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Asset Allocation : 2021 Hard Reit Portfolio Update

Updated: Feb 4, 2022

The Hard Reit Portfolio has performed well this year despite the recent increase in volatility/pullback in the markets. The YTD Performance chart below highlights the stability of the REITS and the volatility of bitcoin.

Barbell Investment Strategy

The portfolio utilizes the Barbell Investment Strategy popularized by Nassim Taleb. The barbell strategy combines two investments on opposite sides of the risk spectrum to create an antifragile portfolio. Combining low risk/volatility real estate investment trusts and high volatility/high risk Bitcoin creates a portfolio with a stable value/income base that allows you to benefit from volatility, absorb monetary inflation and capture exponential growth.

[LOW RISK 80%] Real Estate Investment Trusts

Investment Characteristics : [Inflation Protection, Durability/Antifragility, Income, Growth]

The reit portfolio is conservatively valued at a 15X FFO Earnings multiple and has a strong 6% Earnings Yield The REITS are able to absorb inflation through cap rate compression (property values/NAV increasing) and positive leasing spreads (rents increasing). It boasts cashflow and revenue durability in a volatile world with a 4.25% Dividend Yield that is supported by conservative payout ratios, long weighted average lease terms, and a diversified tenant base.

The portfolio has a large development pipeline that leverages existing land holdings to power long term growth and creates optionality to invest capital at above average returns. Optionality increases antifragility. The pandemic has been an excellent stress test for the REITS and yet they have demonstrated operational resilience by collecting the majority of rent and maintaining strong financial balance sheets.

[HIGH RISK 20%] Bitcoin

Investment Characteristics : [Inflation Protection, Durability/Antifragility, Exponential Growth]

Bitcoin is the model example of an antifragile system as it is completely decentralized and the proof of work security system has not been compromised despite a 1 Trillion market cap and 2009 launch. Bitcoin absorbs inflation as it is a hard asset with a fixed 21M hard supply combined with an exponential network effect that is being driven by adoption.

Bitcoin provides exposure to growth, blockchain technology, the network effect and defends investors from fiat money supply expansion via the fixed 21M hard supply. Bitcoin boasts a 200% Average Annual Return over a ten year period and has very high risk adjusted returns with a Sharpe Ratio that is consistently higher than the S&P 500. The hash rate of the network has been increasing rapidly overtime, this growth in processing power highlights the increasing amount of capital and infrastructure allocated to the bitcoin network. Bitcoin has also survived multiple "bans" from China and lots of main stream media fear uncertainty and doubt.

Riocan Q3 Updates

RioCan offers investors a durable income stream and a reliable growth machine (development pipeline) that generates profitable new residential real estate each year through the densification of existing properties. RioCan's strategic land holdings and massive development pipeline in prime urban locations are a competitive advantage/moat that enable RioCan to invest capital at a high rate of return over the long term. RioCan shifted into growth mode in December 2020 by cutting the dividend to retain earnings to fund development and have increased the speed by monetizing the development pipeline through Joint Ventures with passive capital partners. The residential pipeline is going to be particularly valuable over the next few years as Canada is in the middle of a housing supply crisis and is expecting a significant increase in immigration. I am continuing to accumulate and expect RioCan to outperform in 2022.

  • Overall Q3 Earnings was positive with fundamental and operating metrics improving.

  • 64% 2021 AFFO Payout Ratio

  • Executed NCIB (share buybacks) in November/December to take advantage of market volatility.

  • Significant Value Disconnect between private market and public cap rates

  • Value Disconnect Between US Retail Reits and Canadian Retail Reits

  • Management is being conservative with Cap Rate Valuation - expect cap rate compression on major market retail in 2022

  • Gitlin indicated he wants to begin a sustainable dividend growth initiative in an interview hinting at future dividend increases

  • Reversal of Covid Impairment Charge Possible in 2022. (If Covid is under control management may reverse the 2020 impairment charge.)

  • Debt strategy is working replacing secured debt with unsecured debt at lower rates via ESG Bonds

  • Riocan is working on increasing the length of its average debt term to reduce the sensitivity to rising rates

  • Significant Development completions for 2022/2023 will drive growth

  • New Executive Compensation Program Announced Oct 28 2021. The fact that management agreed to this new structure highlights their strong belief that FFO/UNIT increases and RioCan outperforms peers.

    • 40% three-year cumulative FFO per Unit

    • 40% three-year relative total unitholder return against RioCan’s peer group

    • 10% three-year NAV growth

    • 10% ESG related goals

Dream Office Reit Q3 Update

Overall I am very impressed with the increase to the net asset value despite the pandemic and lockdowns. The share buyback program, investment in dream industrial and the positive leasing spreads have largely been responsible for the increase in value. This remains an undervalued contrarian investment that will significantly benefit from the office reopening. It enables you to purchase discounted office real estate in the downtown core/financial district well below intrinsic value and benefit from the momentum of the dream industrial investment.

  • NAV Increased to $30.74 - Current Share Price represents a 27% Discount to NAV.

  • Value Breakdown $8.21 Dream Industrial Value + $20.54 Portfolio Equity + $1 Cash/Joint Ventures = $29.75

  • Occupancy has been slightly impacted by COVID/Lockdowns although it may have hit a bottom here. We will have to see how the new variant/wave impacts the office reopening although I believe this gets well underway in 2022.

  • Positive Leasing Spreads Leasing Spreads YTD + 8.9%, Leasing Spreads Q3 +34.7% Spreads should continue to be strong for the next four years as rent catch up to market.

  • Share Buybacks Continue (Decrease in Supply = Hard Asset!)

  • Declining Weighted Average Interest Rate on Debt.

Bitcoin Highlights

I have increased the bitcoin allocation in the portfolio to 20%. Understanding the value of bitcoin is more abstract than understanding the value of a traditional cash flowing investment.

The value of bitcoin comes from:

  • Equity Ownership of a Growing Network that cannot be diluted [Growth Value]

  • Effective Money Supply Expansion Absorption [Defensive Value]

I am going to reference a few of the concepts/metrics that have me bullish on bitcoin.

  • Impressive Record since 2009

  • Network Effect - Metcalfe's Law

  • Asymmetric Risk Reward

  • Sharpe Ratio

  • Bitcoin On-Exchange Supply

  • Hash rate

  • Settlement Volume

Impressive Record

Looking at this chart it is clear that Bitcoin is the highest risk asset class having both a 230% annualized return since 2011 and the two largest drawdown years on the chart (-58%, -73%). This makes it ideal for the risk bucket in the barbell portfolio.

The key to winning with bitcoin is holding through the volatility and buying big dips. Notably Bitcoin beat QQQ, 8/10 years and by an annual performance factor of 10 making it the best risk adjusted choice for the long term growth investor.

Bitcoin's Value - Network Effect

Like Facebook, the value of Bitcoin increases exponentially as the network increases in size.

If user adoption continues to increase the value of Bitcoin is likely to grow exponentially from here.

Asymmetric Risk Reward

Adding a Bitcoin position to a portfolio offers investors asymmetric risk reward. The possible continuation of its exponential growth offers investors high potential rewards and the downside can be limited by taking a small position and committed to HODL through volatility.

Sharpe Ratio

Bitcoin consistently offers the highest Sharpe Ratio on the market with its 5Y Sharpe Ratio just below 2. This effectively means that Bitcoin offers better risk adjusted returns than equities, fixed income or gold.

Bitcoin On-Exchange Supply

This chart shows us the net position for Bitcoins that are held on exchanges. It signals whether buyers of bitcoin or planning to hold bitcoin for the long term or preparing to use/resell. Bitcoins that are held off exchanges signal an intention to hold for a longer term.

Since March 2020, when the world's central banks increased the rate of expansion of the fiat money supply, the coins held on exchanges have been decreasing and bitcoin is being taken off exchanges to hold for the long run. This is very different then the last Bitcoin bull market in 2017 which saw more speculative bitcoin investors keep their coins on exchanges ready to flip.

Despite the price increasing significantly over this time period the balance of bitcoins held on exchange has fallen from 17% to 12.9%. The decreasing balance of bitcoins held on exchanges indicates the long term intention of bitcoin holders and is effectively a supply squeeze.

Hash rate

The hash rate is the measuring unit of the processing power of the bitcoin network. The hash rate is an important metric for assessing the strength of a blockchain network and measures how much computing power is dedicated to bitcoin. The hash rate has been increasing overtime and has largely recovered from the Chinese Miner Ban earlier in the year. The ability for bitcoin to survive multiple direct attacks from China has demonstrated the durability of the bitcoin network.

Settlement Volume

The settlement volume tracks how much value is being transacted on the bitcoin network over a 24hr period. It is currently at approximately $23 Billion / Day. More value being transacted = bullish.

Thanks for reading my portfolio update post.

Look forward to seeing what next year brings.



Disclaimer: This article should not be taken as legal investing advice. The choice is yours whether to invest in any asset or not (Please do your own research).

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