Canadian REITS: Yours to Discover
Last week I covered 3 investment ideas for 2011which included REITs (Real Estate Investment Trusts, pronounced “reets”) as a sector that could witness further gains as yield hungry investors look for a place to park their money.
What is a REIT?
A REIT is a company that owns a portfolio of real estate assets. It buys, develops, manages and sells real estate properties. Investing in REITs is your hassle-free way of buying any form of commercial real estate from shopping malls to hotels and apartments.
Why invest in REITs?
REITs will not make you a millionaire, but they will pay you consistent dividends on a monthly basis. You will receive your proportional share of profits as the properties generate cash flow, and the REIT’s value may appreciate over time as cash flow increases and as additional properties are added to the portfolio. Obviously, you are also buying into a business so a proportional share of losses is also a possibility. Think of the dividends as your share of rent from a set of properties you partially own without the business side of managing them. The major advantage of buying shares in a publically traded REIT over directly investing in real estate comes down to liquidity: you can sell your shares anytime just like any other stock.
In 2006, Jim Flaherty crashed the party for Income Trusts under the “corporate tax avoidance” banner. REITs were spared if they met the requirement of maintaining 90% of their revenue (defined as gross revenues plus capital gains) from their properties. REITs are required to pay 90% of their taxable income in dividends and they are RRSP and RRIF eligible investments.
If you’re looking for diversification, REITs would make an excellent asset class to add to your portfolio. I thought I would share with you a REIT list as a bridgehead into this sector to start your due diligence (closing prices of Dec 20, 2010):
Retail
| Company | Ticker | Price | Market Cap | Dividend Yield |
| RioCan REIT | TSE:REI.UN | $21.55 | $5.5B | 6.40% |
| Calloway REIT | TSE:CWT.UN | $23.37 | $2.7B | 6.62% |
| First Capital Realty (taxable corporation) | TSE:FCR | $15.31 | $2.4B | 5.23% |
| Primaris Retail REIT | TSE:PMZ.UN | $19.15 | $1.3B | 6.37% |
| Crombie REIT | TSE:CRR.UN | $12.30 | $0.43B | 7.24% |
| Retrocom Mid-Market REIT | TSE:RMM.UN | $5.21 | $0.096B | 8.64% |
| Scott’s REIT | TSE:SRQ.UN | $7.79 | $0.07B | 10.89% |
Diversified Office/Retail/Industrial
| Company | Ticker | Price | Market Cap | Dividend Yield |
| H&R REIT | TSE:HR.UN | $19.19 | $2.8B | 4.69% |
| CREIT | TSE:REF.UN | $31.22 | $2.1B | 4.52% |
| Dundee REIT | TSE:D.UN | $29.72 | $1.4B | 7.39% |
| Cominar REIT | TSE:CUF.UN | $20.93 | $1.3B | 6.88% |
| Allied Properties REIT | TSE:AP.UN | $21.57 | $0.90B | 6.12% |
| Artis REIT | TSE:AX.UN | $13.39 | $0.89B | 8.07% |
| Morguard REIT | TSE:MRT.UN | $14.61 | $0.83B | 6.16% |
| Brookfield Office Properties Canada | TSE:BOX.UN | $21.80 | $0.44B | 4.95% |
| Whiterock REIT | TSE:WRK.UN | $20.16 | $0.34B | 8.35% |
Residential
| Company | Ticker | Price | Market Cap | Dividend Yield |
| Boardwalk REIT | TSE:BEI.UN | $40.28 | $1.93B | 5.71% |
| CAP REIT | TSE:CAR.UN | $17.24 | $1.31B | 6.26% |
| Northern Property REIT | TSE:NPR.UN | $28.01 | $0.71B | 5.46% |
| Killam Properties (taxable corp) | TSE:KMP | $10.41 | $0.46B | 5.38% |
| TransGlobe Apartment REIT | TSE:TGA.UN | $10.40 | $0.25B | 7.2% |
Retirement/Nursing Homes/Hotels
| Company | Ticker | Price | Market Cap | Dividend Yield |
| Extendicare REIT | TSE:EXE.UN | $8.97 | $0.71B | 9.36% |
| Chartwell Seniors Housing | TSE:CSH.UN | $8.13 | $1.16B | 6.64% |
| Innvest REIT | TSE:INN.UN | $6.5 | $0.58B | 7.7% |
Picking your REIT
If you’re considering investing in REITs, I will provide a few guidelines that you can start with for each of the companies mentioned above.
Start by identifying your sector of interest, it’s always better to pick a company with a diversified property base in different geographic locations because it provides a reliable income stream. Study the management team carefully; a strong team makes a lot of difference. How much experience do they have and how long has the company been around?
Choose those that have quality properties, how many major retailers can you count in their tenant base? Are rents below market level? If yes, these properties have an upside potential as rents can be increased. For those with a sizable percentage of Office or Industrial properties, how does the economy look? What’s the vacancy rate and how is it changing from quarter to quarter?
Among other variables to watch: make sure distributions are lower than cash coming in. How are they financing their investments? What is the cap rate of their latest acquisition? The capitalization rate = net operating income/purchase price which is equivalent to the yield on the property. The cap rate grows with time as the mortgage is paid. A newly acquired property’s cap rate that is lower than the distribution results in yield dilution. For example buying a property with a cap rate of 7% when your yield is 10% might not be the best idea. Obviously, in some cases management might see potential beyond the cap rate.
Finally, keep in mind that REIT shares are affected by the general sentiment prevailing in the stock market no matter how good they are. Don’t forget 2008-2009.
Final thoughts
With interest rates looking subdued in 2011, investors will be looking beyond bonds and high savings account for income producing investments such as REITs. If you don’t have the time or interest in researching and picking individual REITs you can still get all the exposure you want by buying an ETF such as iShares S&P TSX Capped REIT Index Fund (TSE:XRE) which currently yields about 5.70%.
The list provided above is by no means complete; please feel free to add your picks or suggesting more guidelines by leaving a comment.