The Value of Private Investments - Part II

Jul 1, 2019

 
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‘The weather’ or ‘the Canucks’ used to serve as ice breakers in social situations; now this seems to have been replaced with conversations about real estate.  The insatiable desire for BC real estate is unprecedented.  Home prices in Vancouver have skyrocketed by 316% since 2000*; higher than most North American city centers.

However, in the excitement of a rising market, euphoria tends to blind us to the inherent perils.  Like any investment, real estate certainly comes with risks including:

  • Selling at a price you want, if you need to sell quickly (liquidity risk),

  • Servicing costs (strata fees, maintenance, utilities, property taxes, etc.),

  • Unexpected expenses (special assessments, major renovations, floods or fire),

  • Dealing with or trying to evict tenants causing problems, and

  • Risks inherent in leveraging.  If the market drops significantly you may have a mortgage worth more than the property.

To be clear, we love real estate as an investment category, we just want to ensure our clients participate responsibly and minimize some of the risks and potential pitfalls.

We’ve already witnessed astronomical gains in Vancouver real estate.  Rather than continue to participate in this now speculative market, we have instead chosen our private real estate exposure in two other ways:

  1. We are lending to British Columbia homeowners through Canada’s largest private residential Mortgage Investment Corporation** - Antrim Balanced Mortgage Fund.  With this investment, we gain a fixed-income like exposure to Vancouver real estate, swapping the potential for equity gains (or losses) with a consistent income stream.  This is a more conservative approach, with loans backed up by physical property where we currently hold an average of 42%*** equity in the properties.

  2. Our second private real estate investment is in Rise Properties Trust, which invests in apartment complexes in the Seattle area.  Rise Properties Trust is an offshoot of a large BC development company called Mosaic Homes.  We like this investment because:

  • The main driver of returns with this investment comes from steady predicable rental income and not simple speculation that the price of the real estate will increase over time.

  • A consistent secondary driver of returns comes from the improvements made to the properties.  This allows rents to increase over time thereby increasing the assessed value of the properties.

  • It diversifies our clients away from owning more real estate in BC.

  • Seattle is an attractive market with high job growth (home to many corporate headquarters Costco, Starbucks, Amazon, etc), high population growth relative to the national average, and similar geographical land constraints similar to Vancouver. All these factors contribute to a low rental vacancy rates.


 
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Trez Capital Prime Trust

In January we added a third private real estate investment to both our Westmount Income and Westmount Growth models with the inclusion of Trez Capital Prime Trust.

Trez Capital is a leading provider of commercial mortgages in Canada. They manage an investment portfolio of approximately $2.3 billion and have produced consistent income for private investors and major Canadian pension plans since 1997.


The Opportunity  

Most Canadian commercial real estate developers require and benefit from some form of mortgage financing to acquire, develop or re-position real estate.

Commercial real estate projects can be complex, sometimes requiring quick action or unique underwriting experience, and traditional bank loans are not always available to finance such projects.  If for example a developer needed to acquire a piece of land in a short period of time, it is unlikely that a Canadian bank would have the ability to complete their due diligence in time to finance the purchase.  This is where an experienced private investor like Trez Capital can step in to provide short-term financing.

Investors in Trez Capital lend their money in the form of short-term commercial/construction mortgages and in return receive the mortgage payments from the borrowers, resulting in an attractive yield relative to the risk taken.

Features

100% in First Mortgages:

  • A first mortgage is the primary lien against real estate which secures the loan and takes precedence over all other mortgages.  If the property is sold or if the borrower defaults, the first mortgage is paid prior to any other monies borrowed against the property making them more secure.

Attractive Yield

  • Interest rates are at near historic lows with returns on guaranteed investment like GIC hovering in the 1.5-2% range.  Accordingly, we feel that the risk-return on a private mortgage fund with a 50% loan-to-value yielding 5-6% to be an attractive one.

Lower Volatility

  • The price of the investment stays stable at $10 per unit and pays a monthly distribution (with target return of 5%/year). Given that these loans do not trade on an open market, the fund itself does not experience the volatility that you have with similar publicly-traded instruments.

Diversification

  • Trez lends on various types of real estate in Canada and the USA.  This helps provide diversified exposure to commercial, industrial, office, hotel, development land & multi-residential properties. These are asset classes that investors are often unable to access.

Performance

 
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Source - www.trezcapital.com/investments/trez-capital-prime-trust/#performance - returns as of Mar 31, 2019


We are constantly looking for investments to help diversify our models and reduce volatility.  In Trez Capital Prime Trust, we feel that we have found a good yield with an attractive risk/return profile, fixed-income like protection, a good amount of geographical diversification, offered by a company with over a 20-year track record.  

Please join us in the fall for a presentation from the Trez management team.

In the meantime, please feel free to reach out to Lorenzo or I to discuss.

Warm Regards,

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

 

*Source – Teranet National Bank of Canada Housing Index: inflation adjusted percent change in prices from Jan 2000 to Feb 2019.
**Source – Fundamental Research Corp - Nov 6, 2018 Report
***Source – Antrim Balanced Mortgage Fund Portfolio Fund Fact Sheet Mar 31, 2019

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.