How do you handle your REITs in your account? Do you DRIP them or collect the divies and save the cash for later purchases? I understand the benefits of DRIP programs, but wonder if the thesis is a little different since REITS aren't really a buy and hold forever purchase.
Thanks for any input.
Max
Ideally you would hold your REIT in a TFSA, but if it must be in a non-registered account, I would suggest taking the distributions in cash. I am a huge fan of drips, I utilize them extensively, but if your REIT distributions include return of capital, it's a huge pain in the butt to keep track of them if you are going to drip.
I DRIP the REIT in TFSA, and cash the distributions in non-registered accounts. Mostly to reduce paperwork. I will be moving the REIT to TFSA as soon as possible.
Say what? As long as the REIT is run by good management - why wouldn't it be a buy and hold forever? The problem I can think of is that theoretically, where RoC is paid as part of the distribution so that the Adjusted Cost Base becomes zero - the RoC portion has to be reported on one's tax return each year, until a transaction makes the ACB positive again. Note that a DRIP pretty much ensures the ACB won't be negative.
It's not like a REIT such as say RioCan that leases shopping centre space has less of an asset each year, like some of the oil or gas royalty trusts from the past pulling resources out of the ground. Then too, with REIT RoC allows some expenses to be passed on as a capital gain, which is taxed at a better inclusion rate (plus is not considered income for OAS clawbacks).
http://www.jamiegolombek.com/article...article_id=816
As for DRIPs versus cash distributions - IMO it is more important to decide if investment is a good choice to automatically buy.
Most REITs include RoC as part of the cash distributions and require paperwork to adjust the ACB. A DRIP is going to add more transactions but it is relatively simple math so at the end of the day, as long as the bookkeeping system (ex. Excel spreadsheet or program) handles the RoC plus ACB calculations - there is not that much more work involved. So if one has to do bookkeeping anyway - why not DRIP if one likes the automatic investment?
To me, it is like complaining about having to get the lawnmower out, gas it up then start it to mow the back lawn. If one has to do this anyway to mow the front lawn, is that much more difficult to add some extra gas and keep going to mow the back lawn?
The one place I've run into an issue is when I tried to go back into the past to do the calculations. The royalty trust had been bought out so the RoC part per year was difficult information to find. Now that I'm doing the calculations yearly (plus making sure I have backups of the spreadsheet), it's not so bad.
... just my two cents ...
Cheers
Last edited by Eclectic12; 2012-09-10 at 08:40 AM.
Thanks for the responses.
REITs have a commitment to distribute as much free cash as possible, which diverts cash away from capital expenditures. Real estate is a hard asset that suffers from wear and tear and needs regular capital maintenance. Over time, the assets held in a REIT become deteriorated from lack of upkeep spending and "moves down the quality scale" (e.g., from Class A to B) and thus rents shift downward in accordance. The rents are your income distribution - in order to maintain the distribution yield, the value of the assets have to go down (i.e., capital depreciation).
I guess long-term holds shouldn't be a problem as long as you go with ones that have higher quality assets and/or long-term leases (e.g., H&R or Dundee).
One of the problems I am having is keeping track of my transactions. I'm using TDWaterhouse. I'm not very proficient with excel. Can you recommend a program or spreadsheet to help me track these unconventional transactions?
let's take riocan that leases shopping center space, what wear and tear are you talking about? they lease space and stores on that territory do their own upkeep and maintenance
The maintenance costs referenced above are already accounted for in the AFFO.
So the distributions are set after accounting for all that.
Also, REITs almost always issue new units to pay for new acquisitions instead of using retained earnings (since there are none).
As long as the new acquisition is accretive, it's fine.
You are welcome for the responses ... or at least the ones I wrote ...Originally Posted by maxandrelax
I'd hate to speak for others!
If the rental assets are not being maintained - that's bad management. There's nothing about a REIT that requires management to skip maintaining or improving the property. The distributions are *after* such maintenance is planned and paid for.
Deloitte explicitly says:
http://howtoinvestonline.blogspot.ca...good-from.htmlAlthough a REIT claims a deduction for CCA, this is in no way representative of the actual deterioration of its assets; it is simply the prescribed rate at which the taxing authorities will allow real estate owners to amortize their acquisition cost.
As using excel to track transactions - can you explain what is the difficult part?
It's all simple math when you understand the transactions (i.e. addition, subtraction and possibly multiplication). The RoC reduces the cost of the investment and a DRIP increases the cost as more units are being purchased, albeit without a commission.
No DRIP RoC
Wait until the RoC component has been announced on the REIT's website. If it listed as a percentage such as RioCan list the 2011 RoC as 62.45% of the $1.38 per unit distribution. This is .06245 x $1.38 = $0.8618 for the RoC per unit. Say you have a 2010 Adjusted Cost Base per unit (ACB) of $10, then $10 - $0.8618 = $9.1382, which is the 2011 ACB per unit.
If you are tracking the total ACB (i.e. 100 units @ $10 ACB per unit = $1000 total aCB) - then it is just a matter of multiplying the per unit RoC by the number of units you have and then subtracting the total RoC from the total ACB. For example, total 2010 ACB of $1000, total 2011 RoC is 100 units x $0.8618 = $86.18. To calculate the adjusted total 2011 ACB, use total 2010 ACB - 2011 total RoC (i.e. $1000 - $86.18) which is $913.82
DRIP
The only difference with the DRIP, is that you have to add a buy transaction for each DRIP, using the purchase prices from your statements. For a monthly distribution, that is twelve buy transactions with no commission. This will increase the ACB as more units are being purchased. At the end of the year when the RoC information is published, do the RoC calculation to reduce the ACB and it's on to the next year.
Cheers
Last edited by Eclectic12; 2012-09-15 at 08:20 PM.
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