# Caution about REITs



## Berubeland (Sep 6, 2009)

For those of you that are up on REIT's and down on real property, you might want to consider whether you like the current fundamental valuations of the RE market in it's entirety. 

The entire sector may suffer a correction in the near term and this will affect the value of your REITs as well. The value of the underlying assets may well come under scrutiny. 

This is just a thought I have, do your own due diligence


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## Jungle (Feb 17, 2010)

I am looking to add some REIT shares to my portfolio and was wondering this. When there is a correcton on the residential side, will this effect the commercial real estate as well?


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## HaroldCrump (Jun 10, 2009)

IMHO, REITs are over-valued like crazy these days.
It's a combination of the over-heated RE market, a flight to the high yields and perhaps because there's nothing else out there really.
And a belief (maybe misplaced - arguable) that the Canadian RE market is different and will not follow the US fate.
So such risks (real and imagined) are being ignored.

I'm personally not into REITs and don't plan to be in a big way anytime soon.
But then I'm not into RE in any other shape or form either (other than owning my home).
I follow the XRE movements and if there's a significant correction to bring it in the $8 - $10 range, I might buy some.


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## andrewf (Mar 1, 2010)

Like everything else I own, I use a timing strategy. If/when REITs roll over, I'll sell. The fundamentals aren't all that bad at the moment, and I still have a good ten percent above my sell signal at the moment. That's okay though, because that 10 percent is mostly appreciation from the last month.


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## Cal (Jun 17, 2009)

Try to keep in mind that there are many different types of REITs. Health Care, Retail, Residential, Office and Mortgage REITs are discussed in the following article.

http://www.theglobeandmail.com/glob...its-and-how-to-invest-in-them/article1674579/

I agree with Harold that there has been a flight to yield seeking investments and some REIT's are overvalued...but what sector doesn't have something overvalued...


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## furgy (Apr 20, 2009)

Berubeland said:


> The entire sector may suffer a correction in the near term and this will affect the value of your REITs as well. The value of the underlying assets may well come under scrutiny.


I doubt all REIT sectors would fall at once , if you're diversified in commercial/industrial/residential sectors you should be fairly well protected.
If a REIT is profitable , short term swings in the value of the assets shouldn't mean all that much , they may result in slightly higher rates when the REIT is re-financing , a profitable well run REIT should still be able to maintain a decent distribution until the markets return , IMHO.



Jungle said:


> I am looking to add some REIT shares to my portfolio and was wondering this. When there is a correcton on the residential side, will this effect the commercial real estate as well?


In my opinion , no.
Even a major correction in residential housing prices doesn't necessarily mean any less profitability for REITs in the residential sector either , such as apartment REITs or mobile home park REITs.

My portfolio is 80% or more in REITs right now and the distributions are adding up fast , where else you gonna get 14% these days?

I did however just sell one of my winners , RMM.UN , it was up 53% from my entry price and I didn't see much more upside to it in the near future , that kind of profit I just can't resist taking , if they had raised their distribution to match , I would have held it.

The money (plus 53%) is now in higher paying smaller cap REITs , increasing my income substantially.



> I agree with Harold that there has been a flight to yield seeking investments and some REIT's are overvalued


I agree some REITS are over valued , especially the large caps , but I still think the flight to REITs has not reached its peak yet.

I personally don't own any real estate of my own and probably never will again.
I don't see any downside to REITs in the near future.
I like the current risk/reward ratio in REITs as compared to a portfolio of speculative investments that provide no income.


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## Berubeland (Sep 6, 2009)

If the residential real estate market corrects, as it is showing signs of doing, with prices down 3.3% last month and 2% already this month and volume of sales down as well, then I'm thinking that this will spread. 

Commercial and multi family prices are also overblown as evidenced by the low cap rates that make actual returns on their investment difficult. 

I have a post coming up on Million Dollar Journey that goes into more detail.

Real Estate is a sector, like oil is a sector and when the sector takes a hit every stock within that class takes a hit. People aren't that smart as to differentiate. 

That's my theory anyways.


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## Berubeland (Sep 6, 2009)

Oh and diversifying does not mean buying a bunch of stocks in the same asset class. 

For instance if you buy all banks but different kinds of banks that will not save your *** if the financial sector takes a hit. 

Just saying...


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## andrewf (Mar 1, 2010)

I have to agree. REITs are all pretty highly correlated, even if they are in different spaces. They have been fantastic investments since the market bottom. They are one of the best performing asset classes, and they are my only sector (besides gold) that is well above my sell signal. I can't complain about their run, but I don't expect to get much more return from them out of this trade. I've been out of equities since May and June, and waiting for a crash. The market is stubbornly bouncing around the buy/sell signal.


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## kcowan (Jul 1, 2010)

andrewf said:


> They are one of the best performing asset classes, and they are my only sector (besides gold) that is well above my sell signal...


When are you planning to rebalance?


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## andrewf (Mar 1, 2010)

I rebalance as needed, when the allocations strays too far from the model portfolio. I have trimmed my REIT allocations a few times already, but it's currently sitting in cash.


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## furgy (Apr 20, 2009)

Berubeland said:


> Oh and diversifying does not mean buying a bunch of stocks in the same asset class.
> 
> For instance if you buy all banks but different kinds of banks that will not save your *** if the financial sector takes a hit.
> 
> Just saying...


And yet it does make you diversified within that sector (thanks for the input , but this is not 5th grade here) , no matter what you feel about people abilities to differentiate between different real estate classes.

Also , as I said , well run profitable REITs shouldn't have to cut distributions due to short term volatility in share prices , making them a desirable income producing investment in these unsettled markets.

Just sayin'........


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## Berubeland (Sep 6, 2009)

The post is up at Million Dollar Journey.

http://www.milliondollarjourney.com/the-downside-of-owning-reits.htm

BTW, I'm not advocating freaking out and selling all your REITs. Real estate has been a staple and has been steadily going up for the last 20 years. 

I am urging people to really think about and consider the potential downfall of being too heavily invested in REIT's right now. 

I do not claim to know what the future holds for the real estate market. I am also not a real estate bear, I believe that real estate does have value and you can make money owning it or REIT's but I'm not sure that present values are sustainable in any scenario.

Consider that some of the people reading this may be people who are at retirement age who love the steady distributions and yields provided by REITs. I could not in all conscience help but be terrified for those people as every day we are getting rather grim news about the RE market.


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## furgy (Apr 20, 2009)

Berubeland said:


> Consider that some of the people reading this may be people who are at retirement age who love the steady distributions and yields provided by REITs. I could not in all conscience help but be terrified for those people as every day we are getting rather grim news about the RE market.


Most of the bad news I hear lately is about the "housing" market , not necessarily the RE market in general.
The lady who wrote the blurb you link to even said herself "I am not happy with the real estate market, every day there are headlines about the residential real estate market."

I believe there is a huge disconnect between the housing market and the commercial/industrial RE market.

I'm five years from retirement , I'm not terrified.

I like getting 14%.

And I'll say again , well run profitable REITs shouldn't have to cut distributions due to short term volatility in share prices , making them a desirable income producing investment in these unsettled markets.

But in my case , I own no actual RE other than that in my REIT portfolio , and I probably have less money in that than most homeowners have in their homes , especially when you consider insurance , taxes , maintenance etc.


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## Berubeland (Sep 6, 2009)

I don't believe there is such a huge disconnect. 

I saw this http://v1.theglobeandmail.com/servlet/story/LAC.20100617.VOX17ATL/TPStory/TPBusiness/

It is very difficult to find value in todays market and I get every single ICX listing delivered to my inbox. (Toronto's)


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## furgy (Apr 20, 2009)

> I am urging people to really think about and consider the potential downfall of being too heavily invested in REIT's right now.


The same could be said of any asset class , that's nothing new , greater diversification will protect you from greater losses , in some instances , but some , like me , feel that greater diversification leads to mediocre returns.

I'm willing to take more risk and be where the money is.

Interesting little blurb , but just his opinion , he even contradicts himself in some ways.

He states " But as we've seen, it's a seller's market."

With all the doom and gloom you claim is prevalent in RE , how can it still be a sellers market?

To believe what he says , you would have to assume that he knows more about REITs than the people running them , and that I doubt.

There are may ways to value REITs and I don't have all the answers either , but a 14% return has got to be worth a little extra risk , to me anyway.

If you feel the RE market in general is ready to crash , then by all means get out of it , I feel the worst is over , we are in a new economy , RE prices may or may not return to previous highs , but I'm not expecting any great catastrophe in RE either , especially the commercial/industrial sector.


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## kcowan (Jul 1, 2010)

furgy said:


> ...
> There are may ways to value REITs and I don't have all the answers either , but a 14% return has got to be worth a little extra risk , to me anyway...


This brings up another point that I make with investors. How much risk are you willing to take for extra returns.

If you are getting 14% when the market overall is producing 4% yield plus capital appreciation, how much capital appreciation are you counting on? If the answer is 10%, then do you really believe that RE is going to increase at 8% to 10% without limit?


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## andrewf (Mar 1, 2010)

kcowan said:


> This brings up another point that I make with investors. How much risk are you willing to take for extra returns.
> 
> If you are getting 14% when the market overall is producing 4% yield plus capital appreciation, how much capital appreciation are you counting on? If the answer is 10%, then do you really believe that RE is going to increase at 8% to 10% without limit?


REITs are leveraged. They don't need continuous 8% appreciation in underlying RE to return 8%.


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## HaroldCrump (Jun 10, 2009)

Out of curiosity, which REITs are yielding 14%?
I look at the standard large cap REITs (like the ones that are part of XRE) and none of them seem to be more than 7% yield.
XRE yields 6% or less (depending on its current trading price).
Are these private REITs?


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## furgy (Apr 20, 2009)

Small cap REITS are riskier but pay much better.

TR.UN is yielding 17% at current share price , it's a riskier play tho because they may not qualify as a REIT next year.

BTB.UN is yielding almost 12% , I'm getting over 14% considering my entry price which is much less than todays share price.

CRH.UN is yielding almost 13% at current share price.

SRQ.UN is yielding almost 12% a current price.

I hold all of the above as well as some other small cap REITs and my average comes out to 14% or better

RMM.UN was paying me over 14% considering my entry price , but I sold it recently because share price was up 53% and I didn't see much more upside to it , that kind of profit I like to lock in , unless they up their distribution to match the increase in price , then I will hold.

So as you can see , I am happy at 14% income with 53% capital gain from one of my bigger holdings , that 53% is now re-invested at 14% or so , it's adding up fast.

Some of these REITs even give you a 1 or 2% bonus if you choose to DRIP instead of taking cash , that again adds to the bottom line.


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## kcowan (Jul 1, 2010)

andrewf said:


> REITs are leveraged. They don't need continuous 8% appreciation in underlying RE to return 8%.


I understand. But what kind of appreciation do they need? Surely it is not tenant rental increases. And what value do they carry their assets on the books?


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## Scottlandlord (May 27, 2010)

Berubeland said:


> For those of you that are up on REIT's and down on real property, you might want to consider whether you like the current fundamental valuations of the RE market in it's entirety.
> 
> The entire sector may suffer a correction in the near term and this will affect the value of your REITs as well. The value of the underlying assets may well come under scrutiny.
> 
> This is just a thought I have, do your own due diligence


Thanks again for your wisdom.

How many REITs do you actually invest in?

http://www.theglobeandmail.com/glob...ook-for-canadian-reits-to-buy/article1687705/



> Canadian real-estate investment trusts are at a rare point when they can outgun both U.S. rivals and pension funds for deals, so expect to see some buying.


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## CanadianCapitalist (Mar 31, 2009)

Berubeland said:


> I am urging people to really think about and consider the potential downfall of being too heavily invested in REIT's right now.
> 
> I do not claim to know what the future holds for the real estate market. I am also not a real estate bear, I believe that real estate does have value and you can make money owning it or REIT's but I'm not sure that present values are sustainable in any scenario.
> 
> Consider that some of the people reading this may be people who are at retirement age who love the steady distributions and yields provided by REITs. I could not in all conscience help but be terrified for those people as every day we are getting rather grim news about the RE market.


RioCan and comparable REITs are trading at implied cap rates (TD Newcrest estimates) of 6 to 8 percent. Compared to 10-year Canada bonds, that's close to a 4 percent spread. Historically, that doesn't scream overvaluation. Of course, bond yields could rise or REIT earnings could fall in the future. But based on current estimates, you could say that some REITs are at least fairly valued. 

FWIW, RioCan and comparable REITs are trading at close to analyst estimates of NAV. Again, that doesn't scream value but it's hard to argue they are overvalued either.


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## kcowan (Jul 1, 2010)

From earlier this year, Riocan has to reach for its current distributions based on FFO.
ThinkDividends


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## Scottlandlord (May 27, 2010)

CanadianCapitalist said:


> RioCan and comparable REITs are trading at implied cap rates (TD Newcrest estimates) of 6 to 8 percent. Compared to 10-year Canada bonds, that's close to a 4 percent spread. Historically, that doesn't scream overvaluation. Of course, bond yields could rise or REIT earnings could fall in the future. But based on current estimates, you could say that some REITs are at least fairly valued.
> 
> FWIW, RioCan and comparable REITs are trading at close to analyst estimates of NAV. Again, that doesn't scream value but it's hard to argue they are overvalued either.


There is some real value in REITs. Especially as rate rise, and more and more people decide to rent...like in the old days before the nutty Harper 0 down rule!


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## furgy (Apr 20, 2009)

furgy said:


> Small cap REITS are riskier but pay much better.
> 
> TR.UN is yielding 17% at current share price , it's a riskier play tho because they may not qualify as a REIT next year.
> 
> ...


Just got a letter from Interrent REIT , they are offering a 4% bonus for current investors to use their DRIP for re-investment of distributions as well as purchase new shares with no commission , they are paying in excess of 8% before the bonus.


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## Cal (Jun 17, 2009)

Scottlandlord - residential REITS are such a small part of the REIT world.

kcowan - maybe this will help REI.UN pay those distributions:

http://www.realestatechannel.com/fe...te-investment-trust-red-rose-commons-3115.php


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## kcowan (Jul 1, 2010)

furgy said:


> Just got a letter from Interrent REIT , they are offering a 4% bonus for current investors to use their DRIP for re-investment of distributions as well as purchase new shares with no commission , they are paying in excess of 8% before the bonus.


Sounds like a high cost of money. Are they that desparate. Will their new acquisitions be accretive?


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## Scottlandlord (May 27, 2010)

Cal said:


> Scottlandlord - residential REITS are such a small part of the REIT world.
> 
> kcowan - maybe this will help REI.UN pay those distributions:
> 
> http://www.realestatechannel.com/fe...te-investment-trust-red-rose-commons-3115.php


Good post. Thank you for the link.


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## furgy (Apr 20, 2009)

kcowan said:


> Sounds like a high cost of money. Are they that desparate. Will their new acquisitions be accretive?


Did you mean "desperate"? , who knows , maybe.

Will their new acquisitions be accretive? , yes.


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## kcowan (Jul 1, 2010)

furgy said:


> Did you mean "desperate"? , who knows , maybe.
> 
> Will their new acquisitions be accretive? , yes.


Maybe disparate?!
So how much does the acquisition improve their ROI?


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## HaroldCrump (Jun 10, 2009)

I'm seeing a lot of new unit issues for several REITs in last couple of months.
Is there anything specific going on...looks like too much of a coincidence.
Just in the last 2 months, I see the following issues pop up on my brokerage's IPO list (Scotia Capital).
So this are just the ones that Scotia Capital bought into.
There probably are scores of others that I haven't seen.
Are these guys issuing units to fund distributions?

Following is the list:
Chartwell Senior Housing REIT 
Northwest Healthcare Properties REIT 
Homburg Canada REIT 
Artis REIT 
Retrocom Mid-Market REIT 
Timbercreek Mortgage Investment Corporation 
Brookfield Properties Corporation


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## furgy (Apr 20, 2009)

Not entirely sure , but some REITs have had a good run and are raising capital while share price remains high , RMM is one in particular , trading at $5.22 and then they announce new shares being issued at $5.00.

I sold mine while up 53% , bought another that pays twice the distribution , had they increased their distributions I would have held.

I like to think they are raising capital for new acquisitions , but who knows , maybe funding distributions until the economy returns is their plan.

They say in their news release:

"The net proceeds of the offering are expected to be used to fund future acquisitions and for general trust purposes."


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