Dennis Mitchell, CFA

Economy. The economic paces that we are dealing with today means lower interest rates for a longer time. Most equities right now are discounting a 3%-3.5% 10 year bond yield, which makes a lot of companies compelling value at these levels. Expects the Fed might push back their tapering to Q4 and possibly to Q1 if we keep getting weak job numbers like we did today.

Brand new IPO that was spun out of Loblaw’s to hold the majority of their real estate. Better quality real estate than he anticipated, the payout ratio was excellent and the leverage was very low. Experienced management which he likes. Didn’t like some of the aspects of the strategic alliance agreement between Loblaw’s and this company. It limited some of their ability to create value and growth one forward. Also, in a rising interest rate environment, they are only going to generate 1.5% growth 5 years out from now.

Leisure World (LW-T) or Chartwell (CSH.UN-T)? Prefers Chartwell. Has significant turnaround. B leveraging, simplifying the business model, new management. 5.5% dividend yield is safe. Worth $10.50-$11.

Leisure World (LW-T) or Chartwell (CSH.UN-T)? Doesn’t own because it is long-term care and long-term care has next to no growth in the cash flow stream. Assets are in Ontario and BC. Have to do a significant amount of redevelopment in roughly half their portfolio in the next few years, which is all CapX with no general upside. Have to redevelop these assets to an A or B quality standard.

Got some of this when it was spun out of Dundee REIT (D.UN-T), a pure office REIT. This is pure industrial. If you are expecting weak economic growth, industrial real estate tends to not be the best performing asset class. More exposed to export, particularly in Ontario with the auto market. Thinks you can get in and realize some value here.

A global tower company. Has owned for quite some time and is very happy with it. A little disappointed on their global side. Unhedged and the US$ has strengthened while foreign currencies have weakened. However, a strong US$ is probably good for them right now as they are investing outside of the US and into these countries and able to buy assets at a discount. Stock has dropped because a report came out that undermined several of the founding tenants of this company. Most of the report was factually incorrect and blatantly inflammatory. You are getting a great return if you can buy in the low $70s. 1.5% dividend yield is going to grow at about 10%-12% a year.

Very good name. Multi-residential. Some of the issues that have crept up recently is diversification initiatives that management has implemented. Bought some US assets and entered into long-term management agreements and there is speculation that they bought some assets in Ireland. All in all, the portfolio is rock solid. Have made tremendous progress in the last 5 years by bringing the payout ratio down and improving the quality of the assets and diversifying the portfolio. Probably worth $26-$27.

US Mortgage REITs. Dividends are not safe. As interest rates rise, hopefully the spread that they can invest in grows and the cash flow hopefully grows. The offsetting impact is that as interest rates rise, the BV of the offsetting assets that they own collapses. That is what has happened with a number of these mortgage REITs. He sold his holdings.

Growth in this company is going to slow a little. A lot of their growth has been through acquiring facilities, developing facilities and acquiring larger stakes in facilities they already own. This is going to slow down a little but they will continue to grow. Good management. Trading at or just below NAV. Dividend is safe and you can expect modest growth going forward. If you are willing to accept a little volatility than you could step into this. 4.9% dividend yield is safe.

Relationship between the yield of 10 year Canadian government bonds and current REIT prices? Relationship between REITs and 10 year bond yields is inverse. As the 10 year bond yield goes up, REIT prices generally come down. He thinks the sector as a whole is pricing in 3% 10 year bond yield. The fact that we are at 2.4%-2.5% means that the sector has probably overcorrected.

Acquired Primerus REIT with a couple of other bidders so that created a retail platform for them. There was a conundrum as Primerus is internally managed while H&R is externally managed. Decided to internalize management on the entire REIT which resulted in a large payment to the management company. Wasn’t thrilled with this. This is a sound, quality name and cheap at these levels. Probably worth $25-$26.

The question is, where is BV going to trough and can you buy it at a discount to BV. Right now the BV is around $25.50 so if you can buy it at a discount to that price, you should do pretty well. As the 10 year bond continues to back up, the BV is going to continue to come under pressure and it is a question as to whether they can maintain the dividend. He would wait to see who the next fed governor in the US is going to be.

(A Top Pick August 20/12. Down 13.56%.) Sold off in sympathy with the rest of the REIT universe. Sold his holdings. Doubled the size of the REIT in the last 3 years but cash flow per unit growth has been constrained by their balance sheet. Have now de-levered and secured an investment grade credit rating so they will get rid of the convertibles and add more secured debentures which will improve their cost of capital. Still a good quality name.

(A Top Pick August 20/12. Up 27.04%.) Midstream processor tied to gas volumes, NGL pricing, differentials. Have done a great job this year and have a number of developments and expansions they can do, which will grow cash flow per unit going forward. Not a lot of upside left in this. Wait for the low $50’s before getting in.

(A Top Pick August 20/12. Up 42.1%.) Tremendous business 4 or 5 subsidiaries. Still further upside to this name. Worth $60-$65.