing Canadian tech company that has become a major player in global market research solutions. The company was founded in 2000 by noted entrepreneur, Dr. Angus Reid (former founder of Angus Reid Group, Canada’s largest research and polling group) and his son, Andrew Reid.

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    Personal Financial Checklist for 2014

    With much of the country caught in a deep freeze, it may be just the weekend to stay indoors and make progress on your planning for 2014.

    To help you, our wealth management team has updated this handy month-by-month calendar of tasks, ‘to dos’ and reminders to help you get and keep on top of your financial affairs. Even if you’re already in good shape, you’re likely to find something on the list that could help you improve your overall picture — and peace of mind.

    Click on the attached link for your 2014 Month By Month Personal Financial checklist.



    NextWave – A Young Adult’s Guide to Investing

    Finances101 NextWave 150x136 NextWave   A Young Adults Guide to InvestingWe hosted our 3rd NextWave event last week in our King West offices where over 30 young adults gathered to learn about and discuss financial issues specifically relevant to the younger age demographic. This NextWave event is part of a larger program to help young adults develop healthy money management habits and ultimately gain the experience needed to steward wealth responsibly.

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