#capitalism means risk to immediate shareholder profits is the number 1 most important thing

[perpetualseahorse]

which is, notably, exactly what happened with the Spanish flu

[askstockmarket]

Fundamental Analysis and Technical Analysis of Stocks

Fundamental Analysis One of the basic and crucial aspects of healthy stock picking is carrying out Fundamental Analysis for a particular company. Fundamental analysis means evaluating security by studying the various factors associated with it – like the revenue of the company, its profits (past and present), the debt repaying capacity and its immediate contemporaries. This analysis helps in creating a financial horoscope of the company and in essence provides the investor with a clear picture of the security he/she wishes to invest in. All investment worth companies have some common attributes that set them apart. Similarly, all wealth destructors have some common traits which can be seen by an astute investor. Fundamental Analysis is the technique that gives you the conviction to invest for a long term by helping you identify these attributes of wealth-creating companies. There are many tools which help conduct this fundamental analysis, for example, the study of audited financial statements, ratio analysis, the study of industry data and company news. Ratio Analysis for Stock Selection: 'Wise' stock selection entails using some ratios to help you figure out the mettle of your investment. It will pay to keep in mind that a single financial ratio can never determine the true value of a stock. It is advisable to use a combination of ratios to get the bigger picture on the canvas about the financials of a company, its earnings and the value of its stock. Some of the frequently used ratios are given below  (i) Price-to-Earnings Ratio or P/E Ratio: P/E ratio helps investors to understand the market value of a stock compared to the company's earnings and gives an idea about the growth potential of the stock. P/E Ratio = Current Market Price / Earning Per Share A high P/E ratio usually indicates that stock's price is high relative to its earnings and possibly overvalued. As opposed, a low P/E indicates that the current stock price is low relative to earnings. If there are two companies A – with a P/E of 50 and B – with a P/E of 30, then other things being same, B is considered to be a better buy as the market price has not gone up to reveal the growth potential of the company. However, the earnings of a company can be hard to predict as they are based on past performance and expectations of the financial analyst.  Both can give uncertain results. Also, the P/E ratio doesn't factor in earnings growth. Interpretation of P/E ratio is heavily dependent on a comparison of the company with its contemporaries in the relevant industry. P/E ratio is also not neutral to major announcements in relation to the growth of the company and can be pushed up or down by any issues faced by the company. (ii) Earnings Per Share or EPS: Earnings per share are calculated by dividing a company's net income by its number of shares outstanding. An increasing EPS is considered to be a good omen as a strong growth suggests a successful stock which will give a good performance in the future too. However, it's important to realize that companies can boost their EPS figures through stock buybacks that reduce the number of outstanding shares. (iii) Price-to-Book Value or P/B Ratio: The P/B ratio measures whether a stock is over or undervalued by comparing the net assets of a company to the price of all the outstanding shares. This ratio shows the difference between the market value and the book value of a stock. The market value is the price investors are willing to pay for the stock based on expected future earnings. The book value, on the other hand, is derived from a company's assets and is a more conservative measure of a company's worth. Value investors often prefer companies with a market value less than its book value in hopes that the market perception turns out to be wrong. (iv) Debt-to-Equity Ratio: The debt-equity ratio shows the proportion of equity to debt that a company is using to finance its assets. When a company is using a lower amount of debt for financing it will have a low debt-equity ratio. If the ratio is high it means that the company is financing more from debt relative to equity and this can pose a risk to the company as too much debt is not preferred. The debt-to-equity ratio can vary from industry to industry and depending on the type some companies have higher ratios than companies in other industries. (v) Free Cash Flow: Free cash flow is the left-over cash of the company after it has paid off its operating expenses and capital expenditures. It shows the efficiency of a company at generating cash and is considered as an important indicator in determining whether a company has sufficient cash to reward shareholders through dividends and share buybacks. Free cash flow can be an early indicator to value investors that earnings may increase in the future. When a company's share price is low and free cash flow is on the rise, the earnings and share value of the company could soon be heading in the upward direction. Technical Analysis (TA) What is the TA? TA is the study and use of various charts and other technical indicators to make trading decisions. Using past stock price and volume data (also known as market action), the technical analyst tries to predict future price movements. The actions of markets participants can be visualized by means of a stock chart and patterns can be observed therein. The job of a technical analyst is to identify these patterns and develop a point of view. This analysis particularly helps in generating short term trading plans. Believers of this approach do hold the position for a short timespan with a view to capitalize on opportunities created by price fluctuations. Technical analysts observe support and resistance levels to identify points on a chart where a pause or a reversal of the prevailing trend is likely to occur – to decide the entry and exit from a particular stock. There are too many types of charts and techniques used for technical analysis, each serving a distinct purpose, for example, line charts, bar charts, candlesticks, moving averages etc. With the use of specialised software programs, many of which are available off the self, even ordinary investors with a basic understanding of computers can use them for trading decisions. Should you choose the Fundamental Analysis or Technical Analysis? Generally speaking, the time horizon is the factor which guides whether technical or fundamental analysis makes sense. It is generally believed that short-term investors follow technical while long-term investors are better to follow fundamentals. Being open to combining styles may provide the best opportunity to make the most of the market opportunities. Fundamental analysis can be used to identify appropriate targets, while technicals can be followed to make the trading decisions. Together, these methods can generate a confluence providing a better investment opportunity than either used alone.No matter which approaches you to take, it’s always important to do your research.  You have to read books, attend webinars and consult with a SEBI registered investment advisor before risking money in the market.  Successful investors have an extremely systematic approach to the markets. They use specific strategies that have been researched upon and deliver time-tested results. Small and ordinary investors need to take care of one more aspect – that investing in mutual funds is better than investing in individual stocks, at least to begin with. The rationale behind this is quite simple - buying a single stock is a lot riskier than buying a mutual fund.  By nature, the mutual fund invests in a larger pool of stocks which are carefully selected by a qualified and professional fund manager. This minimises the risk of stocks losing the value at the same time. Once you become conversant with markets, you may proceed towards investing in select stocks, and later even may like to participate in derivative markets. Three Simple Investment Mantras: 1. Avoid the ‘herd mentality’ Never invest because so many others have. Please do remember that its ‘Your Money’ which is put at stake. Only you are best to decide its use. 2. Cheap isn't always good and expensive isn't always bad Sometimes a share may be cheap because the industry is facing slow down. And sometimes a stock may be expensive because it's widely expected to see rapid earnings growth in the near future. To evaluate the stock potential not only on its current prices but consider its prospects for your entire investment time horizon. 3. Plan your exit at the time of entry Investing is not about buying alone. It is actually more difficult to decide when to exit from a particular stock. Practically, no stock is to be kept for eternity. For some, the holding period maybe 1 year, for some it maybe 5 or 10 years or even more. What is more important is to keep on reviewing your investment and exit from the stock before its too late. Understanding Some of Jargon's 1. Value Investment Value investment means identifying companies that are trading below their intrinsic value (or stocks which the market has undervalued) and investing money in them. Followers of this approach believe that the market always reacts to good as well as bad news relating to stock. This, in turn, triggers price fluctuations that may not exactly correspond to the company’s long-term fundamentals. So when price temporarily declines, it creates an opportunity for the investor to earn more profit by buying the stock and selling it later when the market eventually corrects its error in valuation. Value investors usually look for companies with strong fundamentals generally represented in the form of consistent earnings, dividend payments, higher book value and cash flow. Investment is such company is mostly done for long term purposes. 2. Growth Investing Growth investing means making an investment decision based on the future potential of a company, with much less emphasis on the present price. Growth investors typically focus on companies which have exceptional growth potential but have relatively lower intrinsic value.  The rationale behind this is that growth in earnings and/or revenues will translate into higher stock prices in the future. Growth stocks are usually found in the fastest growing industries. Companies may be selected based on earnings growth, profit margins, Return on Equity and price movement.  In general, if a company exceeds its previous five-year average of pre-tax profit margins as well as those of its industry, the company may be a good growth stock. A company with a strong stock performance (stock cannot realistically double in five years) is an ideal candidate for growth investing. 3. Qualitative Analysis Qualitative Analysis considers the aspects of a Company that do not pertain to ratios, for example - business model, leadership quality and the competitive advantage. Studying the Business Model is essential to understand the company’s core processes, it is thinking, decision-making abilities. It also gives a clear insight into the company’s vision and understanding.  A strong management team or leadership is an asset that any company must-have. Such a team can lead the organization to unparalleled heights. Figuring out the team’s vision, their track record, their strengths and weakness will lend a helping hand in gauging their stock value. Competitive advantage will allow a company to produce a good or service at a better price, resulting in more sales or better margins. Advantages can also be in the form of brand recall, efficient cost structure, product quality, superior distribution network and advanced customer support. With qualitative analysis, an investor can have an understanding of the company and the industry as a whole. If the industry has strong growth potential, the company is more likely to climb the profit graph. On the other hand, even a good Company operating in a poor industry can reduce your portfolio. Do’s and Don’ts for an Investor in Capital Market: Do’s - • To read all documents carefully before signing. • To always deal with SEBI registered stockbroker or sub-broker or authorised person for any investment through the stock market. • To invest using banking channels, i.e. no dealing in cash. • Do remember that nobody can promise you guaranteed returns in stock market investments. It is neither allowed nor possible. • Do register your mobile number and email ID in your trading, Demat and Bank accounts to get regular alerts on your transactions. Don’ts – • Do not invest and trade on the basis of ‘Tips’. • Do not share the password of your online trading and Demat account with anyone. • Do not share OTP received from banks, brokers, etc. with anyone calling you. These are meant to be used by you only. • Do not invest in any chit fund, Ponzi and unregistered collective investment company. • Do not follow herd mentality for investments. Seek experts and professionals advise for your investments.

Read the full article

[simonconsultancypage]

Why Corporate America Needs a Strong D&O Insurance Market

Paul Ferrillo

In the following guest post, Paul Ferrillo takes a look at the current state of the D&O insurance market and provides his views on the importance of a healthy D&O market for corporate America. Paul is a shareholder in the Greenberg Traurig law firm’s Cybersecurity, Privacy, and Crisis Management Practice. I would like to thank Paul for his willingness to allow me to publish his article on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Paul’s article.

  ****************************

  It does not take a psychic to understand the title of this article.  But maybe it takes one more phrase to make the title complete: “because of the increase in securities litigation, the increase in enforcement activity by the SEC, Cybersecurity issues (and their regulatory issues) and the general uncertainties of the political environment in the United States.”

What do all these things have in common?  They can cause Claims.  What do Claims cost?  Money, and lots of it, to defend and settle them.  And where does this money come from generally?  The D&O carriers.

Not so complicated, right?  Yet it is, as many of the above-mentioned elements can arguably double and triple the cost of Claims, meaning there is potentially a double and tripling of costs and expenses.  But what you say?  Aren’t the carriers making a fortune on premiums today because of these various factors?  Well, maybe, maybe not.  It depends upon who you ask and for what period you are asking about.  The bottom line is that both corporations and D&O insurers need each other to remain healthy and strong. In uncertain economic times, corporations depend upon D&O carriers to be especially strong, since the corporations and directors may call upon the carriers to pay their claims.  Market forces and heavy competition have not allowed this “balance” to happen for many years prior to the recent past.  We explain why below, and why that fact is a potential problem.

  Securities Litigation Claims are at record highs and have long tails

We won’t spend much time on this one.  D&O claims have increased over the last few years.  Securities litigation claims were at record highs in 2017 and 2018, with 403 new federal class actions being filed in 2018 (slightly down from 412 new cases in 2017).  See “Securities Class Action Filings, 2018: a year in review,” available here.  A continuing part of the increase in securities class action filings is the number of filings made after the announcement of a merger or acquisition – in 2018 there were 182 “deal” cases, the second largest number since 2009.

Though filings for 2019 are down slightly from record levels in 2017 and 2018, from a D&O insurance perspective the potential damage has already been done.  Even assuming 45% of those cases filed in 2017 and 2018 get dismissed in one way or another (the average dismissal rate), it means that the 449 cases filed in these years in “inventory” will likely proceed, and cost money to litigate and ultimately settle.  And factoring in an average settlement of $30 million dollars (excluding defense costs), see Recent Trends in Securities Class Action Litigation: 2018 Full-Year Review, available here, these cases could ultimately cost $13.5 billion dollars to settle.  This estimated monetary number, amazing but true, would not include the recent trend of large shareholder derivative settlements that we have seen in the last two years.  Since not all cases settle immediately, the number of cases in inventory is likely much higher than the 449 cases estimate we gave above. So $13.5 billion in potential settlement value is likely “low” as well at the end of the day.

Two more facts to entertain here regarding the impact of securities litigation claims on corporate America, and their D&O insurers:

1) SEC enforcement activity is on the rise.  When the SEC chooses to investigate a company regarding an alleged securities fraud suit, there is no doubt that investigation costs both time, and money. Depending upon the nature and seriousness of the allegations being made (e.g. a “Worldcom” like case), the SEC investigation might ultimately cause the securities litigation suit to settle at a much higher number. There are plenty of examples for this proposition;

2) Cyber Risk can magnify, and in fact cause, securities litigation.  We have seen this story play out before since 2013.  Without identifying company names, cybersecurity breaches can cause loss of extreme amounts of data, a plethora of bad press, and generate privacy litigation and regulatory proceedings.  And cybersecurity breaches can cause stock and market capitalization losses.  Market capitalization losses generate securities class action lawsuits.  Enough said.

  Cyber Risk is increasing exponentially

We almost don’t need to reiterate this fact.  It is evident every day of the week when the most recent hack or breach gets announced across the relevant high-activity blogs.

  So, what is new about cyber risk?  Two things that really matter to directors and officers:

1) Cybersecurity Litigation is now sticking: Though early cyber and privacy related litigation was flashy and new, it did not result in head-spinning monetary settlements.  That is not true today and settlements since the Anthem Healthcare breach have been on the rise.  Why is this important?  Well merely that these settlements are evidencing to the plaintiff bar that cybersecurity breach litigation can be profitable, if not lucrative, for the right case.  This will cause competition among the plaintiffs’ class action firms. And more litigation and more firms get in the game; and

2) Cyber regulators are more on the hunt than ever before.  No doubt this was an expected occurrence in the cybersecurity ecosystem.  It had to happen based upon the sheer volume of new laws and regulations that are being put on the books every month.  We even expected the EU GDPR, which went into effect in May 2018, to be problematic based upon its sheer breath and the prior fines of US companies where privacy was at issue.  But today, the world has changed again, with record fines being recently assessed against British Airways and Marriot in the amount of $230 million and $123 million, respectively.  These are very large amounts, and potentially will be added into the mix of damages sought in against the companies and its board of directors.

  D&O Premiums have increased, but only recently

So, we see some factors stacking up here that should have indicated steadily increasing premiums over the last few years to account for the breath of the new securities lawsuits (including the pre-existing glut of merger-related lawsuits and derivative actions) and expanded risk of the directors and officers to cybersecurity incidents and breaches.

But believe it or not, real increases of greater than 5 % have only occurred in the last four or five quarters.  In the 4 years prior, not insubstantial rate decreases were the norm.  Or increases were “close to zero” when it came to pricing coverage for excess D&O insurance layers.

  Why we need a healthy D&O market for both coverage, and to pay claims

Stepping back, the natural reaction to these facts might be “too bad for the carriers.”  But that really is not the whole story.  There are good arguments for some insureds that rate increases should be supported.  Why?  D&O insurance serves an important purpose to both the healthiest of companies (to help them recruit directors), and to companies that are not so healthy since it serves to backstop claims for advancement and indemnification.  This is especially true when insolvency or bankruptcy might be a real issue for a company.  Getting the right primary D&O carrier who will pay your claim is critical.  But getting the right level of excess D&O coverage is also critical for the larger company, and sometimes you can only build that tower with a “name-brand” carrier which might cost you a little more in premium.  You tend to pay for what you get in D&O coverage, and paying a little bit more can help do the trick.

  But rate increases also don’t mean a blank check should be given to your carrier either.  In times like today, where rate increases are sought, it might be time to ask what your primary or excess carrier can do for you.  Do you need a coverage enhancement?  Do you need a $15 million primary policy instead of a $10 million primary?  Do you need a $15 million layer at the top of your $100 million tower, but you can only get a $10 million layer?  Maybe rate will help you accomplish your coverage goals.

  Today’s D&O market is a fast and ever-changing one.  So is the world for that matter, where political tensions seem to simmer constantly below the boiling point, both domestically and internationally.  Ultimately, we are NOT saying to roll over and play dead when your carriers want a premium increase for all the reasons we mention above. But we are saying your response might rather be, “how can we both help each other in these challenging times.”

The post Why Corporate America Needs a Strong D&O Insurance Market appeared first on The D&O Diary.

Why Corporate America Needs a Strong D&O Insurance Market published first on http://simonconsultancypage.tumblr.com/

[lawfultruth]

Why Corporate America Needs a Strong D&O Insurance Market

Paul Ferrillo

In the following guest post, Paul Ferrillo takes a look at the current state of the D&O insurance market and provides his views on the importance of a healthy D&O market for corporate America. Paul is a shareholder in the Greenberg Traurig law firm’s Cybersecurity, Privacy, and Crisis Management Practice. I would like to thank Paul for his willingness to allow me to publish his article on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Paul’s article.

  ****************************

  It does not take a psychic to understand the title of this article.  But maybe it takes one more phrase to make the title complete: “because of the increase in securities litigation, the increase in enforcement activity by the SEC, Cybersecurity issues (and their regulatory issues) and the general uncertainties of the political environment in the United States.”

What do all these things have in common?  They can cause Claims.  What do Claims cost?  Money, and lots of it, to defend and settle them.  And where does this money come from generally?  The D&O carriers.

Not so complicated, right?  Yet it is, as many of the above-mentioned elements can arguably double and triple the cost of Claims, meaning there is potentially a double and tripling of costs and expenses.  But what you say?  Aren’t the carriers making a fortune on premiums today because of these various factors?  Well, maybe, maybe not.  It depends upon who you ask and for what period you are asking about.  The bottom line is that both corporations and D&O insurers need each other to remain healthy and strong. In uncertain economic times, corporations depend upon D&O carriers to be especially strong, since the corporations and directors may call upon the carriers to pay their claims.  Market forces and heavy competition have not allowed this “balance” to happen for many years prior to the recent past.  We explain why below, and why that fact is a potential problem.

  Securities Litigation Claims are at record highs and have long tails

We won’t spend much time on this one.  D&O claims have increased over the last few years.  Securities litigation claims were at record highs in 2017 and 2018, with 403 new federal class actions being filed in 2018 (slightly down from 412 new cases in 2017).  See “Securities Class Action Filings, 2018: a year in review,” available here.  A continuing part of the increase in securities class action filings is the number of filings made after the announcement of a merger or acquisition – in 2018 there were 182 “deal” cases, the second largest number since 2009.

Though filings for 2019 are down slightly from record levels in 2017 and 2018, from a D&O insurance perspective the potential damage has already been done.  Even assuming 45% of those cases filed in 2017 and 2018 get dismissed in one way or another (the average dismissal rate), it means that the 449 cases filed in these years in “inventory” will likely proceed, and cost money to litigate and ultimately settle.  And factoring in an average settlement of $30 million dollars (excluding defense costs), see Recent Trends in Securities Class Action Litigation: 2018 Full-Year Review, available here, these cases could ultimately cost $13.5 billion dollars to settle.  This estimated monetary number, amazing but true, would not include the recent trend of large shareholder derivative settlements that we have seen in the last two years.  Since not all cases settle immediately, the number of cases in inventory is likely much higher than the 449 cases estimate we gave above. So $13.5 billion in potential settlement value is likely “low” as well at the end of the day.

Two more facts to entertain here regarding the impact of securities litigation claims on corporate America, and their D&O insurers:

1) SEC enforcement activity is on the rise.  When the SEC chooses to investigate a company regarding an alleged securities fraud suit, there is no doubt that investigation costs both time, and money. Depending upon the nature and seriousness of the allegations being made (e.g. a “Worldcom” like case), the SEC investigation might ultimately cause the securities litigation suit to settle at a much higher number. There are plenty of examples for this proposition;

2) Cyber Risk can magnify, and in fact cause, securities litigation.  We have seen this story play out before since 2013.  Without identifying company names, cybersecurity breaches can cause loss of extreme amounts of data, a plethora of bad press, and generate privacy litigation and regulatory proceedings.  And cybersecurity breaches can cause stock and market capitalization losses.  Market capitalization losses generate securities class action lawsuits.  Enough said.

  Cyber Risk is increasing exponentially

We almost don’t need to reiterate this fact.  It is evident every day of the week when the most recent hack or breach gets announced across the relevant high-activity blogs.

  So, what is new about cyber risk?  Two things that really matter to directors and officers:

1) Cybersecurity Litigation is now sticking: Though early cyber and privacy related litigation was flashy and new, it did not result in head-spinning monetary settlements.  That is not true today and settlements since the Anthem Healthcare breach have been on the rise.  Why is this important?  Well merely that these settlements are evidencing to the plaintiff bar that cybersecurity breach litigation can be profitable, if not lucrative, for the right case.  This will cause competition among the plaintiffs’ class action firms. And more litigation and more firms get in the game; and

2) Cyber regulators are more on the hunt than ever before.  No doubt this was an expected occurrence in the cybersecurity ecosystem.  It had to happen based upon the sheer volume of new laws and regulations that are being put on the books every month.  We even expected the EU GDPR, which went into effect in May 2018, to be problematic based upon its sheer breath and the prior fines of US companies where privacy was at issue.  But today, the world has changed again, with record fines being recently assessed against British Airways and Marriot in the amount of $230 million and $123 million, respectively.  These are very large amounts, and potentially will be added into the mix of damages sought in against the companies and its board of directors.

  D&O Premiums have increased, but only recently

So, we see some factors stacking up here that should have indicated steadily increasing premiums over the last few years to account for the breath of the new securities lawsuits (including the pre-existing glut of merger-related lawsuits and derivative actions) and expanded risk of the directors and officers to cybersecurity incidents and breaches.

But believe it or not, real increases of greater than 5 % have only occurred in the last four or five quarters.  In the 4 years prior, not insubstantial rate decreases were the norm.  Or increases were “close to zero” when it came to pricing coverage for excess D&O insurance layers.

  Why we need a healthy D&O market for both coverage, and to pay claims

Stepping back, the natural reaction to these facts might be “too bad for the carriers.”  But that really is not the whole story.  There are good arguments for some insureds that rate increases should be supported.  Why?  D&O insurance serves an important purpose to both the healthiest of companies (to help them recruit directors), and to companies that are not so healthy since it serves to backstop claims for advancement and indemnification.  This is especially true when insolvency or bankruptcy might be a real issue for a company.  Getting the right primary D&O carrier who will pay your claim is critical.  But getting the right level of excess D&O coverage is also critical for the larger company, and sometimes you can only build that tower with a “name-brand” carrier which might cost you a little more in premium.  You tend to pay for what you get in D&O coverage, and paying a little bit more can help do the trick.

  But rate increases also don’t mean a blank check should be given to your carrier either.  In times like today, where rate increases are sought, it might be time to ask what your primary or excess carrier can do for you.  Do you need a coverage enhancement?  Do you need a $15 million primary policy instead of a $10 million primary?  Do you need a $15 million layer at the top of your $100 million tower, but you can only get a $10 million layer?  Maybe rate will help you accomplish your coverage goals.

  Today’s D&O market is a fast and ever-changing one.  So is the world for that matter, where political tensions seem to simmer constantly below the boiling point, both domestically and internationally.  Ultimately, we are NOT saying to roll over and play dead when your carriers want a premium increase for all the reasons we mention above. But we are saying your response might rather be, “how can we both help each other in these challenging times.”

The post Why Corporate America Needs a Strong D&O Insurance Market appeared first on The D&O Diary.

Why Corporate America Needs a Strong D&O Insurance Market syndicated from https://ronenkurzfeldweb.wordpress.com/

[golicit]

Why Corporate America Needs a Strong D&O Insurance Market

Paul Ferrillo

In the following guest post, Paul Ferrillo takes a look at the current state of the D&O insurance market and provides his views on the importance of a healthy D&O market for corporate America. Paul is a shareholder in the Greenberg Traurig law firm’s Cybersecurity, Privacy, and Crisis Management Practice. I would like to thank Paul for his willingness to allow me to publish his article on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Paul’s article.

  ****************************

  It does not take a psychic to understand the title of this article.  But maybe it takes one more phrase to make the title complete: “because of the increase in securities litigation, the increase in enforcement activity by the SEC, Cybersecurity issues (and their regulatory issues) and the general uncertainties of the political environment in the United States.”

What do all these things have in common?  They can cause Claims.  What do Claims cost?  Money, and lots of it, to defend and settle them.  And where does this money come from generally?  The D&O carriers.

Not so complicated, right?  Yet it is, as many of the above-mentioned elements can arguably double and triple the cost of Claims, meaning there is potentially a double and tripling of costs and expenses.  But what you say?  Aren’t the carriers making a fortune on premiums today because of these various factors?  Well, maybe, maybe not.  It depends upon who you ask and for what period you are asking about.  The bottom line is that both corporations and D&O insurers need each other to remain healthy and strong. In uncertain economic times, corporations depend upon D&O carriers to be especially strong, since the corporations and directors may call upon the carriers to pay their claims.  Market forces and heavy competition have not allowed this “balance” to happen for many years prior to the recent past.  We explain why below, and why that fact is a potential problem.

  Securities Litigation Claims are at record highs and have long tails

We won’t spend much time on this one.  D&O claims have increased over the last few years.  Securities litigation claims were at record highs in 2017 and 2018, with 403 new federal class actions being filed in 2018 (slightly down from 412 new cases in 2017).  See “Securities Class Action Filings, 2018: a year in review,” available here.  A continuing part of the increase in securities class action filings is the number of filings made after the announcement of a merger or acquisition – in 2018 there were 182 “deal” cases, the second largest number since 2009.

Though filings for 2019 are down slightly from record levels in 2017 and 2018, from a D&O insurance perspective the potential damage has already been done.  Even assuming 45% of those cases filed in 2017 and 2018 get dismissed in one way or another (the average dismissal rate), it means that the 449 cases filed in these years in “inventory” will likely proceed, and cost money to litigate and ultimately settle.  And factoring in an average settlement of $30 million dollars (excluding defense costs), see Recent Trends in Securities Class Action Litigation: 2018 Full-Year Review, available here, these cases could ultimately cost $13.5 billion dollars to settle.  This estimated monetary number, amazing but true, would not include the recent trend of large shareholder derivative settlements that we have seen in the last two years.  Since not all cases settle immediately, the number of cases in inventory is likely much higher than the 449 cases estimate we gave above. So $13.5 billion in potential settlement value is likely “low” as well at the end of the day.

Two more facts to entertain here regarding the impact of securities litigation claims on corporate America, and their D&O insurers:

1) SEC enforcement activity is on the rise.  When the SEC chooses to investigate a company regarding an alleged securities fraud suit, there is no doubt that investigation costs both time, and money. Depending upon the nature and seriousness of the allegations being made (e.g. a “Worldcom” like case), the SEC investigation might ultimately cause the securities litigation suit to settle at a much higher number. There are plenty of examples for this proposition;

2) Cyber Risk can magnify, and in fact cause, securities litigation.  We have seen this story play out before since 2013.  Without identifying company names, cybersecurity breaches can cause loss of extreme amounts of data, a plethora of bad press, and generate privacy litigation and regulatory proceedings.  And cybersecurity breaches can cause stock and market capitalization losses.  Market capitalization losses generate securities class action lawsuits.  Enough said.

  Cyber Risk is increasing exponentially

We almost don’t need to reiterate this fact.  It is evident every day of the week when the most recent hack or breach gets announced across the relevant high-activity blogs.

  So, what is new about cyber risk?  Two things that really matter to directors and officers:

1) Cybersecurity Litigation is now sticking: Though early cyber and privacy related litigation was flashy and new, it did not result in head-spinning monetary settlements.  That is not true today and settlements since the Anthem Healthcare breach have been on the rise.  Why is this important?  Well merely that these settlements are evidencing to the plaintiff bar that cybersecurity breach litigation can be profitable, if not lucrative, for the right case.  This will cause competition among the plaintiffs’ class action firms. And more litigation and more firms get in the game; and

2) Cyber regulators are more on the hunt than ever before.  No doubt this was an expected occurrence in the cybersecurity ecosystem.  It had to happen based upon the sheer volume of new laws and regulations that are being put on the books every month.  We even expected the EU GDPR, which went into effect in May 2018, to be problematic based upon its sheer breath and the prior fines of US companies where privacy was at issue.  But today, the world has changed again, with record fines being recently assessed against British Airways and Marriot in the amount of $230 million and $123 million, respectively.  These are very large amounts, and potentially will be added into the mix of damages sought in against the companies and its board of directors.

  D&O Premiums have increased, but only recently

So, we see some factors stacking up here that should have indicated steadily increasing premiums over the last few years to account for the breath of the new securities lawsuits (including the pre-existing glut of merger-related lawsuits and derivative actions) and expanded risk of the directors and officers to cybersecurity incidents and breaches.

But believe it or not, real increases of greater than 5 % have only occurred in the last four or five quarters.  In the 4 years prior, not insubstantial rate decreases were the norm.  Or increases were “close to zero” when it came to pricing coverage for excess D&O insurance layers.

  Why we need a healthy D&O market for both coverage, and to pay claims

Stepping back, the natural reaction to these facts might be “too bad for the carriers.”  But that really is not the whole story.  There are good arguments for some insureds that rate increases should be supported.  Why?  D&O insurance serves an important purpose to both the healthiest of companies (to help them recruit directors), and to companies that are not so healthy since it serves to backstop claims for advancement and indemnification.  This is especially true when insolvency or bankruptcy might be a real issue for a company.  Getting the right primary D&O carrier who will pay your claim is critical.  But getting the right level of excess D&O coverage is also critical for the larger company, and sometimes you can only build that tower with a “name-brand” carrier which might cost you a little more in premium.  You tend to pay for what you get in D&O coverage, and paying a little bit more can help do the trick.

  But rate increases also don’t mean a blank check should be given to your carrier either.  In times like today, where rate increases are sought, it might be time to ask what your primary or excess carrier can do for you.  Do you need a coverage enhancement?  Do you need a $15 million primary policy instead of a $10 million primary?  Do you need a $15 million layer at the top of your $100 million tower, but you can only get a $10 million layer?  Maybe rate will help you accomplish your coverage goals.

  Today’s D&O market is a fast and ever-changing one.  So is the world for that matter, where political tensions seem to simmer constantly below the boiling point, both domestically and internationally.  Ultimately, we are NOT saying to roll over and play dead when your carriers want a premium increase for all the reasons we mention above. But we are saying your response might rather be, “how can we both help each other in these challenging times.”

The post Why Corporate America Needs a Strong D&O Insurance Market appeared first on The D&O Diary.

Why Corporate America Needs a Strong D&O Insurance Market published first on

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Disappointment Brings a Bargain Buy 

New Post has been published on https://tradegold.today/disappointment-brings-a-bargain-buy/

Disappointment Brings a Bargain Buy 

Adrian Day of Adrian Day Asset Management looks into the results reported by a triad of companies, including one whose stock fell sharply and that he now considers a strong buy. 

Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE, US$9.73) fell sharply following its fourth-quarter results. Three factors contributed to this: higher G&A (general and administrative) costs; a reduction in 2018 guidance; and most important an impairment charge on the Eleonore royalty it owns. The charge, of $89 million, followed mine-owner Goldcorp reducing its long-term production estimate to 400,000 ounces a year (down from 600,000), a lower but achievable target.

There remains considerable upside in the mine, both from improved operations and exploration. Osisko emphasized that it could reverse the charge if operations improve or the mine life is extended. It should also be noted that the mine remains in ramp-up. Osisko received 6,390 ounces from the mine for its royalty last year but, even with the reduced guidance, expects 7,920 this year and 8,800 thereafter. The mine will generate increased cash flow for Osisko going forward.

The higher G&A expenses were attributable primarily to costs related to the Orion transaction last summer, and Osisko expects a reduction in stable-state G&A going forward. The reduction in production guidance was due primarily to delays in Lydian’s Armenian mine, on which Osisko holds a royalty, and only a temporary reduction.

Good news as well There were plenty of good things about the results, including record gold ounces and revenues. The foundational royalty on Canadian Malartic set a new record, while exploration is underway at brownfield deposits.

The balance sheet remains strong, with an increase in cash to $334 million; a securities portfolio valued at $364 million; and long-term debt of $464 million. Osisko also has $250 million of unused firepower available.

The nearly 10% decline in Osisko’s stock price is overdone, and the valuation discount too great. The stock is trading on a price-to-NAV basis at a discount of 36% to its royalty peers. Osisko is a strong buy here.

Goals Remain but Progress Slow

Goldcorp Inc. (G:TSX; GG:NYSE, US$12.95) has reiterated its 20/20/20 plan to lower costs, increase production, and increase reserves by 20% over five years, even though not much progress has been made to date. Byproduct credits will drive lower costs, but despite higher base metals prices, Goldcorp has kept its year-ahead cost guidance flat, an indication that cost pressures are coming back.

New mines (Borden, Coffee), ramp-ups (Eleonore, Cerro Negro), and expansion (at Penasquito) make the production target doable. Execution will be the key to achieving the goals and to the stock price.

Goldcorp trades at modest discounts to peers, but given the weaker balance sheet—$2.6 billion of debt against cash of $186 million—as well as lower-return projects, a discount is justified. We are holding.

Ares Turns the Corner

Ares Capital Corp. (ARCC:NASDAQ, US$15.92) continues to make progress in digesting the huge American Capital acquisition and toward fully covering its dividend again. Indeed, the company says the transition year after the ACAS acquisition, “is now behind us,” and the tone of the recent conference call was more optimistic.

Most importantly, Ares has a large pool of carry-over income, because it outearned its dividend over the years prior to the ACAS acquisition. This is currently $0.81 per share, “a big number.” Management indicated it wants to be sure of sustained progress before raising the dividend.

The net asset value (NAV) was up slightly, to just over $16, and there was a reduction in companies on nonaccrual (just 3.1% at cost). The company is also on a roll with new investments of over $1.5 billion (including a $900 million block of senior loans in its Ivy Hill unit). With the new investments, debt-to-equity increased to a still comfortable 0.7x, while there is plenty of availability on its credit line.

Dividend boost? Though the company did not say so, I suspect we will see an increase in the quarterly dividend later this year, or, at least, another bonus dividend; the last bonus dividend was paid in early 2015, before GE exited from a SSLP joint venture with Ares.

Trading just below book, with a yield of 9.6%, Ares is a buy for long-term income investors. We also suspect that, with the ACAS acquisition behind it, we should start to see some capital gains as well.

Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is “Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks.”

Want to read more Gold Report articles like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent articles and interviews with industry analysts and commentators, visit our Streetwise Interviews page.

  Disclosure: 1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Osisko Gold Royalties and Ares Capital. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this article: Osisko Gold Royalties, Goldcorp and Ares Capital. I determined which companies would be included in this article based on my research and understanding of the sector. 2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: None.  Click here for important disclosures about sponsor fees. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security. 3) Statements and opinions expressed are the opinions of the author and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author was not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article. Streetwise Reports requires contributing authors to disclose any shareholdings in, or economic relationships with, companies that they write about. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy. 4) This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports. 5) From time to time, Streetwise Reports and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article, until one week after the publication of the interview or article. As of the date of this article, officers and/or employees of Streetwise Reports (including members of their household) own securities of Osisko Gold Royalties and Goldcorp, companies mentioned in this article.

[rebeccahpedersen]

How Do You Evaluate A Multi-Plex For Investment?

TorontoRealtyBlog

Well first of all, if you’re looking at buying a multiplex for investment – good on you, you’ve clearly done something right!

But believe it or not, there’s serious competition for multiplexes – those properties with 3-or-more dwellings.

Cap rates are down, demand is high, and investors are accepting lower returns in order to get into the market.

Let me outline nine criteria that a would-be investor must consider, at the bare minimum, for any multiplex purchase…

Should I outline these in order?

Sure, I could try.

And by try, I mean that every investor has a different set of criteria, and my #4 might be somebody else’s #7.

Of course, you might have a #10, #11, and #12 to add to the list.

And all the while, many of these points go hand-and-hand.

So let me start from the top, where I find most of my clients see it…

–

1) Yield

This should be at the top of the list, no?

Some people would put #2 on the list, but I don’t think that’s smart in this market.

When you buy a stock, what are you looking for?

Well, I suppose that’s a terrible example, since everybody wants to watch the stock go up, up, and up, and they’re looking at the appreciation potential, with the “buy low, sell high” mentality.

But in the good ole days, investors were looking for dividends!

How much is the stock paying you to own it?  You’re a shareholder; you own a portion of the company, so how much of the company’s profit are you receiving?

Times have changed, both in terms of the stock market, and the real estate market.

Ask the man on the street, and he’s looking to buy a stock for $10, and sell it for $15.  But ask the pension funds, and they’re looking for a steady, consistent, predictable, safe return.  They’re the savviest of investors, and they’re looking for a 6% return in perpetuity.

When it comes to investing in real estate, my personal belief is that if you forecast a zero percent appreciation, and the investment makes sense to you based on yield, then the investment will pay out and exceed your expectations.

There’s that old adage in real estate: “When is the best time to sell a piece of real estate?”

The answer: “Never.”

Life happens, situations change, and more often than not, even a long-term investor will need or want to sell.

But on a long-enough time horizon, the appreciation is the icing on the cake, and where the investor makes, by far, the most money.

But at the onset, the short and immediate-term numbers have to make sense.

What does that mean?  What kind of numbers are we looking at in this market?

I see multi-unit dwellings selling at 3% cap rates, and I can’t make sense of it.

When I got into real estate 5.5-6% cap rates on multi-unit properties were the norm.  Over time, those figures have dropped, and it’s up to the investor to decide what works.

2) Appreciation Potential

I suppose the “yield” section was just the preamble for some people.

Every time I talk about yield, and give the example of the dividend-paying-stock, people tell me, “This isn’t 1880; you’re not buying paper-shares of the Great Pacific.”

Fair point.  Times change.

But I’m conservative by nature, and when it comes to buying multi-unit dwellings for long-term investing, I would argue until I’m blue in the face that you have to consider appreciation potential after yield.

Over the last few years, it’s been easy to refute my argument.

I’ve told this story before, so you long-time readers might remember it…

Back in 2010, I had an investor-client in from Los Angeles, who was looking at purchasing a couple of 4-5 unit dwellings.

He was primarily concerned with yield, and the financing ability of the properties (which we’ll explore below), and truly believed, despite his desire to buy, that prices in Toronto were likely headed for a dip.

We found a property in Queen West that was perfect, and hit on several of the other points listed below as well.

It was around a 5.25% cap rate at the list price, and although it would be slightly cash-flow negative each month based on his downpayment, he was willing to consider it.

The property didn’t have an “offer night” as is the custom today, but it still received four offers, and sold for $100,000 over the list price.

My client told me, “This makes no sense.  This is simply the greater fool theory; whoever is buying this property, is expecting to sell it to somebody else down the line for more.”

He wasn’t wrong, logically.

But in practice, he was proven tragically incorrect.

That property, listed at $1.2M, that sold for $1.3M, recently sold for over $2M.

Now tell me again – what’s more important: yield or appreciation potential?

And am I naive to say “appreciation is just icing on the cake?”

3) Location

How can you have any list about real estate evaluation criteria without location?

Location is all part and parcel of the overall evaluation.

Some investors would choose a superior location over a better return, and I wouldn’t disagree.

Earlier this year, I sent a client the listing for a turnkey 4-plex in Mimico, with a rare 4.8% cap rate, what I perceived to be below-market rents, and a copy of the inspection – which looked fantastic.

My client responded with a 3-word email: “It’s in Mimico.”

Enough said.

I liked the income, I liked potential for more income, and I loved the condition of the property.  But he would have rather had a property with a 3.5% cap rate, steps to Trinity-Bellwoods, and at the risk of sounding cliche, “To each, their own.”

Toronto is a rapidly-growing city, both in terms of the population and the urban sprawl, but also in the eyes of the world.

For investors thinking long-term, the best appreciation will undoubtedly be found with those properties that are closest to the city centre, as is the case with every world-class city.  But those properties will have substantially lower yields.

It’s up to the buyer to decide where the best value, for he or she, ultimately lays.

4) Condition

Have you ever looked at the “financials” for an income-property listed on MLS?

It’s hilarious.

You’re lucky if you get property taxes, water, and gas.  Sellers and listing agents love to pretend like electricity and insurance don’t exist.  They’ll be really quick to tell you about the $25 per month the property generates in basement coin-laundry, but they’ll n-e-v-e-r detail the overall cost of ongoing maintenance, upkeep, and repairs.

Part of the reason why many Toronto real estate investors have turned toward condos in the past few years (aside from the lower cost) is because of the maintenance of an 80-year-old 4-plex.  You can do the most thorough of home inspections, and find the property is in A++ shape, but you’ll still be opening your wallet for something, every few months.

As with everything else above, the condition of the property has to be taken into consideration with the other criteria.  You might be willing to pay more, and accept a lower yield, for a true “turnkey” income property.  Or you might decide to pay less, do the work yourself, and hope to add value.

Of course, you can always combine this with #5…

5) Market Rents

Just a brief point to make here, but an important one.

Many properties are being sold with tenants attached, who are leasing at rents well below fair market value.

If properties are sold based on capitalization rates, those rates are taking current rents into consideration, and those rents are below FMV, then it goes without saying that the property is under-valued.

Yes, it can be difficult to get a tenant out so you can raise the rent, and it’s going to become tougher thanks to the Ontario Fair Housing Plan.  But tenants don’t stay forever.

And if you have a property that needs work and has below market rents, when the tenants vacate, you can put work into the property to increase the rents, and add value at the same time.

6) Size & Scope

What do you for a living?

What’s your personal life like?

Tell me about your family…

Now tell me if you would be able to manage a 5-unit property that’s a 45-minute drive in traffic, with whatever knowledge, skill, and capability you currently possess.

Buying a 5-plex is one thing, but managing it is another.

There’s the ongoing maintenance and upkeep, the supervising of tenants, the collection (and chasing…) of rents, and the search for new tenants.

Savvy investors know how to make the property, and the tenants, work for them.  Many landlords will offer a tenant a nominal sum (start with the basement tenant and $30…) to take out the garbage every week.  Many landlords will “allow” the tenants to paint, provided it’s in a neutral colour, and done well.  I put “allow” in quotes, of course, because it’s value-add for the landlord to have a fresh coat of paint, and yet many tenants believe it’s a privilege.

Some investors do this full time – they buy, manage, and maintain multi-unit dwellings.  They have the time, and the experience, to do so.

Other investors have no clue what they’re doing, and they either know that in advance, or find out very quickly!

The fee to manage a property varies drastically, but you’re looking at 5% of gross rents as a starter.  If you can’t handle the size and scope of the property, then factor that cost into your initial financial analysis.

7) Ability To Finance

There’s no hard-and-fast rule on this, but most mortgage brokers will tell you:

4-Units – residential financing

5-Units – there might be a lender out there that will provide residential financing

6-Units – this is commercial, without a doubt

I’ve had clients in the past purchase 5-unit properties and obtain residential financing, but lending criteria changes like the direction of the wind.  More often than not, it depends on which lender you’re talking to, and which underwriter is handling the file.  I’ve seen the 5-unit properties fall into a serious grey area over the years, as some underwriters will lend with residential criteria, and some won’t.

And keep in mind – we’re talking about downpayment and rate!

To buy a 3-plex, you simply need to meet the minimum downpayment criteria (used to be 5%, now it’s 20% for a “second property” subject to some exceptions), and you can obtain a current residential rate, ie. a 5-year, fixed-rate of 2.49%.

When you get into 6-plex and above, you may be required to put down 35%, and the rates could be into the 4-6% range.  Yes, that’s a wide range, but as I said – it depends on your mortgage broker, and which lenders and underwriters they’re talking to.

Going from a 4-unit property, with a 20% down payment, and 2.49% interest rates, to 6-unit property, and a 35% down payment, with a 4.49% interest rate, can be tough to swallow.

But keep in mind, not all “investors” are taking on debt.  Some are buying in cash, some take on debt because it’s cheap (ie. 4.49% is less than their rate of expected return in other investment vehicles), and thus it’s not really a “problem” per se for those looking to buy 6-plexes and up.

You might also argue the yield is better as you climb in the number of units.  Clearly a duplex offers a lower rate of return than a 6-plex, not only because there’s more demand, but because it’s cheaper, easier to afford for the average investor, and thus the price gets bid up.

Ultimately the ability to finance will come into play for an overwhelming majority of investors, and so you might actually start with this.

8) Tenants

Wow, we’re really starting to see how all of these points are intertwined.

The size and scope of the property, combined with the location, combined with the market rents, will ultimately dictate what type of tenants you’ve got.

An investor-client of mine once told me, “Basement apartments aren’t worth the hassle.”

I asked what he meant, and he said, “They’re not worth the $600 they bring in each month.”

Now, this was a long time ago, hence the $600 figure.  Maybe the hassle has been lessened over the years as rents have increased.

But he elaborated in saying, “Ask yourself – what kind of person rents a sh!tty basement apartment for $600 per month?  The lowest common denominator of society, that THAT is now one of my partners in my financial endeavor.”

Sensitivities aside, he might not be wrong.

I’m sure some of the most wonderful people in the world have rented basement apartments, but on the whole, the person looking for the absolutely lowest-priced rental in the city does so not out of desire, but out of necessity.

This client went on to tell me that most of the tenants he’s had renting basements have been troublesome, sometimes in terms of their character and how they treat the unit, but primarily in terms of their ability to service the rent.

Personally, I think if you’re an investor running multi-unit dwellings, there’s a learning curve, and you’ll figure out how to deal with tenants – at every rent level.  And with basement apartments going for $800, $900, or $1,000 in the city, who can turn that kind of money down?

Ultimately, the type of property you have, plus the location, will determine what kind of tenants you get.

And if you’re looking at a property that is tenanted, you want to know everything you can about the tenants in place.

I’ve seen some really sharp listing agents put together info packages on the tenants themselves – their income, occupation, FICO scores, duration of tenancy, and frequency of payments.  That goes a long way toward marketing the property to investors.

9) Proximity To Transit

Perhaps this falls into the “location” category, but having already flushed that out, I think this deserves its own point.

Transit in Toronto is just God-awful, as we all know.

And without generalizing too much here, dare I say that many people who rent, also take transit.

The market rent will be affected by the proximity to transit, the yield will be affected by the market rent, and once again, we see how these points are intertwined.

You could suggest that proximity to parks, schools, retail, etc. bear consideration, but I don’t put them anywhere near the level of importance as transit.  This is my generalization – about renters taking transit, and you can disagree if you want to.  But I’m speaking from experience, with what my clients see out there.

–

You’re probably looking for a point #10, but this list isn’t meant to be well-rounded; it’s meant to point out the most important criteria when evaluating a multiplex for investment.

Somewhere within these points lays a happy medium for the investor.

And as we know, every investor is different.

The post How Do You Evaluate A Multi-Plex For Investment? appeared first on Toronto Real Estate Property Sales & Investments | Toronto Realty Blog by David Fleming.

Originated from http://ift.tt/2slZ4bE

[rebeccahpedersen]

How Do You Evaluate A Multi-Plex For Investment?

TorontoRealtyBlog

Well first of all, if you’re looking at buying a multiplex for investment – good on you, you’ve clearly done something right!

But believe it or not, there’s serious competition for multiplexes – those properties with 3-or-more dwellings.

Cap rates are down, demand is high, and investors are accepting lower returns in order to get into the market.

Let me outline nine criteria that a would-be investor must consider, at the bare minimum, for any multiplex purchase…

Should I outline these in order?

Sure, I could try.

And by try, I mean that every investor has a different set of criteria, and my #4 might be somebody else’s #7.

Of course, you might have a #10, #11, and #12 to add to the list.

And all the while, many of these points go hand-and-hand.

So let me start from the top, where I find most of my clients see it…

–

1) Yield

This should be at the top of the list, no?

Some people would put #2 on the list, but I don’t think that’s smart in this market.

When you buy a stock, what are you looking for?

Well, I suppose that’s a terrible example, since everybody wants to watch the stock go up, up, and up, and they’re looking at the appreciation potential, with the “buy low, sell high” mentality.

But in the good ole days, investors were looking for dividends!

How much is the stock paying you to own it?  You’re a shareholder; you own a portion of the company, so how much of the company’s profit are you receiving?

Times have changed, both in terms of the stock market, and the real estate market.

Ask the man on the street, and he’s looking to buy a stock for $10, and sell it for $15.  But ask the pension funds, and they’re looking for a steady, consistent, predictable, safe return.  They’re the savviest of investors, and they’re looking for a 6% return in perpetuity.

When it comes to investing in real estate, my personal belief is that if you forecast a zero percent appreciation, and the investment makes sense to you based on yield, then the investment will pay out and exceed your expectations.

There’s that old adage in real estate: “When is the best time to sell a piece of real estate?”

The answer: “Never.”

Life happens, situations change, and more often than not, even a long-term investor will need or want to sell.

But on a long-enough time horizon, the appreciation is the icing on the cake, and where the investor makes, by far, the most money.

But at the onset, the short and immediate-term numbers have to make sense.

What does that mean?  What kind of numbers are we looking at in this market?

I see multi-unit dwellings selling at 3% cap rates, and I can’t make sense of it.

When I got into real estate 5.5-6% cap rates on multi-unit properties were the norm.  Over time, those figures have dropped, and it’s up to the investor to decide what works.

2) Appreciation Potential

I suppose the “yield” section was just the preamble for some people.

Every time I talk about yield, and give the example of the dividend-paying-stock, people tell me, “This isn’t 1880; you’re not buying paper-shares of the Great Pacific.”

Fair point.  Times change.

But I’m conservative by nature, and when it comes to buying multi-unit dwellings for long-term investing, I would argue until I’m blue in the face that you have to consider appreciation potential after yield.

Over the last few years, it’s been easy to refute my argument.

I’ve told this story before, so you long-time readers might remember it…

Back in 2010, I had an investor-client in from Los Angeles, who was looking at purchasing a couple of 4-5 unit dwellings.

He was primarily concerned with yield, and the financing ability of the properties (which we’ll explore below), and truly believed, despite his desire to buy, that prices in Toronto were likely headed for a dip.

We found a property in Queen West that was perfect, and hit on several of the other points listed below as well.

It was around a 5.25% cap rate at the list price, and although it would be slightly cash-flow negative each month based on his downpayment, he was willing to consider it.

The property didn’t have an “offer night” as is the custom today, but it still received four offers, and sold for $100,000 over the list price.

My client told me, “This makes no sense.  This is simply the greater fool theory; whoever is buying this property, is expecting to sell it to somebody else down the line for more.”

He wasn’t wrong, logically.

But in practice, he was proven tragically incorrect.

That property, listed at $1.2M, that sold for $1.3M, recently sold for over $2M.

Now tell me again – what’s more important: yield or appreciation potential?

And am I naive to say “appreciation is just icing on the cake?”

3) Location

How can you have any list about real estate evaluation criteria without location?

Location is all part and parcel of the overall evaluation.

Some investors would choose a superior location over a better return, and I wouldn’t disagree.

Earlier this year, I sent a client the listing for a turnkey 4-plex in Mimico, with a rare 4.8% cap rate, what I perceived to be below-market rents, and a copy of the inspection – which looked fantastic.

My client responded with a 3-word email: “It’s in Mimico.”

Enough said.

I liked the income, I liked potential for more income, and I loved the condition of the property.  But he would have rather had a property with a 3.5% cap rate, steps to Trinity-Bellwoods, and at the risk of sounding cliche, “To each, their own.”

Toronto is a rapidly-growing city, both in terms of the population and the urban sprawl, but also in the eyes of the world.

For investors thinking long-term, the best appreciation will undoubtedly be found with those properties that are closest to the city centre, as is the case with every world-class city.  But those properties will have substantially lower yields.

It’s up to the buyer to decide where the best value, for he or she, ultimately lays.

4) Condition

Have you ever looked at the “financials” for an income-property listed on MLS?

It’s hilarious.

You’re lucky if you get property taxes, water, and gas.  Sellers and listing agents love to pretend like electricity and insurance don’t exist.  They’ll be really quick to tell you about the $25 per month the property generates in basement coin-laundry, but they’ll n-e-v-e-r detail the overall cost of ongoing maintenance, upkeep, and repairs.

Part of the reason why many Toronto real estate investors have turned toward condos in the past few years (aside from the lower cost) is because of the maintenance of an 80-year-old 4-plex.  You can do the most thorough of home inspections, and find the property is in A++ shape, but you’ll still be opening your wallet for something, every few months.

As with everything else above, the condition of the property has to be taken into consideration with the other criteria.  You might be willing to pay more, and accept a lower yield, for a true “turnkey” income property.  Or you might decide to pay less, do the work yourself, and hope to add value.

Of course, you can always combine this with #5…

5) Market Rents

Just a brief point to make here, but an important one.

Many properties are being sold with tenants attached, who are leasing at rents well below fair market value.

If properties are sold based on capitalization rates, those rates are taking current rents into consideration, and those rents are below FMV, then it goes without saying that the property is under-valued.

Yes, it can be difficult to get a tenant out so you can raise the rent, and it’s going to become tougher thanks to the Ontario Fair Housing Plan.  But tenants don’t stay forever.

And if you have a property that needs work and has below market rents, when the tenants vacate, you can put work into the property to increase the rents, and add value at the same time.

6) Size & Scope

What do you for a living?

What’s your personal life like?

Tell me about your family…

Now tell me if you would be able to manage a 5-unit property that’s a 45-minute drive in traffic, with whatever knowledge, skill, and capability you currently possess.

Buying a 5-plex is one thing, but managing it is another.

There’s the ongoing maintenance and upkeep, the supervising of tenants, the collection (and chasing…) of rents, and the search for new tenants.

Savvy investors know how to make the property, and the tenants, work for them.  Many landlords will offer a tenant a nominal sum (start with the basement tenant and $30…) to take out the garbage every week.  Many landlords will “allow” the tenants to paint, provided it’s in a neutral colour, and done well.  I put “allow” in quotes, of course, because it’s value-add for the landlord to have a fresh coat of paint, and yet many tenants believe it’s a privilege.

Some investors do this full time – they buy, manage, and maintain multi-unit dwellings.  They have the time, and the experience, to do so.

Other investors have no clue what they’re doing, and they either know that in advance, or find out very quickly!

The fee to manage a property varies drastically, but you’re looking at 5% of gross rents as a starter.  If you can’t handle the size and scope of the property, then factor that cost into your initial financial analysis.

7) Ability To Finance

There’s no hard-and-fast rule on this, but most mortgage brokers will tell you:

4-Units – residential financing

5-Units – there might be a lender out there that will provide residential financing

6-Units – this is commercial, without a doubt

I’ve had clients in the past purchase 5-unit properties and obtain residential financing, but lending criteria changes like the direction of the wind.  More often than not, it depends on which lender you’re talking to, and which underwriter is handling the file.  I’ve seen the 5-unit properties fall into a serious grey area over the years, as some underwriters will lend with residential criteria, and some won’t.

And keep in mind – we’re talking about downpayment and rate!

To buy a 3-plex, you simply need to meet the minimum downpayment criteria (used to be 5%, now it’s 20% for a “second property” subject to some exceptions), and you can obtain a current residential rate, ie. a 5-year, fixed-rate of 2.49%.

When you get into 6-plex and above, you may be required to put down 35%, and the rates could be into the 4-6% range.  Yes, that’s a wide range, but as I said – it depends on your mortgage broker, and which lenders and underwriters they’re talking to.

Going from a 4-unit property, with a 20% down payment, and 2.49% interest rates, to 6-unit property, and a 35% down payment, with a 4.49% interest rate, can be tough to swallow.

But keep in mind, not all “investors” are taking on debt.  Some are buying in cash, some take on debt because it’s cheap (ie. 4.49% is less than their rate of expected return in other investment vehicles), and thus it’s not really a “problem” per se for those looking to buy 6-plexes and up.

You might also argue the yield is better as you climb in the number of units.  Clearly a duplex offers a lower rate of return than a 6-plex, not only because there’s more demand, but because it’s cheaper, easier to afford for the average investor, and thus the price gets bid up.

Ultimately the ability to finance will come into play for an overwhelming majority of investors, and so you might actually start with this.

8) Tenants

Wow, we’re really starting to see how all of these points are intertwined.

The size and scope of the property, combined with the location, combined with the market rents, will ultimately dictate what type of tenants you’ve got.

An investor-client of mine once told me, “Basement apartments aren’t worth the hassle.”

I asked what he meant, and he said, “They’re not worth the $600 they bring in each month.”

Now, this was a long time ago, hence the $600 figure.  Maybe the hassle has been lessened over the years as rents have increased.

But he elaborated in saying, “Ask yourself – what kind of person rents a sh!tty basement apartment for $600 per month?  The lowest common denominator of society, that THAT is now one of my partners in my financial endeavor.”

Sensitivities aside, he might not be wrong.

I’m sure some of the most wonderful people in the world have rented basement apartments, but on the whole, the person looking for the absolutely lowest-priced rental in the city does so not out of desire, but out of necessity.

This client went on to tell me that most of the tenants he’s had renting basements have been troublesome, sometimes in terms of their character and how they treat the unit, but primarily in terms of their ability to service the rent.

Personally, I think if you’re an investor running multi-unit dwellings, there’s a learning curve, and you’ll figure out how to deal with tenants – at every rent level.  And with basement apartments going for $800, $900, or $1,000 in the city, who can turn that kind of money down?

Ultimately, the type of property you have, plus the location, will determine what kind of tenants you get.

And if you’re looking at a property that is tenanted, you want to know everything you can about the tenants in place.

I’ve seen some really sharp listing agents put together info packages on the tenants themselves – their income, occupation, FICO scores, duration of tenancy, and frequency of payments.  That goes a long way toward marketing the property to investors.

9) Proximity To Transit

Perhaps this falls into the “location” category, but having already flushed that out, I think this deserves its own point.

Transit in Toronto is just God-awful, as we all know.

And without generalizing too much here, dare I say that many people who rent, also take transit.

The market rent will be affected by the proximity to transit, the yield will be affected by the market rent, and once again, we see how these points are intertwined.

You could suggest that proximity to parks, schools, retail, etc. bear consideration, but I don’t put them anywhere near the level of importance as transit.  This is my generalization – about renters taking transit, and you can disagree if you want to.  But I’m speaking from experience, with what my clients see out there.

–

You’re probably looking for a point #10, but this list isn’t meant to be well-rounded; it’s meant to point out the most important criteria when evaluating a multiplex for investment.

Somewhere within these points lays a happy medium for the investor.

And as we know, every investor is different.

The post How Do You Evaluate A Multi-Plex For Investment? appeared first on Toronto Real Estate Property Sales & Investments | Toronto Realty Blog by David Fleming.

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