3 top REITs on my radar this year
If you aren’t planning to sell your stocks, any of your stocks, any time soon – you and I shouldn’t fear market calamity.
If anything, it should be time to celebrate.
Why? Stocks are on sale!!
Historically, market volatility triggered by interest rate increases (or any market noise for that matter) are great times for buyers of stocks who intend to hold such stocks for growth or income or both long-term. That mantra applies to Real Estate Investment Trusts (REITs) in our portfolio.
Why REITs?
If you’ve been following the stock market or the housing sector in Canada for any length of time, you’ll know from Toronto and Vancouver housing markets that housing prices in those cities have been sky-high (and rising) for years on end. Soaring housing prices in those markets are good for existing homeowners with little debt. Stratospheric housing prices for others, looking to enter the market; Canadians working and living off lower-incomes are disastrous and simply crushing many home ownership dreams.
With real estate always needed (i.e., people have to live somewhere; most businesses have to operate somewhere), I believe long-term real estate is a very profitable sector to invest in.
Heck, I’ll use my own case study as evidence…
My wife and I are downsizing very soon to a newly built 2-bedroom condo in Ottawa. We are moving to this location not because we don’t love our current home, rather, we want to be closer to the city’s bustling activities full of growth and opportunities. As a result of our move, we’ll get rid of one car – saving close to $3,600 per year in vehicle operating, insurance and licensing expenses. In a condo, we’ll avoid any home maintenance costs associated with lawn care and winter snowplowing. Our housing insurance premiums will be reduced, significantly.
Let’s not forget the health benefits – the ability to walk to amenities and services within 30 minutes of our condo building front door. Being so close to services will be a tremendous boost to my health.
Urban growth is intensifying in Ottawa, and I suspect that will continue.
REITs 101
A Real Estate Investment Trust (REIT) is best understood as a professionally managed trust that buys and holds real estate assets. REITs essentially offer investors (like me) a way to participate in real estate, in many shapes and forms.
Beyond residential properties, such as apartment complexes, REITs can also own health care facilities, hotels, office buildings, retail shopping centres, storage and warehouse facilities, and more.
Some REITs specialize in one sector (e.g., apartment rental suites). Still others might be diversified, holding many of the property assets I listed above in various combinations.
Most REITs have an easy business model to follow – not only do you get to participate in the growth of the REIT like any stock, but you can earn regular (and increasing) distributions over time. The REIT leases the space, collects the rent, and you as a shareholder get the distribution.
For investors that want to hold real estate as part of their portfolio, I believe REITs can be an excellent choice.
REIT pros and cons
There are other benefits and some potential drawbacks associated with REITs, here are a few to consider:
- Returns have been solid – at the time of this post, an investor holding ZREfor example (BMO’s Equal Weight REITs Index ETF) would have seen returns over 10% since fund inception 5+ years ago. Compare that with the Canadian blue-chip equity ETF (XIU) that has only returned about 7% over the last five years.
- Liquidity – REITs are easy to buy and sell. Traditional real estate can take weeks if not months for transactions to close. Buying (or selling) REITs is easy to do via your discount brokerage and transactions settle within days.
- Tax complications – while REIT distributions are nice, REITs are not generally required to pay Canadian income tax if they distributeall of their net income for tax purposes on an annual basis, so that tax is passed on to you and me, the investor. For this reason, I suggest owning REITs in registered accounts such as RRSPs, RRIFs, RESPs, and TFSAs.
- The company’s problem, not yours – the company that bought the real estate property /the REIT is responsible for managing it (not you or I). Therefore, taking care of expenses such as insurance, taxes, and the mortgage is not our problem. We won’t have landlord headaches. The trust will take a certain percentage of the rental charge from tenants and you’ll get some of that income as a distribution as a shareholder. Works for me.
- Asset class unto itself – REITs are an interesting asset class since they may not move with the bond market nor stock market in any lock-step fashion. For that reason, I believe a 5-15% weight in REITs among other portfolio assets can act as a great counterbalance to fixed income investments and equities alike.
Top REITs on my radar
From time to time on this site, I post some of the stocks I’m watching since I hope to add these stocks (or more of them) to my portfolio in the coming weeks or months.
Here are the 3 REITs I’m hoping to add more of this year…
Canadian Apartment Properties REIT (CAR.UN)
CAPREIT is benefiting (and will likely continue to benefit) from growing apartment rental demand.
As one of Canada’s largest residential landlords, you would invest in this REIT to assume ownership in some 50,000+ residential units across urban Canada and in The Netherlands. With a good portion of the REITs’ income derived from rental properties, where rent can rise over time, I believe this REIT is very well positioned to continue to benefit from growth including more urbanization.
At the time of this post:
- CAR.UN has a market cap of almost $8-billion.
- It has a distribution yield of 2.7%.
- It pays a monthly distribution.
RioCan Real Estate Investment Trust (REI.UN)
RioCan is one of Canada’s largest REITs, with a market cap at the time of this post around $8 billion.
Like CAR.UN, REI.UN is also benefiting from growth in Canada’s major urban cities – with retail properties in more densely populated areas. With a strategic plan to manage and develop more mixed-use properties that will allow Canadians to live, shop and work in the same vicinity, asset values and distribution increases are likely to occur with time.
At the time of this post:
- It has a distribution yield of 5.4%.
- It pays a monthly distribution.
Allied Properties (AP.UN)
Staying with the urbanization theme, Allied focuses on assets that allow Canadians to live, work, and play in the same area – as part of urban intensification. They are striving to be one of the real estate leaders in the management and development of urban workspaces in Canada, and managing and owning network-dense data centre properties. Add in some parking assets, and you have a diverse commercial-oriented REIT. I will consider AP.UN after likely focusing on CAR.UN.
At the time of this post:
- It has a distribution yield of 3.2%.
- It pays a monthly distribution.
Summary
Owning individual stocks or REITs are not without risks – including potential market under-performance when compared to owning broad market ETFs.
What’s your take on REITs? Own any for income or growth or both?
Further reading: REITs: Book Value and Net Asset Value Revealed
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
I think you hit a major pro. It is the company’s problem, not yours. Unless you are super handy, maintenance expenses can be EXPENSIVE. Further, the REIT provides you diversification that you would not normally be able to get with individual real estate investing.
Thanks for the very detailed/thorough article.
Bert
Thanks for stopping by Bert. I certainly like to avoid risk where I can when it comes to investing.
Mark: I know zip about ETF’s or REITs and Phantom Distributions and how one needs to adjust their ACB to account for them? Do REITs also have them?
“A phantom distribution (or reinvested capital gain distribution or notional distribution) occurs when an exchange-traded fund (ETF) or mutual fund makes a taxable distribution, but it’s reinvested back into the fund as opposed to being paid out in cash.
In the case of ETFs, an investor does not usually receive additional shares as a result of a reinvested distribution (hence the name, “phantom distribution”). This is because ETF providers (a) do not maintain client records, and (b) cannot issue fractional shares.
Phantom distributions usually occur when an ETF or fund incurs a capital gain, and the capital gain is reinvested instead of being paid out in cash. The capital gain will be immediately taxable and should appear on your T3 or T5 slip that you receive from your brokerage. So the capital gain will be accounted for when you compile your tax slips.”
Ya, the challenge with REITs is you have a mix of ROC, interest, distributions, etc. I wouldn’t hold them in a taxable account personally – although you do get T-slips with that information on them. The T-slip from your discount brokerage will highlight all that information.
You would calculate the ACB just the same as you would for stocks. You probably know of this tool that is very good:
https://www.adjustedcostbase.ca/
The challenge really in with ROC since it’s essentially your money back. There should be no tax on that per se since it simply reduces your cost per share and therefore, reduces ACB.
I have no practical experience in tracking my ACB for REITs in a taxable account – but this is my understanding.
I wouldn’t own REITs inside a taxable account for this reason – too complicated for me to be worrying about.
As far as phantom distributions go, again, it happens but I’m not convinced this is not a reason to own ETFs since it appears on your T5 (for dividend-paying funds) or T3 (for REITs and trust-bearing assets).
I just own CDN stocks that pay dividends in my non-reg. account only and for the foreseeble future I don’t see that changing – less to worry about and I get the DTC for it too 🙂
Hope that helps a bit?
Mark
Ditto here on where things are held.
Too much hassle with REITs in unregistered.
Mark: Read about them in the May 2019 Goodtimes magazine. According to the article there were more than 300 phantom distributions in 2017 and the same in 2018, and unless calculated and ones ACB adjusted the distributions are cumulative, meaning if one did not adjust the 2017, you would pay another tax on the same units again in 2018 and each year after that.. So if one holds and adds to an ETF over the long term, the article suggest ones book value could be too low by $5,000(her example). So if/when they sold the units they would pay another tax on the capital gains incorrectly.
Sounds like one might want to include ETFs along with REITs to only hold in a registered accounts, if at all.
That’s a bundle…300.
Yes, I would agree with the REITs and ETFs comment – definitely focus on registered accounts first!
Most brokers are automatically adjusting abc in unregistered acts. to reflect the reinvested distributions, to prevent you from being taxed twice. (Mine does.) No biggie. In any case an investor can access info on the ETF web site to do their own calculation or check.
Easier not to be concerned with this at all in a registered acct but tracking/checking abc in unregistered acts is also needed to ensure accuracy with stocks and possibly one extra step with etfs.
Here is a link for info with another unlocked link to globe John Heinzl.
https://www.taxtips.ca/personaltax/investing/taxtreatment/etfs.htm
That’s true. Likely why most don’t increase or increase modestly if they do. Although like good dividend growth stocks a few operators have been able to do it. Not sure I’d count on it for sure.
We hold only 5% REITS. 7.7% of our equity.
Probably a good ratio (i.e., < 10%).
I’m around my target range but I may move it up a bit if good opportunities present.
Some reits do raise regularly but usually small amounts comparitively.
CAR 7 consecutive yrs 2.0% avg (own)
AP 7 cons. yrs 1.8% avg
BPY 6 cons yrs 20.3% 5 yr avg (own)
Plaza 16 cons. yrs 10 yr 4.8% avg
Granite 8 cons yrs 10 yr 15.8% avg
Firm Capital 7 yrs cons. 5 yr 5.4% avg
Inter-rent 7 cons. 5 yr 7.9% avg
Slate retail 5 cons 3 yr 3.5% avg
Smart 5 cons 5yr 2.6% avg
There are others but only 2 consecutive yrs and sporadic even over 10 yr periods.
Thanks for the list.
Anybody holds CRT.UN? I am thinking about investing in CTC.A. But some suggested maybe safer to invest in CRT.UN instead.
I own a few hundred shares of it (CRT.UN). I like the income play personally.
Ya, but then again, they are obliged to payout a certain ratio by design so if they get into some debt trouble, therein lies the challenge – can’t hike a payout.
I wouldn’t own more than 15% in REITs, I like my other sectors as well.
I assume the price growth is in line with the real estate price growth for the past couple decades? While the real estate price probably will stay flat or at least with very low growth, I would doubt REIT will have high price growth any more?
May, the way I see it price growth is mainly related to the earnings growth of the company. Some REITs are agressively buying to grow their portfolio, and building new etc. It could be argued flat or reduced real estate prices may lower business costs and help operating profits. The risk is many REITs are highly leveraged, and if economy declines and/or interest rates rise it could affect tenant occupancy, rents and debt costs.
Of course this all varies also with type of REIT, geographic diversity etc.
Yes, I would say it varies with the REIT since some are growing through acquisitions.
Thanks. That makes sense. As REITs do not really increase distributions I was not considering them other then BPY.UN. Also because I live in Metro Vancouver and I have more than $1M locked in my house already. I consider that pretty much RE already for me.
I hold BPY.UN for a few reasons: it actually increases distribution every year so fat; it has a high yield; it distributes US dollars which I want to collect for my travel out of board.
Will take a serious look into REITs. Especially CAR.UN and AP.UN. Both looks quite expensive right now though.
I think REITs have a place in a portfolio May, even beyond the house (> $ 1 M in Vancouver or otherwise) since they tend to move differently than bonds or stocks. Something to consider although certainly not a must in any portfolio.
I own CAR.un but not REI or AP. A bought it about 30 mths ago and it is up ~70%. My best performer – period.
I thought REI is more of a retail property owner vs residential, and I believe about half their properties are in the GTA. I haven’t seen any numbers on this though.
I’m looking to own more REITs too, particularly in the residential housing area.
CAR.UN is likely only going to go up over time. REI.UN is getting into mixed-use I recall (retail base with condos around it). Honourable mention goes to KMP.UN.
Yes, that’s what I’ve read on REI.
Yeah, I missed KMP.un trying to buy it too low. Keeping an eye on it, but need some more market cooling to enter.
I think our market cooling might be coming!
It already is according to my accounts! ha
Might be wrong but I feel a little more bullish on REITs vs stocks.
I hear ya. Down quite a bit in value but the dividend income is up (BMO and NA and other stocks poised to provide a raise later this year….)!
On another note I see BMO gave us a 3% raise
Yup, and NA 4.6% increase. A good week. Just added $75 to annual income without lifting a finger. Except this reply 🙂
Yes, mine is rising a bit too. I think 5 more raises likely coming this year for me.
No N/A here.
I think we own close to 250 shares but I would need to check that. DRIPping at least x2 per quarter for sure.
I missed the NA announcement, thanks for the heads up. Darn farming interfering with my reading of the news. In any event, this will move the DRIP sufficiently to cross the threshold to get another share per payment (unless the price goes up too much).
Well, that’s why you have my site Lloyd 🙂
I have some REITs but if I had to do it over again I’d just go with BPY.UN for property exposure.
I was thinking of adding BPY.UN to my list but I see little growth, more of an income play here with 5-6% yield for the foreseeable (as in decades) future.
Thanks for sharing, I have usually steered clear of property as I already have so much of my money in my home. However, perhaps REITs would be a good option to diversify.
Nothing wrong with having “so much money in your home” Laura, a good problem to have…so if that’s the case it’s good to consider diversifying away from real estate (i.e., you live in Toronto or Vancouver) to have a more balanced portfolio. I personally wouldn’t have more than 15% in REITs in my investment portfolio for the reasons that my wife and I will own a condo too.
I was a bit surprised when I evaluated several REITs in preparation of my book. Most fell into the category of higher yield but little or no income growth.
For these three two show good price growth (CAR & AP), REI has had no price grwoth since 2010, but NONE show any real distribution growth:
CAR.UN 21.72% Dist gwth
REI.UN 5.52% Dist gwth
AP.UN 18.43% Dist gwth
REI.UN has been a slow grower for sure, more like an income play, but I suspect that will change in the coming years based on their direction.
As for CAR.UN – I can see more price growth since they tend to have a slower-growing dividend policy.
AP.UN should shoot up over time given the intensification in Toronto.
KMP.UN gets an hounourable mention.