Investing

What's the catch with Real Estate REIT units?

  • Last Updated:
  • May 20th, 2017 12:26 pm
[OP]
Deal Fanatic
Feb 15, 2006
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ksgill wrote:
Dec 21st, 2016 4:04 pm
See above, your return isn't much better at around 4.8%, hardly worth getting out of bed for. 10 year GICs in 2011 were paying 4.25% risk-free.
6-8% distribution is much better than 4.8%.

The 2011, 10 year GIC at 4.25%, is NOT available in 2016 is it? Also a 10 year GIC locks you in for 10 years, that is a terrible lock.
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Mar 24, 2008
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Arrgh wrote:
Dec 21st, 2016 8:38 pm
6-8% distribution is much better than 4.8%.

The 2011, 10 year GIC at 4.25%, is NOT available in 2016 is it? Also a 10 year GIC locks you in for 10 years, that is a terrible lock.
Not arguing with you if you want to invest in REITs... hey, it's your money. If you are attracted by this, I recommend you also look into preferreds as an investment. Good luck!
Illegitimi non carborundum
[OP]
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Feb 15, 2006
6629 posts
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Toronto
ksgill wrote:
Dec 21st, 2016 8:47 pm
Not arguing with you if you want to invest in REITs... hey, it's your money. If you are attracted by this, I recommend you also look into preferreds as an investment. Good luck!
Preferreds would be a better comparison. The 10-yr GIC, from 2011, is just a poor example for comparison as it is illiquid, from years ago, whereas REITs can be bought/sold any time and provides a higher rate for distribution.

There are not too many preferreds giving 6-8% return though, and preferreds haven't done well in recent years.
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Arrgh wrote:
Dec 23rd, 2016 12:25 pm
Preferreds would be a better comparison. The 10-yr GIC, from 2011, is just a poor example for comparison as it is illiquid, from years ago, whereas REITs can be bought/sold any time and provides a higher rate for distribution.

There are not too many preferreds giving 6-8% return though, and preferreds haven't done well in recent years.
Wont find blue chips yielding 6-8% with preferreds; but names like ECN, Bombardier, Cannacord Genuity will be in the 7+% range. Theres a bombardier series that pays monthly, based on prime rate.
:idea: :) :lol: :razz: :D
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Aug 19, 2016
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I am not sure anyone mentioned this or not (didn't bother to read the whole tread), but the so-called dividends you are getting are actually distributions.

REIT are just returning capital to unit holders. They issue units like crazy. You can see that their shares outstanding increases at a massive rate, which would result in dilution. The more shares outstanding the more distribution they need to pay, the more units they need to issue to keep up with the payments.
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Jul 30, 2008
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ksgill wrote:
Dec 21st, 2016 4:04 pm
If you do the math from your example, it's a terrible return! This is roughly a ~4.2% (100k compounded for 10 years @ 4.2% ends up @ 150,895) annual compounded return.


See above, your return isn't much better at around 4.8%, hardly worth getting out of bed for. 10 year GICs in 2011 were paying 4.25% risk-free.

Hypothetical examples and maths aside, REITS act both as stocks (drop with the markets) and long term bonds (drop with rising interest rates). For me personally, the risk premium is just not there to invest in these securities beyond the exposure already provided by broad market indices. YMMV.
Your math completely ignores the fact that you can reinvest the distributions because they are freed up from the holding, and that thus they also "compound" assuming you just reinvest it back into the same holding (though you are free to invest it anywhere else). If you get a 6-8% dividend every single year from a holding that went down by only 1% in 10 years, you are getting a 6-8% return (minus a tiny bit to account for the 1% decrease in the holding price). I'm gonna just make it simple here and say you're getting 7k/year in the distribution on a 100k initial investment. So assuming you reinvest only one time per year, the 1st year, you'd have 100k with 7k distribution which you reinvest in the REIT, the 2nd year you'd have 107k in the REIT (and your new distribution would be 7k x 1.07 = $7.49k), and you can keep going on and on with this, with the 10th year yielding you a dividend of 7k x 1.07^10 = 13.77k dividend. So no, you are most certainly not making 4.2% or 4.8% on a REIT that is paying you 6-8% distribution year after year. My example also assumes there will be absolutely no distribution increase in 10 years.

The one thing I like about REITs is these days you can often purchase them at a steep discount to the NAV. Take D.UN. Management was clear the market was not valuing their held assets fairly, that they stated they will sell a large chunk of the assets to get the fair value for them (since they felt traders were not valuing them fairly) to bring the traded price closer to the NAV. D.UN immediately popped (I wished I held it at that point, but did not, just read about it as a bystander). After a few months, it went back down to similar levels, which I judged to be unfair. The new distribution rate was much lower than the FFO, so I deemed it an extremely safe distribution, and bought a whole bunch. The stock has gone up about 20% in since I bought in the last 4 months, plus paying a hefty 9% distribution (on my initial investment) for me to wait. I had assumed the appreciation would take a lot longer than a few months, figured it might be years, no doubt spurred on to some extent by the oil price increase. I subsequently sold a decent amount because now it is valued much closer to "fair value", and it's more of a REIT that will just keep paying distribution with not as much upside.

The other thing I like about REITs is that they keep chugging out the distributions, so from day 1 you are taking back a chunk of your initial investment, getting a distribution every month, and being able to allocate it to a different holding. In the long term, this to me makes it much safer. The safest thing a company can do is give me back my money so that I can diversify it further. I'm also weary of high multiplyer holdings because they already have a priced-in assumption that the company is going to keep growing fast (one of the reasons I wasn't too scared to invest heavily into Apple when it went down significantly a few years ago, whereas I was afraid to invest into Google - both went on to do very well, but my money felt safer with Apple).

As I said, though, I don't just throw my money at random REITs. I took advantage of low unfair values of the holdings as compared to NAVs. Back in the day, the opposite was true; a lot of REITs were 15-20% above their NAV, making them much less safe in my eyes. If that happens again, I'll likely have zero REIT holdings, and won't participate in REITs until/if it flips around again.

EDIT: I'm sure I dropped a couple of "dividends" above, so rather than going through it, just know that I meant to say "distributions" :P.
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Sep 18, 2016
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hold them in your TFSA and enjoy the distributions.
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Jan 7, 2017
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A REIT is seen as the real estate version of a mutual fund. In most cases it is a company that owns or operates income-producing real estate. From what I've heard, Storage and Residential real estate is okay, but Luxury and Commercial is bad. Leveraged mortgage REITs are a nightmare.
Known to many as the Welsh Investor, I am semi-retired living off my investment income and working casually as a financial analyst/consultant. I enjoy meeting new people and sharing investing insight, information, and advice.
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Nov 7, 2016
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WelshInvestor wrote:
Jan 10th, 2017 10:41 am
A REIT is seen as the real estate version of a mutual fund. In most cases it is a company that owns or operates income-producing real estate. From what I've heard, Storage and Residential real estate is okay, but Luxury and Commercial is bad. Leveraged mortgage REITs are a nightmare.
i'd like to ask about REITs .. particularly hte following ones - does anyone or yourself have advice on these ones?

i'm kinda thinking of the inevitable population aging scenario of old age housing investments .. i've been reading people's thoughts about this in the US and i have been wondering about REITs in general, these ones i got off the internet, any advice on them?

any advice in general of "how much" i could invest in REITs within a registered account? i have some XIC investments already, what percentage of your "porfolio" would you say would go into REITs? - only people with REIT experience please let me know!

Medical Properties Trust
Northwest Healthcare Properties
and
HCP Inc.
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Mar 8, 2013
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nutcrackergirl wrote:
May 16th, 2017 4:57 pm
i'd like to ask about REITs .. particularly hte following ones - does anyone or yourself have advice on these ones?

i'm kinda thinking of the inevitable population aging scenario of old age housing investments .. i've been reading people's thoughts about this in the US and i have been wondering about REITs in general, these ones i got off the internet, any advice on them?

any advice in general of "how much" i could invest in REITs within a registered account? i have some XIC investments already, what percentage of your "porfolio" would you say would go into REITs? - only people with REIT experience please let me know!

Medical Properties Trust
Northwest Healthcare Properties
and
HCP Inc.
How much to invest in REITs in a registered account? Suppose you are 71, and must start withdrawing, then I would say you should invest enough in your RRSP / RRIF to make the mandatory minimum withdrawal. On the other hand, if I were in my 40's, I would not invest in REITs because I would not want the monthly distributions that require reinvestment. Instead, I would invest in a global equity index fund now and only as I approached retirement, I would start buying REITs, maybe with new contributions. Finally, I would not try to pick one REIT stock or sector. Unless you want to spend a lot of time on this, just buy ZRE or the 17 REITs that are held by ZRE.
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Nov 7, 2016
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akaManny wrote:
May 16th, 2017 7:04 pm
How much to invest in REITs in a registered account? Suppose you are 71, and must start withdrawing, then I would say you should invest enough in your RRSP / RRIF to make the mandatory minimum withdrawal. On the other hand, if I were in my 40's, I would not invest in REITs because I would not want the monthly distributions that require reinvestment. Instead, I would invest in a global equity index fund now and only as I approached retirement, I would start buying REITs, maybe with new contributions. Finally, I would not try to pick one REIT stock or sector. Unless you want to spend a lot of time on this, just buy ZRE or the 17 REITs that are held by ZRE.
i see, i wanted to ask about ZRE and .. those other ones like XRE and VRE? any advice on how to pick one over another?
i am currently using questrade for this
i am in my 30s.. i wanted to diversity, that was the point of the focus on REITs i guess, i'm just not sure about its volatility and such
i also wanted to do it within a TFSA .. hoping to avoid things like taxes and such, i'm not sure if distributions they give are taxed in a tfsa, but i think with the ETF, it sounds like this would not happen?

so it sounds like you are saying the monthly distributions they give out and the work required to re-invest them - this is not worth it compared to similar ? earnings in an ETF that holds a bunch of REITs? i may be understanding things wrong here
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Apr 8, 2017
58 posts
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nutcrackergirl wrote:
May 17th, 2017 12:38 pm
i see, i wanted to ask about ZRE and .. those other ones like XRE and VRE? any advice on how to pick one over another?
i am currently using questrade for this
i am in my 30s.. i wanted to diversity, that was the point of the focus on REITs i guess, i'm just not sure about its volatility and such
i also wanted to do it within a TFSA .. hoping to avoid things like taxes and such, i'm not sure if distributions they give are taxed in a tfsa, but i think with the ETF, it sounds like this would not happen?

so it sounds like you are saying the monthly distributions they give out and the work required to re-invest them - this is not worth it compared to similar ? earnings in an ETF that holds a bunch of REITs? i may be understanding things wrong here
If you are in your 30s and do not own a house then i would recommend to have no more than 10% of your portfolio in REIT. Investing in dividend growth stock will outperform REIT by the time you are ready to retire, both from cap appreciation and dividends.

Edit: REIT are only good for diversification and as a hedge against inflation
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Nov 7, 2016
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ShuttleBoy wrote:
May 17th, 2017 12:44 pm
If you are in your 30s and do not own a house then i would recommend to have no more than 10% of your portfolio in REIT. Investing in dividend growth stock will outperform REIT by the time you are ready to retire, both from cap appreciation and dividends.

Edit: REIT are only good for diversification and as a hedge against inflation
ah i see the last line there
i am wondering if investing in dividend growth stock right now .. is risky? to hold for long term i mean, i am not a trading type

i may be understanding your line wrong
[OP]
Deal Fanatic
Feb 15, 2006
6629 posts
1276 upvotes
Toronto
Many REITs are returning 6-8% or even more. But the tax treatment is different than dividend, so it's usually better to hold them inside registered accounts and save the work (in doing tax).

The REITs are more risky than blue chip stocks, The 6-8% return, if sustained, is much better than most blue chip dividend stocks that may return 4%.

Holding no more than 10% in REITs, well, is one point of view.
Newbie
Apr 8, 2017
58 posts
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nutcrackergirl wrote:
May 17th, 2017 12:51 pm
ah i see the last line there
i am wondering if investing in dividend growth stock right now .. is risky? to hold for long term i mean, i am not a trading type

i may be understanding your line wrong
Investing in dividend growth, blue chip companies, for the long term carries the least risk among other investment strategies.

Assuming you buy these stocks at fair value with current yield 4%, with annual dividend increase of 6%, the stock will yield ~9.6% after 15 years. The beautiful thing is that share price and dividend growth both follows earnings, so share price will at least double during the same 15 year period.

Compare this to a REIT that do not increase distributions and share price remain almost stagnant and then decide which strategy works for you.

My last statement is referring to periods with high inflation. When inflation rate is higher than normal history shows that stocks tend to underperform while real estate outperforms and track inflation. Having a small % of REIT acts as a hedge in high inflation period (just like bonds that acts as hedge in deflation periods)

The average investor with zero knowledge of portfolio optimization or quant investing might find it hard to do the asset allocation based on correlation between asset classes but if i am to choose only 1 asset class to invest in it will be stocks.

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