The Value of Private Investments

January 7, 2019

 
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To say 2018 was a challenging investment year would be an understatement. After 10 years of (mostly) uninterrupted rising markets, the downturn of 2018 came as a shock to many. Equity markets ended sharply down for the calendar year, spooking investors.

As portfolio managers, our goal is to reduce our client’s exposure to these sharp declines.  So how do we decrease portfolio risk and volatility when the equity and bond markets are falling?

We do so by adding private investments to our portfolios.

Private investments are not traded on a stock market exchange (like the Toronto Stock Exchange) and therefore their prices are not affected by the volatility those markets experience.  In April of 2018 we added a second private investment to our models with the addition of RISE Properties Trust.

Although stock markets finished down for the calendar year, both our private investments generated positive returns:

  • RISE Properties Trust Class F (CAD): 15.43% (12 months ending Sep 30, 2018)

  • Antrim Balanced Mortgage Fund Class F: 6.78%


Below is a recap of both investments:

 
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RISE Properties Trust

Many of our clients express a desire to invest in real estate, but it is increasingly difficult to find properties with positive cash flow to justify the risks and work required.

RISE is a private Canadian Real Estate Investment Trust, founded by a few principals in the BC development company MOSAIC Homes. RISE is in the business of buying, renovating and renting apartment units in the Greater Seattle Region.  Essentially, our clients collectively own physical investment properties (currently about 1,500 apartment units) in their investment accounts without the hassle of dealing directly with tenants, mortgage payments, special assessments and the work involved in being a landlord.

The buildings are predominately two to three story wood frame apartment complexes in the suburban areas of Seattle.  The buildings are generally 25-30 year old properties that are mismanaged and outdated.  These properties become ‘disjointed’ in terms of their offering and true market value.  RISE sees these buildings as having the right opportunity to step in and increase rental income and property value.

 

Copper Creek - Milton, WA
181 Unit Garden Style Community

Alaire Apartments - Renton, WA
357 Unit Garden Style Community

 

RISE will acquire a building and spend approximately 10% of the acquisition price on renovations and repositioning.  These improvements are largely cosmetic and help increase the amount of rent RISE can charge, which ultimately increases the value of the property.  


Example of a Renovation on the Starboard Property:

 
 

RISE focuses on the Seattle suburban areas close to large employers like Boeing, Amazon, Starbucks, Costco & Microsoft. This strong job market and population growth provides for a robust renter base.  With a very experienced management team at the helm, RISE has proven to be a great way to get real estate exposure in an A-Class market without the risks present in BC.

RISE completed their 6th year of operations and has returned 14.92%/year[1] to investors since inception.

[1] On Class F (CAD) units as of Sep 30th 2018


 
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Antrim Balanced Mortgage Fund

Antrim is a private Mortgage Investment Corporation (MIC) which was formed in Langley, BC in 1993. 

As unit holders, we pool our money together and lend it out as a mortgage to homeowners.  Investors in Antrim are playing the role of the bank, and earn the interest payments collected on the mortgages.

Over the last few years, the federal government has taken numerous measures to tighten mortgage qualification requirements in an attempt to slow the heated Canadian real estate market. This has made getting a mortgage from a bank more difficult and is increasing the pool of borrowers seeking financing through Canadian MICs like Antrim.

Antrim takes several measures [2] to reduce the risk of the fund, making it in our opinion one of the more conservative MIC investments in Canada.

  • Loan terms are 1 to 2 years (87% had a term of less than 12 months).

  • Management focuses on residential properties (less risk than construction, land or commercial loans).

  • Loan to value is low at 59% (this means on average there is 41% equity in each property).

  • The average loan is $380,000 and mortgage pool is over $500 million (diversified pool of 1300+ mortgages).

  • The majority of the loans are first mortgages (78%) with the balance in second mortgages.

  • Daily liquidity; you can sell your investment on any business day of the week.

[2] Antrim Portfolio Update – September 2018 (Year Ending Financial Statements)

Our clients often ask us why borrowers come to Antrim for mortgage loans. We thought it would be beneficial to showcase a current loan in the portfolio to illustrate:

 
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This is a first mortgage refinance of a single-family home in Vancouver that was funded in November. The appraised value was $1,600,000. Antrim lent $479,000 which is 30% of the appraised value. The interest rate on the mortgage is 6.95%. The borrower is a 42 years old female with a total income of $80,000.  She wants the funds to build a laneway home to increase rental income on the property, however her bank is unwilling to lend based on her income.  Her mortgage broker plans on approaching CIBC again in 1-2 years once she has an established history of paying her mortgage down, so in the interim, the borrower is forced to take a higher interest rate through a private lender.

This example illustrates a typical loan in the Antrim portfolio, which provides a very good rate of return 6.95% for the investor with the protection of a large amount of equity in the home.

Antrim Balance Mortgage Fund (Class F) has returned 8.1% since inception with no return lower than 6.5% in any year.

Both RISE and Antrim diversify our Growth & Income models outside of the stock and bond markets, ultimately reducing volatility and increasing returns. We are in the final stages of evaluating one more private investment to add to both models as we continue to prioritize diversification. You can expect to hear more about that in the next few weeks.

Markets do take downturns – it’s normal to go through rough patches.  As unpleasant as it is, we have to stay focused.  Investing is long game and we can’t let our long-term vision be derailed by short-sightedness.  The important thing in 2019 will be stay nimble and diversified.

If you would like to discuss private investments in additional detail or if you are interested in making a further investment, we would be happy to arrange a time to meet.



Wishing you a very happy New Year,

 
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Matthew Evans, CFP®, CIM®  | Portfolio Manager
HollisWealth®, a division of Industrial Alliance Securities Inc.
m.evans@westmountwealth.com  

 
 

This information has been prepared by Matthew Evans who is a Portfolio Manager for HollisWealth® and does not necessarily reflect the opinion of HollisWealth. The information contained in this blog comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.  

HollisWealth® is a division of Industrial Alliance Securities Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.