Today we kick off with a Special Segment on the Canadian REIT sector – specifically for investors looking to earn passive income, from release estate, without the headaches of being a landlord.  In our Your Stock Our Take Segment we review two listener question – the first on TSV Venture listed People Corporation (PEO:TSX-V), a group benefits provider and TSX listed PFB Corp. (PFB:TSX), a manufacturer of insulating building products. And in our Stars and Dogs of the week we review innovated mountable and wearable camera maker GoPro Inc. (GPRO:NASDAQ).

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Now, let’s dig into the show.

I would like to welcome again, myhost, KeyStone’s Senior Equity analyst, father of 1, and a man who, is so impressed with his Canucks improbable 4-0 start that he is personally taking Trevor Linden to dinner this evening and already planning the Stanley Cup parade route, Mr. Aaron Dunn.


As investors and analysts, we are always looking for great ways to generate cash returns for our clients long-term. There is an investment vehicle that Aaron covers on the Canadian income stock side of our research that can allow you to earn great passive income from release estate without the headaches of being a landlord. And who does not like that idea.

The concept of owning a condo, second home or vacation property to rent out seems like a great idea, but most people have also heard the horror stories about collecting rent from unreasonable tenants, the constant maintenance and the high price of getting into the market.

But there is a way to participate in cash producing real estate without all the hassle – enter the REIT.


Since you cover the sector extensively, why don’t you describe to our listeners in layman’s terms what a REIT is….


A REIT is a company that owns income-producing real estate and redistributes a high percentage of net cash flow back to its investors. REITs can be publicly traded on a stock exchange and be bought and sold by anyone like a regular stock.


Why are REITS a good option for some Investors?


1)  If you want to participate in rental type income, they are a far simpler method of getting into that market. If you have rental properties, you need to collect rent from your tenants and maintain the properties. That’s work if you don’t enjoy doing it. You can hire a property manager to collect the rent and deal with any maintenance. Both the management and maintenance are extra costs on your investment – reducing your cash flow. Further, you’ll probably have to pay off the mortgage on top of the interest.

2)  Invest in real estate without the burden of debt – iIf you’re buying a rental property, it’s a huge investment. Even a condo costs from $300,000-$800,000 in a number of Canada’s hot real estate markets. The average investor will need a mortgage and will have to pay interest on it. If you don’t sleep well with too much debt, you’ll be happy to know that by investing in REITs, you can invest in real estate without adding to your debt load because you can invest as much or as little as you like.

3)  Own high end, high-quality real estate – You can handpick the highest-quality REITs based on their historical business performances. You can choose to invest in REITs with conservative business models, which acquire portfolios of high-quality real estate assets, target low payout ratios, and maintain high occupancies. You can also access markets such as Vancouver and Toronto that are far too pricy for the average investor.

4)  Income tax advantage – REITs pay out distributions that are like dividends but are taxed differently than dividends. In non-registered accounts the return of capital portion of REIT distributions is tax deferred until unitholders sell or adjusted cost basis turns negative. If you don’t want to track the adjusted cost basis, then you can buy REITs in TFSAs to collect tax-free monthly income. Or you can invest in RRSPs.

5)  Professional management teams – Each REIT has a professional management team and a board of trustees with specific industry experiences and the knowledge to manage the business and the properties . These professionals are the best at doing what they do. Why not leave it to them to handle the everyday operations of the REITs?

Now our topic to start the show this week could not be more timely seeing as you just completed KeyStone’s annual REIT sector Report.

What are the pickings like in the Canadian REIT market?

The Canadian market is home to about 52 publicly-traded REITs which invest in all types of income-generating property like apartment buildings, office towers, industrial and warehousing facilities, shopping malls and retail stores, and the list goes on. In today’s market, these REITs offer their investors income yields ranging from 3 per cent to just under 10 per cent.

How would you describe you research methodology for this report?


Our research methodology for the REIT sector is generally the same as for any other sector. We utilize a GARP (Growth at a Reasonable Price) strategy to identify companies with strong underlying fundamentals relative to market price.

The fundamental variables we analyze include:

1. Valuation: A critical component of the GARP investment strategy is price sensitivity. Investors should look to purchase quality companies, with strong fundamentals, that trade at reasonable valuation multiples. Price-to- cash  ow (FFO and AFFO) is the primary valuation metric utilized in this report.

2. Financial Stability: Debt assessment is a critical element of REIT analysis. Companies with excessive debt loads are at greater risk of  nancial turmoil if interest rates rise or the economy contracts. In this report, we have highlighted the debt-to-gross book value (D/GBV) and interest coverage ratios. We have generally targeted D/GBV ratios in the 50% to 55% range or below and interest coverage in the range of 2.7 to 3.0 times or greater.

3. Growth: REITs with a good growth pro le have much higher potential to generate investment returns beyond the income distribution, as well as to grow their distributions over time. Total revenue and NOI growth are important but we are especially focused on accretive growth in cash  ow (FFO and AFFO) per unit. We also pay special attention to same-property growth in rental rates and NOI which provide insight into the quality of the underlying assets and the strength of their markets.

4. Additional Metrics: A thorough analysis also requires inspection of other key operating metrics such as occupancy, cost of capital, as well as the quality, age, location, and diversication of the property portfolio.

Can you get into the REIT ASSET CLASSES within Canada?

REITs can also be separated into two general categories. Understanding what category a REIT falls into is helpful when conducting an analysis.

1. Residential: primarily comprised of multi-family residential (apartments) and to a far lesser extent mobile home properties.

2. Commercial: further divided into office, Industrial and Retail (malls and retail complexes) properties.

Generally speaking, residential REITs are considered to have lower operating risk than commercial REITs which are impacted to a great extent by general economic conditions. However, a number of other factors also play into operating risk such as quality, age, location, and regulatory factors (ex. rental caps) associated with the respective property.

Your general conclusions and where you saw value from the report?

Overall we think REIT valuations are roughly in line with historical averages. However, when compared to cur- rent interest rate yields, the sector overall appears to be attractively valued on an income basis. Generally, the fundamentals throughout the sector are reasonably strong. Payout ratios have declined over the last 2 years and we believe that the vast majority of REITs are paying sustainable income yields. Canadian focused REITs with high exposure to Alberta and Western Canada have felt pressure from the energy patch downturn. Most of the names with primarily non-oil patch Canadian exposure are trading at premium valuations. We have found some opportu-nities in REITs with heavy U.S. exposure and have current BUY ratings on two companies in this area. Our view looking forward is that market sentiment towards the sector will continue to be volatile. We believe that an alloca- tion of approximately 10% of the equity portfolio is reasonable for most investors who do not already have expo- sure to other investment real estate either inside or outside of their portfolios.

Your Stock Our Take

People Corporation (TSX VENTURE:PEO)

People Corporation is a national provider of group benefits, group retirement and human resource services.

Let’s take a quick look at the most recent quarterly results…


For the third quarter of this year, People Corporation experienced revenue growth of $9.8 million (93.1 %.) The Company recognized acquired growth of $7.6 million (71.8%) and organic growth of $2.2 million (21.3%). Organic growth is primarily comprised of the increase in revenue resulting from the addition of new clients from the Company’s existing and expanded benefits consulting team and natural inflationary factors.


People Corporation’s financial results fully reflect the effect of last year’s acquisition of Coughlin & Associates Ltd. (“Coughlin”) and organic growth initiatives. The effect of the acquisition of BPA Financial Group Limited (“BPA”) is partially reflected in the results as the transaction closed April 13, 2016. Adjusted EBITDA increased 61.6% to $3.5 million in the third quarter.


All of these numbers are records.


Debt levels are relatively high (for a relatively small company), but sustainable at present given EBITDA levels and particularly if the organic growth continues.


From a valuations prospected, its Enterprise Value to EBITDA is in the range of 13 times. Which is on the higher end for a company of its size, but not unacceptable given growth. If the last quarter is typically of what the company can produce moving forward it offers some potential value, but is not cheap. At times, it is ok to pay up for a good company – we have monitored the company for several years now – and do like its progression. It is on our radar, and we may consider it if there was a pullback.






The well-known developer of mountable and wearable cameras, and accessories in the United States and internationally. The former market darling….has taken a beating in recent years.


Year to date the stock is down 17%, over the past 12-months it has been basically cut in half – down 49%, and down 82% from its all time highs.


The positives here are the company recently made some new product launches – product launches, including the Hero5 Black and Hero5 Session video cameras and the company’s first camera drone, the Karma.


The company has strong cash position with no real debt.


The negatives – although revenues are increasing – income is declining and the company produced negative EBITDA over the past 12-month – so valuations remain high.


GoPro was a great idea, but the visibility and poplularity of the product took the stock to extremely unrealistic valuations as the consumer electronics business is very competitive .


GoPro is somewhat similar to fitness device manufacturer Fitbit – also a public company that has seen its share price decimated in recent years.  It offers electronic goods that are likely to reach a demand ceiling or be made obsolete by new technologies from other companies.


What’s more, GoPro now faces big competitors in this market in the form of Sony and Garmin.


While the stock will bounce around with new product announcement (probably with a level of volatility only a GoPRO camera can properly capture) – we believe the best days in terms of market highs are well behind the company.

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