A Slice of the Realestate pie.
A slice of the real estate pie
Investing in companies tied to the housing market takes
the stress out of dabbling in real estate
House and condo owners aren't the only investors who've been making sweet profits
during the recent boom in property values across Canada and the United States.
Investors who prefer a more hands-off approach to real estate have also been doing
well -- and with just a fraction of the stress that comes with actual property
ownership. That's right, you can enjoy today's real estate bonanza without opening a
door, dipping a paintbrush or negotiating with a whining tenant.
How? By investing in companies whose fortunes are tied to real estate. Some of these
equities actually rise faster than the housing market itself, making them a leveraged
bet on house prices. Others are only indirectly connected to the housing market,
making them a more secure investment if the housing boom begins to cool.
The most straightforward approach is to invest in a real estate investment trust, or
REIT, that owns a portfolio of apartment buildings. REITs are types of income trusts
that trade on the stock exchange like regular stocks. But most are high-yielding
equities because they distribute most of their earnings -- derived mostly from rent --
to investors in the form of regular cash distributions.
As property values rise, REITs tend to perform well. Last year, the Standard &
Poor's/TSX capped REIT index (which includes a number of REITs that own offices,
hotels and shopping centres, in addition to those that own apartments) produced a
return of 14%, including distributions. So far this year, the performance has been
even stronger, with a total return of 19% in just nine months.
Admittedly, apartment REITs have lagged the overall REIT sector in total returns,
partly because of rising vacancy rates in many urban markets across Canada as more
people buy homes instead of renting them. But there are a number of standouts that
have made the returns on actual home ownership look downright tame.
For example, Boardwalk REIT (BEIun/TSX), which owns multi-family residences in
Western Canada, has produced a total return of 32% over the past 12 months.
Northern Property REIT (NPRun/TSX), which owns residential properties in the
Northwest Territories, Nunavut and Alberta, has done even better, with a one-year
total return of 34.5%.
That beats the best housing market in Canada by a wide margin -- and again,
investors have endured a minimum of legwork for their stellar gains.
Sure, what you're getting here is primarily rental income. But keep in mind that these
apartment REITs own the properties they rent and, in some cases, additional land
that can be either sold or developed.
Killam Properties Inc. (KMP/TSX), for example, which owns rental properties in
Atlantic Canada and Ontario, believes it has enough surplus land to build another 750
to 1,000 units, representing about 15% of the company's existing rental portfolio. It
David BermanFinancial Post could also choose to sell some of that land.
If you don't mind straying into commercial real estate, there are also firms -- usually
giant retailers -- in Canada and the United States that might be considered real
estate companies in disguise. That is, they happen to own vast amounts of property -
- usually with stores on top -- that have grown exceptionally valuable in recent years.
Late last year, for example, Kmart Holdings Corp. suddenly gained recognition as a
valuable real estate company (rather than a troubled retailer) after it announced a
deal to sell 50 stores to Sears Roebuck & Co. for a whopping US$575-million, and a
number of other stores to Home Depot.
Earlier this year, an investment group that included Kohlberg Kravis Roberts & Co.
and Bain Capital LLC acquired Toys 'R' Us Inc. for US$6.6-billion -- and their interest
in the company was largely spurred by the value of the troubled toy retailer's real
estate. Investors who bought Toys 'R' Us shares prior to the takeover bid made a tidy
50% on their investment.
If you want to stick closer to the actual housing market, though, consider investing in
companies that sell mortgages to homeowners. The big banks own a massive chunk
of this business, of course. But you can get a far more pure investment (since big
banks do many other things besides selling mortgages) by buying shares in
companies that specialize in so-called sub-prime mortgages.
These mortgages are aimed at prospective homeowners who don't meet most of the
typical requirements for big loans -- like new university graduates, recent immigrants
and self-employed workers. These people might not have the best credit ratings, but
they're nonetheless financially capable of owning a home.
Home Capital Group Inc. (HCG/TSX) is arguably the biggest and most successful
name here. Through its subsidiary, Home Trust Co., it sells sub-prime mortgages
across Canada. The company charges slightly higher rates to offset the greater risks,
but it doesn't suffer from a high proportion of defaults on the loans. This has resulted
in big earnings growth during Canada's housing boom, with Home Capital's net
income rising at an annual clip of more than 30% in recent years.
Needless to say, Home Capital's share price has also risen. The shares are up more
than 60% over the past 12 months, closing yesterday at $38.60 on the Toronto Stock
Exchange. Just two years ago, the shares were trading at less than $7, giving them a
440% cumulative return. When was the last time you heard of a house rising that
much in just three years?
Michael Goldberg, an analyst at Desjardins Securities, believes the good times will
continue. He estimates Home Capital will produce $1.60 in earnings per share in
2005, up from $1.25 last year. In 2006, he estimates earnings will rise again, to
$2.15, or 34% above this year's estimated earnings. "They primarily sell loans that
have been declined by the banks," Mr. Goldberg says. "So if the housing market turns
down, that can actually increase the size of their business," since the big banks will
be the first to shut their vaults.
Home Capital isn't the only Canadian company having great success selling
mortgages these days. Xceed Mortgage Co. (XMC/TSX) and Equitable Group Inc.
(ETC/TSX) have seen their share prices rise 39% and 33%, respectively, over the
past 12 months.
Meanwhile, other companies have tapped into the housing boom by selling home
improvement materials to people who have either just bought a home or refinanced
one. According to one estimate, about a third of all money generated from mortgage
refinancing is plowed into home improvements -- great news for companies like
Home Depot (HD/NYSE), the second-largest retailer (and largest home-improvement
retailer) in the United States.
In the most recent fiscal year, Home Depot sold an amazing US$73-billion worth of
hammers, wrenches and work benches, generating US$5-billion in net income, up
16% over the previous year.
Curiously, investors have been less than enthusiastic about this stock. Yes, the share
price has nearly doubled over the past two years. But it has declined about 11% so
far this year and is still down about 45% from its record high in 1999 -- possibly
because observers feel the company is going to have trouble growing if the
mortgage-refinancing market dries up in the United States.
Still, the stock trades at a reasonable 15 times its trailing earnings and should
continue to generate mammoth profits if the housing market remains buoyant.
The shares of rival Lowe's Cos. Inc. (LOW/NYSE) have enjoyed a steadier ride.
They're up 11.4% so far this year and have tripled in price since 2000. The company
sold US$36.5-billion of building supplies last year and reported net income of US$2.2-
billion.
In Canada, your best bets are Canadian Tire Corp. (CTR/TSX), whose shares have
risen 28.7% in 2005, and Rona Inc. (RON/TSX), whose shares are up 10% over the
same period.
Finally, you can bet on the companies that actually do the home-building. Toll
Brothers Inc. (TOL/NYSE), which makes luxury homes in the United States, saw its
shares hit a record high of US$58.67 earlier this year, up almost 500% over the past
three years. The shares have since declined to US$43.47 on fears the housing market
is due for a pause or correction.
© National Post 2005
Copyright © 2005 CanWest Interactive, a division of CanWest Global Communications Corp. All rights reserved.
Investing in companies tied to the housing market takes
the stress out of dabbling in real estate
House and condo owners aren't the only investors who've been making sweet profits
during the recent boom in property values across Canada and the United States.
Investors who prefer a more hands-off approach to real estate have also been doing
well -- and with just a fraction of the stress that comes with actual property
ownership. That's right, you can enjoy today's real estate bonanza without opening a
door, dipping a paintbrush or negotiating with a whining tenant.
How? By investing in companies whose fortunes are tied to real estate. Some of these
equities actually rise faster than the housing market itself, making them a leveraged
bet on house prices. Others are only indirectly connected to the housing market,
making them a more secure investment if the housing boom begins to cool.
The most straightforward approach is to invest in a real estate investment trust, or
REIT, that owns a portfolio of apartment buildings. REITs are types of income trusts
that trade on the stock exchange like regular stocks. But most are high-yielding
equities because they distribute most of their earnings -- derived mostly from rent --
to investors in the form of regular cash distributions.
As property values rise, REITs tend to perform well. Last year, the Standard &
Poor's/TSX capped REIT index (which includes a number of REITs that own offices,
hotels and shopping centres, in addition to those that own apartments) produced a
return of 14%, including distributions. So far this year, the performance has been
even stronger, with a total return of 19% in just nine months.
Admittedly, apartment REITs have lagged the overall REIT sector in total returns,
partly because of rising vacancy rates in many urban markets across Canada as more
people buy homes instead of renting them. But there are a number of standouts that
have made the returns on actual home ownership look downright tame.
For example, Boardwalk REIT (BEIun/TSX), which owns multi-family residences in
Western Canada, has produced a total return of 32% over the past 12 months.
Northern Property REIT (NPRun/TSX), which owns residential properties in the
Northwest Territories, Nunavut and Alberta, has done even better, with a one-year
total return of 34.5%.
That beats the best housing market in Canada by a wide margin -- and again,
investors have endured a minimum of legwork for their stellar gains.
Sure, what you're getting here is primarily rental income. But keep in mind that these
apartment REITs own the properties they rent and, in some cases, additional land
that can be either sold or developed.
Killam Properties Inc. (KMP/TSX), for example, which owns rental properties in
Atlantic Canada and Ontario, believes it has enough surplus land to build another 750
to 1,000 units, representing about 15% of the company's existing rental portfolio. It
David BermanFinancial Post could also choose to sell some of that land.
If you don't mind straying into commercial real estate, there are also firms -- usually
giant retailers -- in Canada and the United States that might be considered real
estate companies in disguise. That is, they happen to own vast amounts of property -
- usually with stores on top -- that have grown exceptionally valuable in recent years.
Late last year, for example, Kmart Holdings Corp. suddenly gained recognition as a
valuable real estate company (rather than a troubled retailer) after it announced a
deal to sell 50 stores to Sears Roebuck & Co. for a whopping US$575-million, and a
number of other stores to Home Depot.
Earlier this year, an investment group that included Kohlberg Kravis Roberts & Co.
and Bain Capital LLC acquired Toys 'R' Us Inc. for US$6.6-billion -- and their interest
in the company was largely spurred by the value of the troubled toy retailer's real
estate. Investors who bought Toys 'R' Us shares prior to the takeover bid made a tidy
50% on their investment.
If you want to stick closer to the actual housing market, though, consider investing in
companies that sell mortgages to homeowners. The big banks own a massive chunk
of this business, of course. But you can get a far more pure investment (since big
banks do many other things besides selling mortgages) by buying shares in
companies that specialize in so-called sub-prime mortgages.
These mortgages are aimed at prospective homeowners who don't meet most of the
typical requirements for big loans -- like new university graduates, recent immigrants
and self-employed workers. These people might not have the best credit ratings, but
they're nonetheless financially capable of owning a home.
Home Capital Group Inc. (HCG/TSX) is arguably the biggest and most successful
name here. Through its subsidiary, Home Trust Co., it sells sub-prime mortgages
across Canada. The company charges slightly higher rates to offset the greater risks,
but it doesn't suffer from a high proportion of defaults on the loans. This has resulted
in big earnings growth during Canada's housing boom, with Home Capital's net
income rising at an annual clip of more than 30% in recent years.
Needless to say, Home Capital's share price has also risen. The shares are up more
than 60% over the past 12 months, closing yesterday at $38.60 on the Toronto Stock
Exchange. Just two years ago, the shares were trading at less than $7, giving them a
440% cumulative return. When was the last time you heard of a house rising that
much in just three years?
Michael Goldberg, an analyst at Desjardins Securities, believes the good times will
continue. He estimates Home Capital will produce $1.60 in earnings per share in
2005, up from $1.25 last year. In 2006, he estimates earnings will rise again, to
$2.15, or 34% above this year's estimated earnings. "They primarily sell loans that
have been declined by the banks," Mr. Goldberg says. "So if the housing market turns
down, that can actually increase the size of their business," since the big banks will
be the first to shut their vaults.
Home Capital isn't the only Canadian company having great success selling
mortgages these days. Xceed Mortgage Co. (XMC/TSX) and Equitable Group Inc.
(ETC/TSX) have seen their share prices rise 39% and 33%, respectively, over the
past 12 months.
Meanwhile, other companies have tapped into the housing boom by selling home
improvement materials to people who have either just bought a home or refinanced
one. According to one estimate, about a third of all money generated from mortgage
refinancing is plowed into home improvements -- great news for companies like
Home Depot (HD/NYSE), the second-largest retailer (and largest home-improvement
retailer) in the United States.
In the most recent fiscal year, Home Depot sold an amazing US$73-billion worth of
hammers, wrenches and work benches, generating US$5-billion in net income, up
16% over the previous year.
Curiously, investors have been less than enthusiastic about this stock. Yes, the share
price has nearly doubled over the past two years. But it has declined about 11% so
far this year and is still down about 45% from its record high in 1999 -- possibly
because observers feel the company is going to have trouble growing if the
mortgage-refinancing market dries up in the United States.
Still, the stock trades at a reasonable 15 times its trailing earnings and should
continue to generate mammoth profits if the housing market remains buoyant.
The shares of rival Lowe's Cos. Inc. (LOW/NYSE) have enjoyed a steadier ride.
They're up 11.4% so far this year and have tripled in price since 2000. The company
sold US$36.5-billion of building supplies last year and reported net income of US$2.2-
billion.
In Canada, your best bets are Canadian Tire Corp. (CTR/TSX), whose shares have
risen 28.7% in 2005, and Rona Inc. (RON/TSX), whose shares are up 10% over the
same period.
Finally, you can bet on the companies that actually do the home-building. Toll
Brothers Inc. (TOL/NYSE), which makes luxury homes in the United States, saw its
shares hit a record high of US$58.67 earlier this year, up almost 500% over the past
three years. The shares have since declined to US$43.47 on fears the housing market
is due for a pause or correction.
© National Post 2005
Copyright © 2005 CanWest Interactive, a division of CanWest Global Communications Corp. All rights reserved.
posted by Mortgageman at 9:38 AM
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