# Canadian Real Estate Investment Trust (REF.UN) vs ZRE



## Franko (Mar 31, 2012)

Hi all,

I'm looking into adding a bit of REIT diversity to my long-term indexing portfolio. I've been researching options and came up with ZRE as the obvious ETF choice, if I were to go that route. I also liked REF.UN as they have a great history of dividend increases and consistency. I'm fairly new to the REIT industry, so wanted to ask for opinions/thoughts from the more experienced REIT investors out there. Thoughts on the two options? Which would you go with?

Cheers,

Franko


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## AltaRed (Jun 8, 2009)

It depends. ZRE gives you diversity amongst a range of several REITs. REF.UN is a single REIT, albeit it is diversified into office, retail. industrial and perhaps multi-family residential as well. REF.UN is a conservative steady bulwark in the industry and rarely surprises one way or the other. Steady as a rock...as the saying goes.


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## Franko (Mar 31, 2012)

AltaRed said:


> It depends. ZRE gives you diversity amongst a range of several REITs. REF.UN is a single REIT, albeit it is diversified into office, retail. industrial and perhaps multi-family residential as well. REF.UN is a conservative steady bulwark in the industry and rarely surprises one way or the other. Steady as a rock...as the saying goes.


I see, thanks for the insights. So it sounds like REF.UN is a "blue-chip"-type REIT holding. Steady as you said, but at the cost of that steadiness and promise already being priced in.


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## james4beach (Nov 15, 2012)

REF.UN advantages: has outperformed for a long time, and if the future continues similarly to the past, it may produce superior returns to an index like ZRE or XRE

ZRE advantages: diversified among many companies, so you're not exposed to a single company's risk. This insulates you from single company dangers such as mismanagement and corporate fraud.

By the way, you'll probably want to hold REITs inside an RRSP or TFSA because they report a variety of different kinds of distributions that can be a real pain to track.



Franko said:


> I'm looking into adding a bit of REIT diversity to my long-term indexing portfolio.


I'm not sure this helps your diversification. I see it the opposite way: for someone who already invests in the TSX, adding REITs further increases your exposure to finance/credit/real estate... these are strongly linked sectors.

REITs are directly exposed to real estate in a leveraged way that amplifies both positive and negative performance. If you invest in Canadian banks (as all TSX investors do), you're getting real estate exposure through that because real estate and credit go hand-in-hand.

As an exercise, you might want to review all of your investments, all ETFs and mutual funds, and calculate what % of your equity is exposed to the finance/real estate sector. If that number is already high, like the *37% in the TSX Composite*, pushing it higher is _not_ diversification.


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## AltaRed (Jun 8, 2009)

I am not convinced of a blanket statement that REITs necessarily increase exposure to finance/real estate/credit. While it is true that a REIT carries significant debt via mortgages, the amount of leverage varies tremendously amongst the REITs and the type of REITs.

I am a firm believer that the residential REITs like BEI.UN, CAR.UN, CSH.UN are pretty independent of the TSX finance sector simply because their balance sheets are in good shape, their payout ratios are manageable AND their income base is residential rental. Everyone must live somewhere. Then there are conservative REITs like REF.UN and while not a REIT, a corporation like FCR that issue eligible dividend income.


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## james4beach (Nov 15, 2012)

But the asset side of their balance sheet is directly exposed to property values: if nation-wide real estate falls 20%, the asset side of their balance sheets fall 20%. Simultaneously, rental incomes would drop (especially in corporate). Is that not the case?


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## AltaRed (Jun 8, 2009)

james4beach said:


> But the asset side of their balance sheet is directly exposed to property values: if nation-wide real estate falls 20%, the asset side of their balance sheets fall 20%. Simultaneously, rental incomes would drop (especially in corporate). Is that not the case?


NAV writedowns really do not affect AFO or AFFO. That is immaterial to already depreciated (on the books) assets. As long as a REIT's balance sheet is solid, 20% asset writedowns are not all that relevant. Hence the adage - avoid highly leveraged REITs. 

As I said earlier, there is little liklihood of a revenue decrease in residential/retirement REITs. Now if one is focused on office REITs, or hospitality REITs, good luck with that. They are very cyclical. The simple solution is to stay away from cyclical REITs or at least pick a broad based REIT like REF.UN. As I said earlier... it depends... don't brush all REITs with the same brush. They are as different as banks are to insurance as base metals are to precious metals or energy.

Disclosure: I own REF.UN, REI.UN, AAR.UN, BEI.UN and CAR.UN. I missed a pricing opportunity on CSH.UN a year ago but it is on my watch list should it dip to the $12 range. Also note: REI.UN is known as a retail REIT but it is slowly re-inventing itself by re-developing older strip malls into multi-purpose residential/retail/commercial offerings. They have a tremendous, well located land base from which to tear down and rise again.


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## Franko (Mar 31, 2012)

AltaRed said:


> As I said earlier, there is little liklihood of a revenue decrease in residential/retirement REITs. Now if one is focused on office REITs, or hospitality REITs, good luck with that. They are very cyclical. The simple solution is to stay away from cyclical REITs or at least pick a broad based REIT like REF.UN.


When you say "broad based", do you mean that any hit to commercial real estate will be blunted for REF.UN because it invests across various commercial subsectors? It seems to me that REF.UN would still get hit harder by economic impacts (rate hikes/real estate crashes) than, say, a mixed residential/commercial pick like ZRE (as AltaRed mentioned, everyone has to live somewhere). Then again, I'm pretty new to REITs, so maybe my understanding is off.


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## AltaRed (Jun 8, 2009)

I am simply suggesting that REF.UN is a mix of retail, office and industrial and so it is not impacted as much when one of those sectors hits a rough spot. One might argue that a significant economic downturn might hurt all those sectors and that is no doubt true in a prolonged slump, but unless tenants go bankrupt, they will continue to pay their lease rents until contract term is up. Obviously they are not as bullet proof as residential rentals though. One has to do their due diligence to see where they want to be in this space, and everyone has their preferences.

Some like the REITs that hold the property for WalMart, or Empire, or CTire and especially the supermarket chains (everyone has to eat). That is all and good but I don't like a REIT that is beholden to its primary tenant, especially when that tenant holds a significant interest in its own REIT. Seems like if push came to shove at the parent level, the parent would squeeze the REIT to keep its own business in shape. It's a conflict of interest in my view and I won't touch them. YMMV.

Added: The real point of my discussion is that not all REITs are alike. They are often as different to each other as other sectors are in the economy. I didn't mean to 'promote' any particular REIT.


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## Franko (Mar 31, 2012)

Thanks again for the information, AR and James. If I were to pick REF.UN as my choice for commercial REIT investment, what would you suggest for a "bulwark of the industry" REIT that invests in residential properties, one which I could hold to act as a foil to REF.UN? I'm debating holding a few individual REITs to avoid paying ZRE's management fee.


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## gardner (Feb 13, 2014)

There was a longish thread last spring about REIT ETFs and a roll-your-own approach:
http://canadianmoneyforum.com/showthread.php/44801-Making-own-REIT-etf

The gist was, since the Canadian REIT landscape is rather small, the index funds don't add a lot of value. Holding 4 or 5 REITS can give you almost as much diversification as the fund, with no management expense.


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