# Canadian REITs to hold long term, guidance welcome



## mrPPincer (Nov 21, 2011)

hi everyone, I'm planning to add a few CDN REITs to my otherwise index portfolio next week (folowed by some US ones through VNQ)

I have zero experience doing the research and your collective knowledge and experience will be invaluable to me, so thanks in advance for your input.

I understand that people are thinking there's a RE bubble in canada atm, and as well, that some think the US RE market may be close to bottom, that's why I'm going 50% US reits now, and will rebalance my reits percentage by adding to CDN reits later.

I'm thinking maybe northern properties riet and, obviously riocan because it holds the largest market share, but really have no foundation for those choices without furthur research.

I'm interested in your opinions on what 3 or 4 reits are good to buy for the long term right now and why.

Thanks again for any assistance.


----------



## larry81 (Nov 22, 2010)

Instead of individually selecting REIT, have you considered the possibility to invest in a basket of REIT through an ETF like ishare XRE ?

Pros
- Extra simple
- Instant diversification

Cons
- 0.55% MER


----------



## Cal (Jun 17, 2009)

Even if there is a residential RE bubble as you alluded to....the rent or cash flow of REI.un that you mentioned should not be affected, as they deal with commercial properties. I agree w larry, XRE would cover all of your basis. But as an FYI most REIT's don't have much to do w residential RE.


----------



## mrPPincer (Nov 21, 2011)

Thanks for the idea larry but the mer is not for me

yes thought of that, then I was origonally gonna buy all 19 of the BMO Equal Weight REITs Index ETF (ZRE) but then I thought it would take years to cover the cost of purchasing them vs the MER, and then there's the question of whether that much diversification is worth the initial purchase, so I was thinking of getting a few that would cover varying sections of the market.
(comparing to a price of about 0.55% MER it would take about 3 years or more for the cost of doing that at my purchase costs)

Now thinking of buying into just a few cdn etfs, but without too much overlap.


----------



## Jon_Snow (May 20, 2009)

XRE is one of the shining stars of my portfolio. Love it.


----------



## Argonaut (Dec 7, 2010)

Buy REI.UN and REF.UN. No MER. The two best. One with relatively high yield, the other with growing yield. Exposure to Canada and the US. Go go go.

The MER on XRE is completely outrageous. Then again, so is the 0.40% I'm paying on my corporate bond ETF.. but it's harder for the small guy to get corporate bond diversification so I'll grin and bear it.


----------



## mrPPincer (Nov 21, 2011)

Cal said:


> Even if there is a residential RE bubble as you alluded to....the rent or cash flow of REI.un that you mentioned should not be affected, as they deal with commercial properties. I agree w larry, XRE would cover all of your basis.


I was kinda thinking as much, about commercial properties vs residential, it is good to hear your thoughts on that, thanks so much!


----------



## mrPPincer (Nov 21, 2011)

Jon good to hear XRE is doing so well, but my strategy at this point is to just slash mers 

Argonaut thanks, I will definitely look at both REI.UN and REF.UN. 
I'm a small guy too but I'm avoiding bonds of any kind atm, my standin is HISAs.
High intersest savings acounts atm rival GICs, so no point locking in, at least for me.


----------



## Spidey (May 11, 2009)

I agree that if you have a decent size portfolio adding the individual REITs that make up the XRE ETF is the way to go. I also toss in a couple of other RE entities into my real estate holdings, namely BPO and FCR, that aren't in XRE as they are not classified as REITs. I would recommend going slowly. These things tend to go on sale about once a year.


----------



## mrPPincer (Nov 21, 2011)

Thanks Spidey, I will add BPO and FCR to my list to keep an eye on.
(btw I see that I own about $70 worth of BPO already when I look at the detailed holdings of VCE, and possibly a little more with TD cdn index-e)

My plan is to separate about $10,000 of my CDN holdings into REITs, so if I'm to keep costs below 0.55% I'll buy no more than 5 over the year.
I will try to take your advise and take my time.


----------



## PMREdmonton (Apr 6, 2009)

You could go the ETF way in which case I would suggest ZRE from BMO over XRE from ishares. The problem with XRE is that it only holds around 12 stocks and it cap weights them. So over half the weighting is to 3 holdings which isn't a lot of diversification. ZRE is equal weighted but holds the same issues - nevertheless it offers better overall diversification. Either way I think both charge way, way too much MER at 0.55% for this lack of diversification.

If you want to go to individual holdings try not to get too much overlap in the sectors and regions so you don't concentrate your risk too much. They all do slightly different things. Some of the possibilities include rental apartments, business office space, industrial space, medical diagnostics and labs, senior's housing, professional offices and retail. They all may fair differently in different environments but all are benefitting a great deal from the low interest rate environment we are in so make sure you don't pay too much for the assets (i.e. P/B) as the earnings will decrease as interest rates normalize.

I've gone the individual REIT route myself and I like:

TGA.UN - apartments
MRT.UN - diversified (retail, apartments and industrial)
AX.UN - industrial and retail
BOX.UN - business offices
BPO - business offices in US

If you buy them you'll probably want to do so in a tax-advantaged account like TFSA or RRSP so you don't have to worry about calculating ACB (average cost base) when you decide to sell to calculate capital gains (you have to subtract the return on capital (ROC) you get in your distributions over the years in the distributions which are part ROC and part income).


----------



## mrPPincer (Nov 21, 2011)

Thanks PMR, good advise.
I now think I'll pick 5 that don't overlap too much.
I'll have to learn the analysis tools I now have with TDW, so I should start asap


----------



## PMREdmonton (Apr 6, 2009)

Remember to focus on AFFO (adjusted funds from operations) and not PE when looking at the companies. The depreciation curves are too steep for these real estate properties and gives them artificially high PEs.

I'd also again recommend that you be careful about not paying up for earnings too much right now and focus a great deal on assets or P/B. Don't pay up too much for earnings right now and don't get too focused on yield alone. Management is extremely important in the assessment of a REIT. Also be careful that your REIT isn't too beholden to any one customer as the loss of that customer could be devastating. That's why scot's REIT trades at such a high yield with their dependence on KFC.


----------



## gibor365 (Apr 1, 2011)

PMREdmonton said:


> You could go the ETF way in which case I would suggest ZRE from BMO over XRE from ishares. The problem with XRE is that it only holds around 12 stocks and it cap weights them. So over half the weighting is to 3 holdings which isn't a lot of diversification. ZRE is equal weighted but holds the same issues - nevertheless it offers better overall diversification. Either way I think both charge way, way too much MER at 0.55% for this lack of diversification.


One of the first stocks I bought when started investing last year was PMZ.UN , was assuming that Target expansion in Canada will highly benefit it. But than I realized that in order to have 7-8 REITs I like and not to be overweighted in REIT , I need portfolio close to 1 mil... This is why I started to invest into to XRE and ZRE (about 1/3 REIT allocations in XRE and 2/3 in ZRE). I like ZRE more as it weighted and has exposure to much more good REITs, and I bought XRE as I want to have a little high exposure to 3 top REITs (core holdings of XRE).


----------



## Mall Guy (Sep 14, 2011)

Always stick with the quality names, and don't get caught up in chasing yield. Personally I like XRE over ZRE because of its concentrate in its top 5 holdings. However, I am only in individual names, based on the payout ratio (the lower the better), capital reinvestment, quality of the cash flow (ie FCR for Banks, Grocery, Drug Stores over SRQ for KFC, although they have added a number of SDM properties as of late) and quality of the assets, and the management teams. Denis Mitchell once said he would take quality assets over a dream management team any day.

May I also suggest that you let the RRSP season get behind us a little bit (moneys goes in and then takes a month or so to find a home). Yield hungry retail investors have pushed some names to 52 week highs (REI.UN $27.67). I dare say that's why Morguard Corp chose now to launch their apartment REIT (Rai Sahi knows how to make money . . . usually for himself . . . but is willing to take a few investors along for the ride). 

As for US names, there might be a contrarian play there, as many are still out of favor. Although, vacancy is reportedly found a bottom, pressure on rental rates have not. Be very choosy about sectors and geography, as America was not created equal. 

And look for names that have matched their lease term to their financing. Going with short term money can make AFFO look go, but what happens when the music stops (which it did not so long ago). The quality name also have lower debt levels (45% to 55%).


----------



## PMREdmonton (Apr 6, 2009)

I've never invested in a US REIT.

From what I understand, these should be held in taxable accounts due to withholding taxes - is that correct?

Of course, you can have a bit of both world's by investing in a Canadian REIT with properties in the US. I think BPO is one such example. I thought REI expanded there a bit, too.


----------



## mrPPincer (Nov 21, 2011)

Something I was wondering, a canadian exchange traded reit with a lot of US holdings, will it have any withholding tax?


----------



## mrPPincer (Nov 21, 2011)

(It is correct that US exchange traded dividend producers can be held in taxable accounts where you can write off the withholding tax against your taxes, but it's a nonrefundable.tax credit.
It won't have the withholding tax applied when held in RRSP or RIF, but if held in TFSA it is taxed but you don't get the non-refundable tax credit)
So RSP usually best, TFSA worst place.


----------



## PMREdmonton (Apr 6, 2009)

The issue is where the head office is listed and not where the stock is traded.

For example I have shares in a company known as MFC Industrial Ltd (MIL on the NYSE) that is not listed on the TSX and pays dividends in USD but is nevertheless headquartered in Canada and pays Cdn eligible dividends and there are no withholding tax issues in the non-registered account where I hold it.


----------



## mrPPincer (Nov 21, 2011)

Mall Guy thanks for the info.
(REI was gonna be one of my first purchases. I'll probably wait a bit on that one now)

As far as US exchange traded reits, I'll just buy VNQ in my registered account; with an MER of just 0.12 it will save me the hassle.
I've got enough head scratching before me with my choices the canadian market


----------



## PMREdmonton (Apr 6, 2009)

mrPPincer said:


> Mall Guy thanks for the info.
> (REI was gonna be one of my first purchases. I'll probably wait a bit on that one now)
> 
> As far as US exchange traded reits, I'll just buy VNQ in my registered account; with an MER of just 0.12 it will save me the hassle.
> I've got enough head scratching before me with my choices the canadian market


The only thing is how much of the distributions are eaten up from withholding taxes?


----------



## londoncalling (Sep 17, 2011)

Like pipelines, the Canadian REITs are overpriced IMO as investors are hunting for yield. I do like many of the reits available just not at these prices. I do believe REI is a must hold for anyone considering a reit just maybe wait for a pullback. In addition to REI I do like BPO, REF, and AX as well as NWC and CRR as regional plays. I have not looked at any of these stocks recently and am just going by my previous research and understanding. I still follow them from afar but am currently at a proper allocation for REITs so would either have to sell to buy or overweight my allocation. In all likelihood I would just add to REI. Everyone thinks there will be a pullback in RE. I do think that is a possibility but cannot say for sure. Regardless, there is no point in paying MER for a REIT etf as the drag is just too much for something that can be easily achieved on your own. Start with 3-5 of the biggest and best then add another 2-3 over time to diversify geographically or by asset holding of the REIT. If I could do it over again that is what I would do. Instead I paid an MER for years then tried to overdiversify my reits. I don't see an issue with VNQ as MER is quite a small price to pay for the saved research. As always with real estate the key metric, aside from AFFO, is location, location, location... 


Cheers!


----------



## mrPPincer (Nov 21, 2011)

VNQ is safe from w/h taxes* in a RRSP or RIF

I'm really liking BPO now that I see it's interlisted, and with it's HQ here. (a good candidate for TFSA gambits).

Still have not figured out how to see the AFFO using TDW. I thought their research tools were supposed to be top notch.
For some reason I'm reminded of those apes that discover the monolyth in 2001 a space odyssey

edit * I meant US withholding taxes due to our tax treaty with the US, not any taxes the fund loses from it's foreign non-US holdings (if any), those are unrecoverable.


----------



## Spudd (Oct 11, 2011)

Click on the Reports tab and look around in there. If there's a "morning action notes" report for the given stock, it will definitely contain the AFFO as well as more other numbers than you can shake a stick at.


----------



## Mall Guy (Sep 14, 2011)

oh, and don't forget about unit holder/management alignment, as well as internal vs ex-internal management. The recent Whiterock bonus to CEO on the merger with Dundee being the poster child . . . even Calloway had to learn that lesson.


----------



## CashMoney101 (Mar 6, 2012)

Lots of great advice here. I also did an overview of all the Canadian REITs that over DRIP plans in a blog post last month, and while it's not definitive it should get you started on your research. http://www.cashmoney101.ca/canadian-reit-stocks


----------



## mrPPincer (Nov 21, 2011)

Thanks again everyone, there is indeed a lot of good advise here and I will be revisiting this thread down the road when it comes time to readjust my RE holdings.

Just thought I'd give an update.
Three months ago on April 17th I bought 235 shares of Riocan (barely enough to drip 1 full share, 3 times so far) and sold the equvalent amount of canadian index on the same day.
Did the same thing on the US side in my TDW rsp, selling TDW index funds, phoning in to get accesss to the funds (had to because the mutual funds I sold don't get valuation till end of day), then bought shares of TD with a limit order on the TSE, and sold them with a limit order on the NYSE, at a high enough price to cover my trading costs and taking into account the currency difference. The dollar was at about par at that time.
With the US dollars I bought (among other things) enough VNQ to bring my REIT allocation to 10%.

Turns out that was a good day to sell index to buy reits, as the reits were up less than the indexes were that day.
My REITs have done compartively well in my portfolio, rising from 10% to 10.83% in the past 3 months (that number would even be a bit higher if I left out new money).
Just goes to show, even though reits may have been seen as overpriced at that point, they were not seen as overpriced vs the general market in the following months, and it turned out to be a good move at that point in time.

Not so as much with emerging markets, which have been down since I broke out 5% for some VWO (keeping allocation to this sector at 5% through a small monthly auomated purchase plus ocassional additional purchase of CIBC EM Index through PC Financial, which gives a small MER rebate, and gets me around the problem of transaction fees at a low cost), but that's a different story.


Oh yeah, forgot, the support staff at TDW was excellent, and the complex series of transactions described above went flawlessly in spite of my first time trying any of it, except that there was a power outage here right in the middle of everything that lasted until after the markets closed, so I had to complete some of it over the phone, and some the next day, but as it turned out the way the markets went the next day happened to be in my favour, just luck


----------



## killuminati (Mar 14, 2011)

I've been waiting for a pullback on REI and REF for a long time and all they do is keep hitting all time highs.

Maybe I'm better off getting some now and averaging down slowly as it drops. I'm in this for the really long hall at least 10 + years, since I'm only in my 20s.


----------



## rd_aaron (Jun 24, 2011)

killuminati said:


> I've been waiting for a pullback on REI and REF for a long time and all they do is keep hitting all time highs.
> 
> Maybe I'm better off getting some now and averaging down slowly as it drops. I'm in this for the really long hall at least 10 + years, since I'm only in my 20s.


I keep holding onto REF because it just keeps going. It's my best performer... up 25% over about a year. Got out of REI just a little too soon as it's jumped up about 5% over the last month.


----------



## CanadianCapitalist (Mar 31, 2009)

londoncalling said:


> Like pipelines, the Canadian REITs are overpriced IMO as investors are hunting for yield.


It is amazing to see how much REITs have bounced back from the crash of 2008-09. The REIT Index has returned 21%, 22% and 55% in the past three calendar years and is up double digits once again YTD. One has to really wonder how long this happy state of affairs will last.


----------



## HaroldCrump (Jun 10, 2009)

CanadianCapitalist said:


> It is amazing to see how much REITs have bounced back from the crash of 2008-09. The REIT Index has returned 21%, 22% and 55% in the past three calendar years and is up double digits once again YTD. One has to really wonder how long this happy state of affairs will last.


I suspect until the REIT yields get in line with mainstream yields like banks and pipelines.
Assuming, of course, there is no sudden RE crash and/or a crippling recession (which will affect commercial RE).


----------



## killuminati (Mar 14, 2011)

CanadianCapitalist said:


> It is amazing to see how much REITs have bounced back from the crash of 2008-09. The REIT Index has returned 21%, 22% and 55% in the past three calendar years and is up double digits once again YTD. One has to really wonder how long this happy state of affairs will last.


It will last right until I decide to buy. I held off almost a year because it was at 52 week highs and it just won't drop.


----------



## blin10 (Jun 27, 2011)

i bought rei.un early on around $26 thinking i'm overpaying big time for it and to average down around 22, but this thing been going steady straight up... I want to get more but most reits have gone up like crazy so I'll be patient


----------



## Financial Cents (Jul 22, 2010)

Not sure if folks got the answer to their withholding tax question:
http://www.myownadvisor.ca/dividend-investing/

"I keep U.S. dividend-paying stocks in my RRSP. Why?

U.S-dividend paying stocks do not recieve any favourable tax treatment from our government. So, by keeping U.S. stocks inside an RRSP I avoid paying withholding taxes.

• U.S. stocks held inside an RRSP or LIRA – no withholding taxes.
• U.S. stocks held inside an RESP or TFSA - pay 15% withholding taxes.
• U.S. stocks held in unregistered accounts - pay 15% withholding taxes + taxes at marginal tax rate.

Happy Investing!


----------



## PMREdmonton (Apr 6, 2009)

Financial Cents said:


> Not sure if folks got the answer to their withholding tax question:
> http://www.myownadvisor.ca/dividend-investing/
> 
> "I keep U.S. dividend-paying stocks in my RRSP. Why?
> ...


On your last point I do think you get a credit for the withhholding taxes paid in your unregistered accounts.

I try to hold US divvy stocks in my RRSP account. I try to hold British ADRs that pay dividends in my TFSA (theoretically). I try to hold Cdn. divvy stocks in my unregistered account to get the Canadian dividend tax credit.


----------



## Pluto (Sep 12, 2013)

*sad arilysf*

I have some units of XRE ( iShares Canadian capped RIETS). I bought them in fall of 2008 and winter 2009 and have a tidy paper capital gain. My plan was to gradually sell off the units in pieces and if they ever got near their previous high, around 17, sell them all. However, I was asleep at the switch and didn't sell last April. The reason I want to sell is to lock in the capital gain and put the money in something with less downside, maybe short bonds, then wait for the next market debacle to buy it back. 

Anyway, I'm wondering if I should sell them now, or see if they recover a bit. They recently dropped from nearly 18 to right now about 15. Interestingly they seem to be recovering a bit the last few days even though headlines state Fed desperate to start tapering. I suppose fears of tapering are already priced into the market. Any thoughts?


----------



## liquidfinance (Jan 28, 2011)

PMREdmonton said:


> On your last point I do think you get a credit for the withhholding taxes paid in your unregistered accounts.
> 
> I try to hold US divvy stocks in my RRSP account. I try to hold British ADRs that pay dividends in my TFSA (theoretically). I try to hold Cdn. divvy stocks in my unregistered account to get the Canadian dividend tax credit.



You can't claim a credit for US withholding tax inside a TFSA. 

You have to declare taxable income to get a credit and TFSA income is not reported to the CRA so impossible to credit against. 
However paying 15% is probably more cost effective for the majority than holding outside a TFSA where your marginal rate is likely to be over 30%


----------

