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The Q&A inbox has filled up again so let's take a look at some of the issues that are bothering readers.

Hotel REIT

Q - On BNN recently, Eric Nuttall of Sprott mentioned a REIT, American Hotel Income Properties (HOT.UN-T). Could you have a look at it? The high yield is very appealing, perhaps too much so. - Robb H., Calgary

A – The yield certainly is attractive – 8.5 per cent after the close on Oct. 6, based on a price of $9.55 and a monthly payout of 5.4 cents (U.S.) per unit. The cash flow is attractive but the unit price is down significantly from its 52-week high of $11.14, reached briefly last winter.

Although it is based in Vancouver, the REIT invests in U.S. hotel properties in secondary markets. As of the end of the second quarter, it had 113 hotels in its portfolio, boosted by the recent acquisition of 18 Marriott and Hilton branded hotels in markets along the Eastern Seaboard.

The REIT's recent financial performance looks impressive. Second-quarter revenue was up 56 per cent year-over-year, to $69.5-million (the REIT reports in U.S. currency). EBITDA rose by 47.7 per cent to $22.3-million, funds from operations (FFO) increased by 38.4 per cent to $14.5-million, while adjusted funds from operations (AFFO) rose 34 per cent to $12.5-million. However, it should be noted that this apparently rapid growth was not organic but rather fuelled by the addition of new hotel properties.

A possible area of concern is the fall-off in AFFO, which is a key measure of a REIT's financial health and the basis for its payouts. In the second quarter, diluted AFFO per unit was 20 cents, down from 27 cents in the same period of 2016. The payout ratio was up to 84.8 per cent from 61 per cent last year, in large part due to the dilution of existing units as a result a new issue of 19.4 million shares in June. For the first half, the payout ratio was 90 per cent, up from 73.9 per cent last year.

Loss for the first half of the year was $3.1-million, but that is not generally a concern with REITs because of the large depreciation write-offs they can claim.

REIT president Ian McAuley said the goal is to provide investors "with consistent annual yields of approximately 8 per cent, while significantly improving the quality of our hotel portfolio through accretive acquisitions and value-added capital expenditures."

Overall, this young REIT (it started trading in March 2013) looks attractive to aggressive investors at the current level. However, it has a history of volatility and the high yield suggests that investors are somewhat leery about its prospects. – G.P.

Stingray

Q – I would like to know more about Stingray Digital (RAY.A-T). This company claims to be the world leader as a streaming music provider... More than 80 per cent of revenue is recurrent. Last year, Caisse de dépôt et placement du Québec increased its ownership and recently the CEO/founder increased his ownership substantially. The stock pays a dividend and is increasing it. The shares keep moving up. I would certainly appreciate an opinion from you on this highly performing company. Thank you. – Pierre D.

A – There seems to be a fair amount of interest in this Montreal-based company, judging by the number of questions we have received. You may not know it, but you probably have its service on your TV set – Stingray provides the content for a large number of music channels in the upper ranges of your band.

As our reader points out, the stock has been a strong performer recently. After falling as low as $7.19 in June, the shares have moved higher and closed on Oct. 6 at $9.17.

The stock looks expensive at that level. The trailing p/e ratio is 50.9, which is pricy by any standard. The company is growing, but not by enough to justify that level of p/e. First-quarter 2018 revenue (to June 30) was up by 18.9 per cent, which is a nice bump although not enough to support that level of investor enthusiasm. Recurring revenue (the best kind for any business) was 87 per cent of total revenue and that, of course, is a real plus.

Adjusted net income for the quarter was $5.7-million ($0.11 per share) compared to $5.2-million ($0.10 per share) the year before. Free cash flow was $7.2-million, up from $5.9-million last year. The company recently increased the quarterly dividend to 5 cents per share (20 cents per year). The stock yields 2.2 per cent.

The company appears to be solid and its revenue looks secure. However, as mentioned, it looks expensive at this level. As a result, I would not recommend buying at this time but it's worth keeping an eye on the shares. If they pull back below $9, you may want to take a position. – G.P.

Fixed income investing

Q - My portfolio is now about 45 per cent cash after taking some profits. I am 75; my spouse is 65. I would like to have 25 per cent or so in fixed income. Would you see any problem with having the entire fixed income allocation in XBB, or would you suggest diversifying among a number of bond ETFs? - Larry W., Kamloops, BC

A – XBB is the trading symbol for the iShares Core Canadian Universe Bond ETF. It covers the entire domestic bond market, including corporate and government issues and bonds of varying maturities. If you only want exposure to Canada, it's a good fund to hold (I own it myself).

But Canada only represents a fraction of the world bond market. You may want to diversify by adding ETFs that give you some exposure to fixed income securities from the U.S. and overseas. Here are three you might consider.

iShares Core Total USD Bond Market ETF (IUSB). This invests in a portfolio of U.S. dollar-denominated bonds that can be both investment grade and high yield. It has done quite well in 2017 with a year-to-date gain of 3.56 per cent to Oct. 6. The expense ratio is only 0.06 per cent.

iShares Core International Aggregate Bond ETF (BATS: IAGG). The mandate here is to invest in a portfolio of investment-grade bonds that are not denominated in U.S. dollars. The main holdings are issues from Japan, France, Germany, Italy, and the U.K. The expense ratio is 0.09 per cent. Year-to-date return is 1.31 per cent.

iShares J.P. Morgan Emerging Markets Bond ETF (EEM). As the name suggests, it invests in debt from Emerging Markets countries but only in bonds denominated in U.S. dollars. It has been on a strong run this year with a gain to date of 8.8 per cent. The expense ratio is 0.40 per cent.

Any mix of these and XBB would provide a lot more diversity and profit potential for your portfolio. – G.P.

RESP dilemma

Q - I have $2,400 in a RESP in a BMO savings account. I could not transfer this to BMO Investorline since they don't accept the provincial grants I guess. So I need to invest in a BMO product, ETF, or mutual fund. My kids are nine and eleven. Do you have any BMO recommendations for RESPs with time horizon of say seven years? Bond ETFs like ZCS are down and stock ETFs like ZWH are up, and I don't know any good mutual funds. Any recommendations on BMO products? Thank you. – Jamshid S.

A – I can't understand why Investorline won't accept government grants. I think they are giving you the run-around because the account is so small. However, if you are stuck with the BMO account you might want to consider the BMO Target Education 2025 Portfolio. It is a balanced fund, currently about 57 per cent in stocks with the rest in fixed-income and cash. The fund will be rebalanced to reduce risk as it approaches its maturity date. It's not a cheap fund (MER 1.83 per cent) and the return is not spectacular (4.05 per cent over the year to Aug. 31, A units). But the risk factor is on the low side, which is important when you are saving for the kids' education. And the maturity date closely coincides with when you will need the money. – G.P.

Robotic ETFs

Q - I have a question regarding stocks such as BOTZ and ROBO. Both are U.S. stocks involved in Automation/Robots, etc. My thinking is that this area is something that has potential, with everything I have read about the number of jobs that may disappear in the near future. My question was whether you had any insight on this type of stock. - Gord Z.

A – ROBO, which is listed on Nasqaq, was the first ETF to specialize in robotics and automation companies. The portfolio holds 91 positions in such firms from around the world and is highly diversified – not a single stock exceeds 2 per cent of the total holdings.

Bellwether companies include Rockwell Automation, Hiwin Technologies Corp., and Fanuc Corp. A little over 44 per cent of the portfolio is North American based with about 34 per cent in Asia and 19 per cent in Europe. About three-quarters of the holdings are in small- and mid-cap companies, which by definition makes this a higher-risk investment.

This ETF has performed well so far in 2017 with a gain of 28.3 per cent to the end of August. It closed on Oct. 6 at $38.95 (U.S.), just below its all-time high. The management expense ratio is 0.95 per cent.

BOTZ is the symbol for Global X Robotics and Artificial Intelligence ETF, which also trades on Nasdaq. It is a smaller fund than ROBO, with a lower MER at 0.68 per cent. It was launched in September of 2016. The fund holds fewer stocks and makes bigger bets on individual holdings. For example, Keyence Corp. makes up 7.91 per cent of the portfolio, closely followed by Nividia Corp. (7.76 per cent). The fund's one-year gain to Sept. 30 was 43.13 per cent.

Either fund would be suitable for investors who want to take a long-term position to this exciting sector but don't want to zero in on individual companies. But keep in mind they are likely to be volatile. Both funds are too new to have any performance history in down markets. – G.P.

If you have a financial or investing question you'd like me to answer, send it to gpape@rogers.com and write Globe Question in the subject line. Note that I cannot guarantee a personal response but will publish the most interesting queries here.

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Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca. Follow Gordon Pape on Twitter at twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney

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