In this exciting edition:

• Launch update
• Market Guy Mailbag
• Feature story: Riocan Can

Launch update
Thanks to everyone for helping make the launch of The Market Guy a big success. Already the number of subscribers has increased by over 38% since the first edition. The fact that some of you became subscribers against your will and better judgment is beside the point. If you’d like to share the column with a friend, colleague, or enemy, go right ahead. Make sure they contact me by e-mail and I’ll add them to the list. Do you know of anyone who might be interested? Remember, it’s mail@marketguy.ca for all yourMarket Guy needs.

Market Guy Mailbag
The mail is rolling in and I love it. It’s great to hear from you.

Bouch in Embrun writes:
Congratulations on your inaugural issue. Very entertaining and informative. Did you set up a website, or will it be distributed via email?

Thanks Bouch for being the first to write in. I’m glad to hear you like the content. You are obviously quite ill. In terms of a website, yes, that’s in the works. For now, I want to be as intrusive as possible and what’s more intrusive than e-mail? I’ll let you, the home readers, know when the site is up and running.

Lamont in Connecticut writes:
Your e-column brought about some numbness, but I was able to imagine that theoretically it would be very interesting.

I think everyone feels that way, Lamont. It’s a burden we all have to bear, a bear we all have to cross.

And that concludes the first edition of the Market Guy Mailbag.

Feature Story: Riocan Can

Let’s start off with a photo:

Would you want this guy investing some of your hard earned money? I sure would. Meet Edward Sonshine, President and Chief Executive Officer of Riocan (ticker: REI.UN on the TSX), Canada’s largest real estate investment trust (REIT). Riocan owns and manages many of the open-concept shopping centres that have been popping up all over the country. Chances are, they own property in your neighbourhood. Let’s check with a selection of Market Guy’s loyal readers:

Dick in Edmonton? You can visit Mayfield Common.
Ozner in Barrhaven? Head over to the Riocan Centre.
Mike in Kanata? Have fun at The Centrum.
If I knew anyone named “Larry” in Saskatoon, he’d shop at Confederation Mall.

I’d provide a complete list of properties, but there are 171 across 8 provinces. Market Gal is so used to me babbling on about the company, that she’s started pointing out many of the sites. It gives me a warm glow when she says, “That’s a Riocan property!” I just assumed she’d been doing the correct thing and ignoring me.

Browse their list of top ten sources of revenue by tenant and you’ll see names like Wal-Mart, Loblaws, Staples, and Canadian Tire. These aren’t fly-by-night outfits. They are large, anchor tenants that provide a predictable source of revenue for the company. In 2002, the occupancy rate was a hefty 95.8%. But what about the danger of fleeing tenants? Well, Wal-Mart’s average remaining lease term is over 14 years.

Why I bought the stock
In 1999, people were making so much money on their tech stocks and I figured they’d be in the mood for some serious spending. I didn’t want to buy any retailer in particular, as the sector can be volatile and potentially disastrous for investors (Eaton’s being one example of retail road kill). Over the course of my research, I learned about commercial property REITs as a lower-risk way to participate in the sector without being subjected nearly as much to the nasty swings in consumer sentiment and behaviour. I also wanted to add another yield play to the portfolio. Enter Realfund, a small-cap REIT investing in shopping centres. Also thinking the stock was a good buy, Riocan swept in with a takeover shortly after my purchase. After spending some time learning about the company, I decided to keep my capital in play with the now larger Riocan.

It’s time for a tangent. In the 2002 annual report, Riocan talks about the lure of new-format retail centres. My favourite passage offers W.P. Kinsella’s quote, “build it and they will come,” made famous by the film, Field of Dreams. This film makes my top 10, easy. If you didn’t get choked up (even just a little) when Ray starts playing catch with his dad, then you have ice in your veins. In terms of emotional power, this ranks right up there with Bambi’s mother getting shot and the spider dying in Charlotte’s Web. This holds true even though I’ve seen the film 800 times.

How it’s worked out
The position was initiated at a pre-takeover equivalent of $8.58. In early 2001, additional units were purchased at $9.90. The stock currently trades at roughly $14, with 2003 distributions expected to come in at $1.14 a unit ($0.095 per month). Distributions have increased each and every year since the inception of the trust. Based on the two purchases, my annual yield is 12% (just over 8% to those buying today). Incidentally, almost 38% of the 2002 distributions were tax-deferred. Music to my ears.

What I’m afraid of
Rising interest rates and REITs aren’t supposed to be good friends. The argument is that, with rising rates, the yield on REITs such as Riocan will be less attractive compared to other income investments that carry less risk. For example, the Government of Canada 5-year bond runs at around 3.25%. This is one of the safest investments around. But what if rates go up, to say, 4%? 5% 6%? If you own a 6% bond and plan on carrying to maturity, is it worth taking on the added risk that comes along with Riocan’s 8%? So that means investors will want to receive extra compensation. That means a lower stock price.

But even if they may not be good friends, does that mean they have to be enemies? Here’s my line of reasoning: Rates typically rise when the economy is doing better. If the economy is doing better, the companies in Riocan’s lease book are apt to be among the beneficiaries. And what’s good for the lessee’s is good for Riocan. I also think rates would have to go up a significant amount (and quickly) to make this a bad story. I just don’t see rates jumping aggressively in the short term. Just one guy’s opinion.

For me, more troublesome is the advance in the share price. I would have been content to just receive my distributions and only a modest level of capital appreciation over time. If the shares keep chugging along, I may have to pair the holding. As you can see, I’m very concerned about capital and profit preservation. By the way, Market Dad thinks I’m nuts to be troubled by a rising share price. All he could do was shake his head and say, “geez!” In any event, I think the share price is getting a bit frothy. But I’m not ready to trade. I’ll hold and continue to grab the monthly distributions.

What’s the punchline?
My experience with Riocan illustrates several aspects of my investing philosophy:

I gravitate to investments that pay me a little something. I want the cash. Having to distribute a portion of the income imposes an extra layer of discipline on a company. They know that if anything happens to the distributions, there will be hell to pay when the market opens. See what happened to Trans-Canada Pipelines when they chopped their dividend a few years ago? Total carnage, with the management team out the door shortly thereafter. No management team wants that. If there was a Market Guy mantra, it would go something like this: “give me the cash…ohm.”

Also, you don’t need to invest in volatile, flashy companies in order to build your capital. Sometimes it’s the relatively boring instruments and the one’s that stay out of the headlines that get you where you want to go. Warren Buffett, when asked about his investing acumen and ability to pick the winners, replied that it was more about his ability to avoid the losers.

Now have another look at the picture of my buddy, Edward Sonshine. As David Letterman would say, he looks like the guy who approves your cheque at the supermarket. In reality, he’s the guy who approves the cheque from the supermarket. And I’m keeping my money with him.

The Market Guy is an instructor with the Department of Psychology at Carleton University. He’s not a professional advisor. He’s just a guy who loves investing and talking about the markets. This past weekend, he and the Market Gal welcomed the masses to their annual garage sale. Throw your garbage on the driveway, and they will come. Throw your comments and stories at mail@marketguy.ca