# REITS for rising rates



## dime (Jun 20, 2013)

Those of you who invest in REITS, which Canadian reits do you think will perform the best in the future when interest rates rise? I read that the ones with growth in cash flow will do best. Any suggestions?

Also whats the best source of info online for Canadian Reits? I get the REIT newsletter from Canaccord, which is has detailed info.


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## tygrus (Mar 13, 2012)

Here is the myth about REITs that they are sensitive to mortgage rates. REITs are business loans, not residential mortgages. The govt is careful not to raise rates on businesses when they try to raise rates on residential lending. 

Besides, what I have heard is that many REITs have taken advantage of low rates and locked in for longer terms.


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## Eder (Feb 16, 2011)

All REITS will suffer if there is an interest rates increase, as will utilities. It doesn't matter the metrics of the particular equity in the sector, it's just that selling pressure will occur.


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## ashin1 (Mar 22, 2014)

well i really like riocan and h&r reit.


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## Just a Guy (Mar 27, 2012)

tygrus said:


> Here is the myth about REITs that they are sensitive to mortgage rates. REITs are business loans, not residential mortgages.
> 
> Besides, what I have heard is that many REITs have taken advantage of low rates and locked in for longer terms.


You're technically correct here...except the fact that business loans are higher than residential to begin with. They are also subject to increases upon renewal. Business mortgages tend to be 1-1.5% higher than residential rates.

Even if they are locked in, renewals do come due eventually...usually every 5 years, but it can go up to 10...most fall in that range.


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## james4beach (Nov 15, 2012)

tygrus said:


> The govt is careful not to raise rates on businesses when they try to raise rates on residential lending.


Sorry but the government doesn't have that power; the bond market does.

Yes I realize the govt tunes some parameters but it's important to remember that the bond market ultimately controls this. Interest rates can rise dramatically even if government does nothing to cause it


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## Pluto (Sep 12, 2013)

dime said:


> Those of you who invest in REITS, which Canadian reits do you think will perform the best in the future when interest rates rise? I read that the ones with growth in cash flow will do best. Any suggestions?
> 
> Also whats the best source of info online for Canadian Reits? I get the REIT newsletter from Canaccord, which is has detailed info.


Riet unit prices don't withstand a rising rate trend. the unit prices typically go down, in order to keep the yield competitive. Aren't these basically a landlord - tenant situation? 
Essentially, to increase cash flow, they have to raise rents. Typically rents don't go up very fast. These are not growth companies. In general you will see downward pressure on REIT unit prices until the next cycle.


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## Synergy (Mar 18, 2013)

dime said:


> Those of you who invest in REITS, which Canadian reits do you think will perform the best in the future when interest rates rise? I read that the ones with growth in cash flow will do best. Any suggestions?.


Good question. I've heard people claim residential and health care REITs may do better than others that aren't able to regularly increase their rates along with rising interest rates. If rates rise slow enough and the economy picks up, REITs in general may do okay. I've reduced my exposure overall but still keep a healthy allocation (retail, office, industrial, apartment, & healthcare).


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## Oldroe (Sep 18, 2009)

I live for the day Rio can gets beat down again.

Buying it for $10 was a gift, very scary gift. Some were in the mid teens please.


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## gt_23 (Jan 18, 2014)

tygrus said:


> Here is the myth about REITs that they are sensitive to mortgage rates. REITs are business loans, not residential mortgages. The govt is careful not to raise rates on businesses when they try to raise rates on residential lending.
> 
> Besides, what I have heard is that many REITs have taken advantage of low rates and locked in for longer terms.


Perhaps in theory, but in reality (the world that I live in) this is not true. Just look at the charts to see how REITs track interest rate moves.


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## gt_23 (Jan 18, 2014)

dime said:


> Those of you who invest in REITS, which Canadian reits do you think will perform the best in the future when interest rates rise? I read that the ones with growth in cash flow will do best. Any suggestions?
> 
> Also whats the best source of info online for Canadian Reits? I get the REIT newsletter from Canaccord, which is has detailed info.


If you're intent on buying REITs near their peak valuations (and all-time low for interest rates), their is really no further upside for the sector, however, you can minimize your capital loses by focusing on asset classes:

Residential>health care>office>diversified>commercial>indstrial


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## dime (Jun 20, 2013)

gt_23 said:


> If you're intent on buying REITs near their peak valuations (and all-time low for interest rates), their is really no further upside for the sector, however, you can minimize your capital loses by focusing on asset classes:
> 
> Residential>health care>office>diversified>commercial>indstrial


I agree with you about industrial REITs. Bought some shares of Pure Industrial last week. TD Waterhouse wrote in a recent report:
"Industrial-focused REITS have the greatest potential to benefit from cap rate compression and market rent growth. These REITS have lagged compared to other property sectors and are well positioned to benefit from a pick-up in the economy, as well as a a weaker Canadian dollar, in our view."


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## gibor365 (Apr 1, 2011)

dime said:


> I agree with you about industrial REITs. Bought some shares of Pure Industrial last week. TD Waterhouse wrote in a recent report:
> "Industrial-focused REITS have the greatest potential to benefit from cap rate compression and market rent growth. These REITS have lagged compared to other property sectors and are well positioned to benefit from a pick-up in the economy, as well as a a weaker Canadian dollar, in our view."


Maybe AAR.UN is a not bad choice.... I like that they didn't cut dividends during last recession even though price went down to $1.30. However AFFO payout looks a little high at 90%.
http://www.reuters.com/article/2014/05/14/piret-results-idUSnPn3dYltH+89+PRN20140514


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## gt_23 (Jan 18, 2014)

gibor said:


> Maybe AAR.UN is a not bad choice.... I like that they didn't cut dividends during last recession even though price went down to $1.30. However AFFO payout looks a little high at 90%.
> http://www.reuters.com/article/2014/05/14/piret-results-idUSnPn3dYltH+89+PRN20140514


I like DIR for inidustrial right now and so does the market. The market doesn't seem to like AAR to much, although I have heard that it is an attractive takeover target due to its size (I own AAR and DIR, but more DIR).


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## PuckiTwo (Oct 26, 2011)

gt_23 said:


> I like DIR for inidustrial right


I couldn't find DIR. Do you mean "Dundee International Reit" which changed its name to "Dream Global Reit" (DRG.Un)?


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## gibor365 (Apr 1, 2011)

PuckiTwo said:


> I couldn't find DIR. Do you mean "Dundee International Reit" which changed its name to "Dream Global Reit" (DRG.Un)?



He is talking about DIR.UN


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## PuckiTwo (Oct 26, 2011)

Thks Gibor, I will look into this.


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## HaroldCrump (Jun 10, 2009)

DIR is ex Dundee Industrial REIT, spun off from the parent Dundee REIT.
Now they are all called Dream...


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## gibor365 (Apr 1, 2011)

HaroldCrump said:


> DIR is ex Dundee Industrial REIT, spun off from the parent Dundee REIT.
> Now they are all called Dream...


Yeap, I work in such building  there is board in lobby that they changed name 
Dundee has generally too many stocks 
btw, what happened to DRG.UN today? Just got alert that they down 4+%


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## llagebs (Feb 24, 2014)

gibor said:


> btw, what happened to DRG.UN today? Just got alert that they down 4+%


No idea. Dream Office is also down 2% for no apparent reason. Can this kind of price movement be caused by a big institutional sell order?


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## gt_23 (Jan 18, 2014)

gibor said:


> Yeap, I work in such building  there is board in lobby that they changed name
> Dundee has generally too many stocks
> btw, what happened to DRG.UN today? Just got alert that they down 4+%


It is selling off in some pretty big (above average for sure) blocks. Not sure why, but may have something to do with eastern Europe situation.

DRG is inherently quite risky with no asset or geographic diversification. They should not be allowed to call it "global."


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## HaroldCrump (Jun 10, 2009)

gibor said:


> btw, what happened to DRG.UN today? Just got alert that they down 4+%





llagebs said:


> No idea. Dream Office is also down 2% for no apparent reason. Can this kind of price movement be caused by a big institutional sell order?





gt_23 said:


> It is selling off in some pretty big (above average for sure) blocks. Not sure why, but may have something to do with eastern Europe situation.


No, it is a simultaneous secondary issue by both companies - parent D.UN as well as DIR.UN.
In the latter case, it is at a substantial discount from recent trading range.


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## gt_23 (Jan 18, 2014)

5 yr Canadas are up from 2% range this week. REITs are down 2%...still don't think they are sensitive to rate increases?

You just lost a quarter's worth of dividends in a couple of days....this illustrates why chasing the yields is not worth the risk.


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## tygrus (Mar 13, 2012)

gt_23 said:


> You just lost a quarter's worth of dividends in a couple of days....this illustrates why chasing the yields is not worth the risk.


Well considering I sold last week, I guess I dodged a bullet


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## Synergy (Mar 18, 2013)

gt_23 said:


> 5 yr Canadas are up from 2% range this week. REITs are down 2%...still don't think they are sensitive to rate increases?
> 
> You just lost a quarter's worth of dividends in a couple of days....this illustrates why chasing the yields is not worth the risk.


1+, I was about to post a similar comment in another thread.


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## dime (Jun 20, 2013)

The broader market is selling as well (finally, as its well over due). Every quality asset has a fair price point where an investor would want to own it. The challenge is to determine what price is 'fair' and also might occur in the market over the next 12 months. Also which REITs have potential to grow the AFFO over the next few years to keep pace with rising rates. Maybe we will have some good buying opportunies ahead with the selling action?


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## gt_23 (Jan 18, 2014)

Reviving this topic again!

RTRE is down 5% over 1 month and 5 year Canadas up from 2.05% to 2.25% What's going to happen if rates actually move?

Short trade brewing?


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## AltaRed (Jun 8, 2009)

Don't know where you are getting your 5 yr GOC Bond rate from. It was 1.69% close on Sept 15, up from just under about 1.5% a month ago.

Added: REITs, utilities and preferreds will all fall if interest rates rise significantly and hold. They did last year when GOC5 went to circa 2.1%. I'd like to see a GOC5 rate of 3% eventually.


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## Synergy (Mar 18, 2013)

I've been trimming my REIT holdings and hope to trim some more on any further strength. Let's see how tomorrow plays out - Feds.


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## dime (Jun 20, 2013)

Grabbed some D.un today. I can't resist that yield at 8%.

Also for a while now TD rates Dream Office an "Action List Buy" and says the current price is "unjustifiably inexpensive" based on "an outlook on occupancy and rental rates that is far too pessimistic" resulting in a currently depressed unit valuation trading at 15% below NAV.


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## the_apprentice (Jan 31, 2013)

dime said:


> Grabbed some D.un today. I can't resist that yield at 8%.
> 
> Also for a while now TD rates Dream Office an "Action List Buy" and says the current price is "unjustifiably inexpensive" based on "an outlook on occupancy and rental rates that is far too pessimistic" resulting in a currently depressed unit valuation trading at 15% below NAV.


Good buy. Looking to do the same.


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## gt_23 (Jan 18, 2014)

AltaRed said:


> Don't know where you are getting your 5 yr GOC Bond rate from. It was 1.69% close on Sept 15, up from just under about 1.5% a month ago.
> 
> Added: REITs, utilities and preferreds will all fall if interest rates rise significantly and hold. They did last year when GOC5 went to circa 2.1%. I'd like to see a GOC5 rate of 3% eventually.


Yes my bad, should be 10 yr canadas


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## gt_23 (Jan 18, 2014)

dime said:


> Grabbed some D.un today. I can't resist that yield at 8%.
> 
> Also for a while now TD rates Dream Office an "Action List Buy" and says the current price is "unjustifiably inexpensive" based on "an outlook on occupancy and rental rates that is far too pessimistic" resulting in a currently depressed unit valuation trading at 15% below NAV.


Wow...you justify a buy with sell-side research 

Good luck with the longs, but there is very little upside and lots of downside....easy to resist the yield.

FYI...your argument of REITs as cheap based on NAV was the same one that was made months ago before this topic was revived. In the interim, REIT investors have lost >5% only slightly offset with <2% of taxable dividends. They weren't worth the risk then, and still aren't now.


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## KaeJS (Sep 28, 2010)

Oldroe said:


> I live for the day Rio can gets beat down again.
> 
> Buying it for $10 was a gift, very scary gift.


You can't feel the jealousy I am feeling and I don't think the text I can provide to you over the internet is going to convey even a miniscule portion of that emotion.

Good purchase.


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## dime (Jun 20, 2013)

gt_23 said:


> Wow...you justify a buy with sell-side research
> 
> Good luck with the longs, but there is very little upside and lots of downside....easy to resist the yield.


Don't quite follow the "sell-side" research comment. You're saying TD's analysis isn't correct?

What do you figure the downside is? 

Also, how many years do you figure it would take to break even on the capital if REITS do come down to your estimated level. Lets say it takes me a few years for my initial capital to be recovered, I'm getting paid to wait... far better than any GIC yield. I figure a 8% with a 50% return of capital seems pretty decent every year. 

Thanks


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## Westerncanada (Nov 11, 2013)

Also interested in the comment above? 

D.UN has been paying me all year... and they may get hammered in a correction but like most real estate will be coming around?


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## gt_23 (Jan 18, 2014)

dime said:


> Don't quite follow the "sell-side" research comment. You're saying TD's analysis isn't correct?


There's far too much to comment on this forum, however, I would recommend Michael Lewis as a good easy place to start if your interested in learning more. I work on the sell-side of a bank-owned brokerage and don't use our firms research in my investment decision-making. Buy-side or independent research is the only way to go, but the catch is you usually have to pay for it.

I'm not saying it isn't correct, but forecasting stock prices and financial modelling is discretionary, and TDW will use TDW's discretion in TDW's best interest, which is to stimulate trading activity and keep their corporate clients happy.



dime said:


> Also, how many years do you figure it would take to break even on the capital if REITS do come down to your estimated level. Lets say it takes me a few years for my initial capital to be recovered, I'm getting paid to wait... far better than any GIC yield. I figure a 8% with a 50% return of capital seems pretty decent every year.
> Thanks


I think you should try thinking more like a portfolio manager. Any period of time where your P/L is 0 (i.e. your CLs are being offset by high dividend flow) is lost opportunity that must be made up in the future just to bring you back to the index's gain. Furthermore, the longer you are in the trade to recover your capital, which is likely when we're at an interest rate bottom, the highher the lost opportunity, and the greater the risk of a negative event.


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## Synergy (Mar 18, 2013)

Rates lower for longer, let the party continue!


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## KaeJS (Sep 28, 2010)

Synergy said:


> Rates lower for longer, let the party continue!


What a big surprise... :rolleyes2:


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## dime (Jun 20, 2013)

> Quote Originally Posted by Synergy View Post
> Rates lower for longer, let the party continue!





KaeJS said:


> What a big surprise... :rolleyes2:


So what specifically is a "considerable time" according to Yellen? 6 months? 6 years? They just love to keep things vague so they can dither and waffle their way along without committing to anything firm.


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## Synergy (Mar 18, 2013)

dime said:


> So what specifically is a "considerable time" according to Yellen? 6 months? 6 years? They just love to keep things vague so they can dither and waffle their way along without committing to anything firm.


Your guess is as good as mine. Consensus seems early 2015 (1st hike). If and when things start to tighten (short term rates), things may tighten quicker than expected (by the end of 2016). Coin toss IMO but I will be adjusting my portfolio accordingly.

http://www.bnn.ca/News/2014/9/17/Fe...-rates-near-zero-for-considerable-period.aspx


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## AltaRed (Jun 8, 2009)

Except short term rate changes (or not) only indirectly influence longer term rates. Longer term rates are what the market thinks, not what a central banker wants.


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## Woz (Sep 5, 2013)

Based on the dot plots they released, a “considerable time” would seem to be 2015. 

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20140917.pdf (page 3)

If they do actually plan to increase rates by more than 0.75% by the end of 2015, as the majority of FOMC participants indicated, then they’ll need to make the first rate hike in June at the latest.

Of course they could always waffle .


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## My Own Advisor (Sep 24, 2012)

These low rates are killing long-term savers, little incentive to save.


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## Asterix (Jul 19, 2012)

I'm confused with the tax implications of holding a US REIT. For instance, what were to happen if I were to hold SPG in my RRSP account? It is my understanding that if US securities are held in an RRSP account, the US Withholding Taxes on dividends are waived due to a tax treaty between the two countries. Since SPG is a REIT, are tax implications more complicated? I have read from different sources that REITs are not covered under the tax treaty, but I could not get a definitive answer. In other words, is my RRSP the best place to hold SPG, and if so, will I be liable to a US Withholding Tax on the dividends? Is there also a tax on capital gains if held within my RRSP? 

Also, is now a bad time to buy REITs due to the imminent rate increase?

Thanks!


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## gardner (Feb 13, 2014)

This is the best concise explanation I have found about foreign tax witholding:
http://canadiancouchpotato.com/2012/09/17/foreign-withholding-tax-explained/

Imminent rate increases have been imminent for five years. I expect their immanency to continue on for a while yet. Most of the forces in control of interest rates want them to be low.


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## Asterix (Jul 19, 2012)

gardner said:


> This is the best concise explanation I have found about foreign tax witholding:
> http://canadiancouchpotato.com/2012/09/17/foreign-withholding-tax-explained/


Thanks gardner, but unless I'm missing something, this article has no mention of holing individual US REITs?


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