July 4, 2017

On Tuesday, American markets were closed for their holiday while Toronto was down 0.3%.

Canadian Western Bank was up 1.7%.

Constellation Software was down 2.3%.

Interest rates are on the rise. The yield on the government of Canada five year bond is up to 1.44% which is a nice jump from the 0.93% level of a month ago. This rate was last this high in early 2015 and on sustained basis it was last higher than this in 2011. Rate reset preferred shares should continue to rise as this rate moves higher and I believe tend to lag the government rate sometimes having a delayed reaction.

RioCan REIT provided an interesting update today:

On June 29, 2017, RioCan completed the sale of its Cambie Street property in Vancouver, B.C. for a sale price of $94.2 million, which equates to a capitalization rate of 3.29%. RioCan has also entered into a firm agreement to sell a portfolio of six chartered bank branches located in B.C. at a sale price of $30.3 million, which equates to a capitalization rate of 3.72%. The sale is expected to close in the third quarter of 2017.

Capitalization rate in real estate means net operating income divided by the sale price. And net operating income means income before interest, depreciation and income tax.

LOOK at these cap rates! RioCan is selling property at 30 times EBITDA and 27 times EBITDA.

Assume for the moment that depreciation is zero since it is often offset or more than offset by property appreciation. We still need to pay something for interest and income tax. These buildings would appear to be trading at something like 50 times the net income they bring in!

Possible explanations:

Stupid buyers who say well all the other buyers are paying stupid amounts so we shall too?

Redevelopment opportunities, to increase rent value?

Future rent increases?

I just can’t imagine paying such high amounts to access a stream of rents. I think RioCan is wise to sell. RioCan is a very well run company. They may suffer some from the Sears bankruptcy and and other retail problems. But I suspect they will continue to do well over the years.