April 19, 2022

Tuesday was a nice day to be an equity investor. The S&P 500 was up a hefty 1.6% and Toronto was up 0.6%.

Some of the notable gainers were: Shopify – up 4.25%, Toll Brothers  – up 3.8%, WSP Global – up 3.0%, AutoCanada – up 4.7%, Amazon – up 3.5%

And nothing on our list was down by any notable amount and few were down at all.

Aecon was in the news with a contract win in Ontario. This construction company has been a disappointment. But perhaps their time is coming. The Federal government is pushing the provinces to get on with infrastructure spending (cost-shared projects). And Aecon’s Airport “concession” in Bermuda must now be enjoying a lot more traffic.  To date, however construction has been a very tough way to make money for them it seems.

I’m wanting to move some of my cash into safe fixed income while also using some for bargains but also not wanting to deplete the cash too much. Ideally, Melcor Developments will finally show some real life so I can cash some of that out. I usually don’t communicate with management. But in the case of Melcor I have been “putting the wood” to investor relations and (indirectly) their finance group trying to light a fire under them to  work at getting their profits up. I’m far from satisfied with a $17 stock price. I’ve suggested to them that they analyse the return on investment of a number of their recently completed communities to see what level of markup (gross margin) leads to what level of return on capital. Slowly, they seem to be getting convinced to do that analysis. Lot prices have actually increased significantly over the years. But it seems their costs have risen even faster.  I will keep hammering on them that the current profits and share price are too low and they need to at least try to do better.

Anyhow, given my familiarity with the company, I am comfortable that the convertible debenture of the Melcor REIT paying 5.1% and maturing December 2024 and convertible to REIT units at $8.90 is a reasonably safe investment. Despite some vacancies in their office buildings it looks like the REIT is doing well and can afford a distribution increase. I’m hopeful that they will announce a distribution increase with the Q1 results in May. The Debenture symbol is MRD.DB.B. It trades now at par $100. I own some bought at the discounted prices available in 2020 (pandemic panic). I now have an order in to buy more at $100. Actually I might not get it at $100 but I am not inclined to pay more than par.  The REIT units themselves seem likely to be a better investment. But I already have a good exposure to those and I want to keep this money in cash or fixed income. The scenario that I think is quite possible is that the REIT increases its distribution partly because they would like to issue more units in order to buy some recently completed retail properties from the parent Melcor Developments. A distribution increase should push the unit price up making it easier to issue units of the REIT to purchase those properties. Of course there are always risks, higher interest rates could certainly lead to market value losses on the REIT’s buildings and that is a negative for the unit price. And higher interest rates are a negative for the unit price in general and really for all investments directionally.

Also, of relevance to the parent Melcor Developments, it was reported today by CMHC that single family home starts in Alberta were 23% higher this March compared to last year. Still not particularly high but improving. 





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