Investing

What's the catch with Real Estate REIT units?

  • Last Updated:
  • May 20th, 2017 12:26 pm
Sr. Member
Nov 13, 2013
611 posts
213 upvotes
CollegeGraduate wrote:
Dec 24th, 2016 12:31 am
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.
It's not just return of capital they also pay out of their earnings. They do collect rent after all.
[OP]
Deal Fanatic
Feb 15, 2006
6701 posts
1325 upvotes
Toronto
ShuttleBoy wrote:
May 17th, 2017 1:13 pm
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.
You are comparing the most ideal condition of the best of the blue chip stocks (dividend of 4%, and then 6% increase, and stock price increases), to REITs that do not increase distributions and share prices remain stagnant. Guess what, the real world doesn't work like that.

There are many blue chip stocks that also had decreases in stock prices, or does not increase dividends much, or even cut dividends, or even go bankrupt. Not ALL blue chip stocks have perfectly ideal growth stories.

There are many REITs that also increase in prices (lots of examples lately) and increase distributions. Not all, but many. So it is not true that all or most REITS are stagnant.

If giving comparisons, it should be based on reality, not fantasy.
Sr. Member
Aug 19, 2016
693 posts
237 upvotes
fogetmylogin wrote:
May 17th, 2017 1:24 pm
It's not just return of capital they also pay out of their earnings. They do collect rent after all.
A lot of them went to management fees. How else do they get paid?
Deal Addict
Mar 8, 2013
1320 posts
353 upvotes
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
It is helpful that you give your age (30's) and goal (diversify). Diversifying, like beauty, is in the eye of the beholder. If you are already holding XIC, you are not really diversifying by adding one or more Canadian REITs. The performance of these REITs will correlate with the performance of the general Canadian economy, ie XIC. If you want to diversify, you should invest in asset classes, currencies, and geographies that are different. My opinion is that the goal of diversification is to give the highest probability that the basket of investments will return higher than the rate of inflation. As for picking specific REITs, I regularly see 'experts' on BNN explain why this REIT or that REIT is a good choice for reasons that make sense to me listening. However, stuff happens like oil price collapse, and the market disagrees so the recommended REIT drops. I think that it is human nature to think that with enough research and insight, we can pick the winners. For any given time period, this may be true, but if you buy a stock, how do you know when to sell or hold?

XRE and VRE are similar in that they are market weighted ETFS, so the highest percentage is in 2 Canadian REITs, REI and HR. By investing in XRE or VRE, you are assuming that the largest REITs will outperform the others. If either HR or REI gets hit with a scandal, or cannot grow their earnings more than other REITs, ZRE will outperform because it is an equal weighted ETF. That is why I prefer an equal weighted ETF, such as ZRE.

We do not really know how REITs will perform in a rising interest rate environment. Theoretically, some REITs will benefit, because rising interest rates equate with a growing economy and rent increases, some might not. I think that this is an extra unknown that makes it inappropriate for someone in their 30's to invest in REITs (Canadian or otherwise). That's my opinion, anyway.
Newbie
Apr 8, 2017
94 posts
23 upvotes
Arrgh wrote:
May 17th, 2017 1:40 pm
You are comparing the most ideal condition of the best of the blue chip stocks (dividend of 4%, and then 6% increase, and stock price increases), to REITs that do not increase distributions and share prices remain stagnant. Guess what, the real world doesn't work like that.

There are many blue chip stocks that also had decreases in stock prices, or does not increase dividends much, or even cut dividends, or even go bankrupt. Not ALL blue chip stocks have perfectly ideal growth stories.

There are many REITs that also increase in prices (lots of examples lately) and increase distributions. Not all, but many. So it is not true that all or most REITS are stagnant.

If giving comparisons, it should be based on reality, not fantasy.
I should have indicated that i am talking about canadian blue chips and not US or international. I haven't started investing in my RRSP yet so my US and international exposure is only through index funds.

Since we are talking reality lets first apply it on REIT. I did some research on some REITs 6 months ago and my conclusion is as follows:
- Only 3 REIT met my criteria of diversification, past performance and payout ratio
- The highest yield is 5.5% and the lowest 3.5% (not 6 to 8% as mentioned)
- 2 of them increase distributions by 2-3% every 3 or 4 years, the 3rd increased distributions 5 consecutive years and cut it in the 6th
- only one provided cap appreciation ~30% over 5 years

Now to the stocks:
- Yield of 4% is achievable in telecom, utilities, pipelines and financial sector. These are the canadian blue chips
- 5 year dividend growth 8-14% CAGR for my holdings
- Same companies have more than than 6% CAGR over 10 year period and 15 year period
- S&P 500 divodend growth 7.1% CAGR over 10 years. Of course yield of US blue chips is hard to find at 4%

So this concludes that my numbers represent reality and not fantasy, although future performance might be different.

Finally, i am not against having 5-10% REIT in my portfolio if i don't have real estate exposure (i.e. own a house) but i will not be chasing 8% yield and definitely will not build my portfolio around REITs
Jr. Member
Feb 26, 2017
198 posts
46 upvotes
ShuttleBoy wrote:
May 17th, 2017 10:28 pm
I should have indicated that i am talking about canadian blue chips and not US or international. I haven't started investing in my RRSP yet so my US and international exposure is only through index funds.

Since we are talking reality lets first apply it on REIT. I did some research on some REITs 6 months ago and my conclusion is as follows:
- Only 3 REIT met my criteria of diversification, past performance and payout ratio
- The highest yield is 5.5% and the lowest 3.5% (not 6 to 8% as mentioned)
- 2 of them increase distributions by 2-3% every 3 or 4 years, the 3rd increased distributions 5 consecutive years and cut it in the 6th
- only one provided cap appreciation ~30% over 5 years

Now to the stocks:
- Yield of 4% is achievable in telecom, utilities, pipelines and financial sector. These are the canadian blue chips
- 5 year dividend growth 8-14% CAGR for my holdings
- Same companies have more than than 6% CAGR over 10 year period and 15 year period
- S&P 500 divodend growth 7.1% CAGR over 10 years. Of course yield of US blue chips is hard to find at 4%

So this concludes that my numbers represent reality and not fantasy, although future performance might be different.

Finally, i am not against having 5-10% REIT in my portfolio if i don't have real estate exposure (i.e. own a house) but i will not be chasing 8% yield and definitely will not build my portfolio around REITs
That's a good summary of the Canadian Blue Chip stocks and REITs. For my Canadian portfolio its almost all energy, financials, utilities and telecom (11 out of my 13 stocks). When looking at Canadian Dividend Growth stocks there is a site I found helpful, that keeps a list of the CDN stocks with over 5 years of dividend growth.

http://www.dividendgrowthinvestingandre ... star-list/

Canada is a much smaller market that the US. When looking at REITs you might also want to look at US stocks as there are several that are growing revenue, have 4%+ yield and are growing their dividend.
Sr. Member
Nov 13, 2013
611 posts
213 upvotes
CollegeGraduate wrote:
May 17th, 2017 5:42 pm
A lot of them went to management fees. How else do they get paid?
How is that different from any other business? I know there is a lot of insider ownership in a lot of the smaller REITs but in the end you are bascially you are betting on Real Estate in a diversified way. I would assume the management costs are lower than if you own your own strip mall for example?
Newbie
Mar 3, 2011
6 posts
interesting discussion, how about your opinion on stocks like BPY and FCR? they have exposures to Real Estate but they are not REITs.
Newbie
Nov 7, 2016
37 posts
3 upvotes
akaManny wrote:
May 17th, 2017 5:42 pm
It is helpful that you give your age (30's) and goal (diversify). Diversifying, like beauty, is in the eye of the beholder. If you are already holding XIC, you are not really diversifying by adding one or more Canadian REITs. The performance of these REITs will correlate with the performance of the general Canadian economy, ie XIC. If you want to diversify, you should invest in asset classes, currencies, and geographies that are different. My opinion is that the goal of diversification is to give the highest probability that the basket of investments will return higher than the rate of inflation. As for picking specific REITs, I regularly see 'experts' on BNN explain why this REIT or that REIT is a good choice for reasons that make sense to me listening. However, stuff happens like oil price collapse, and the market disagrees so the recommended REIT drops. I think that it is human nature to think that with enough research and insight, we can pick the winners. For any given time period, this may be true, but if you buy a stock, how do you know when to sell or hold?

XRE and VRE are similar in that they are market weighted ETFS, so the highest percentage is in 2 Canadian REITs, REI and HR. By investing in XRE or VRE, you are assuming that the largest REITs will outperform the others. If either HR or REI gets hit with a scandal, or cannot grow their earnings more than other REITs, ZRE will outperform because it is an equal weighted ETF. That is why I prefer an equal weighted ETF, such as ZRE.

We do not really know how REITs will perform in a rising interest rate environment. Theoretically, some REITs will benefit, because rising interest rates equate with a growing economy and rent increases, some might not. I think that this is an extra unknown that makes it inappropriate for someone in their 30's to invest in REITs (Canadian or otherwise). That's my opinion, anyway.
i am interested int he ZRE you referenced
wondering if you had any advice on how to invest it? is it just like other ETFs? you just buy it and hold it i mean, do i have to worry about taxes when i sell/re-balance etc? i plan to hold some in a TFSA - how much of one's portfolio would you recommend in this? (or any other ETFs with REITs)
i ask because currently i hold this 25% in XIC ... 50% in VXC ... 12.% in VSC and ... 12.5% in VCN inside a TFSA, and an almost identical holding inside an RRSP, both are very small (about 10k each, i am unsure if i can afford/want to buy real property or rent .. i live in toronto, i wanted to stay and invest, then i got outpaced by the global marketplace and now homes are over-valued) - i don't know if anyone has advice on my small portfolio holding amounts..

i have been reading a lot on distributions and tax differences with REITs compared to stocks .. but i do not know if that applies to REITs held inside an ETF like ZRE..
Deal Addict
Mar 8, 2013
1320 posts
353 upvotes
nutcrackergirl wrote:
May 18th, 2017 10:24 pm
i am interested int he ZRE you referenced
wondering if you had any advice on how to invest it? is it just like other ETFs? you just buy it and hold it i mean, do i have to worry about taxes when i sell/re-balance etc? i plan to hold some in a TFSA - how much of one's portfolio would you recommend in this? (or any other ETFs with REITs)
i ask because currently i hold this 25% in XIC ... 50% in VXC ... 12.% in VSC and ... 12.5% in VCN inside a TFSA, and an almost identical holding inside an RRSP, both are very small (about 10k each, i am unsure if i can afford/want to buy real property or rent .. i live in toronto, i wanted to stay and invest, then i got outpaced by the global marketplace and now homes are over-valued) - i don't know if anyone has advice on my small portfolio holding amounts..

i have been reading a lot on distributions and tax differences with REITs compared to stocks .. but i do not know if that applies to REITs held inside an ETF like ZRE..
The tax differences with REITs compared to stocks will be in an ETF, the same as if you held the individual stocks that are in the ETF. Holding REITs (or any ETF that contains REITs) within a registered account avoids all those issues, since you don't need to report or pay taxes on those distributions.
Deal Addict
Jun 2, 2012
1011 posts
307 upvotes
akaManny wrote:
May 19th, 2017 9:17 am
The tax differences with REITs compared to stocks will be in an ETF, the same as if you held the individual stocks that are in the ETF. Holding REITs (or any ETF that contains REITs) within a registered account avoids all those issues, since you don't need to report or pay taxes on those distributions.
Bingo!
Newbie
Feb 5, 2017
64 posts
30 upvotes
I also like ZRE and have around 65K of it in RRSP with DRIP activated.
ZRE is and will always be only 4% of my portfolio.
I have also 16% in CAN index ETF.
Most of my money is in US/Intl/Emerging markets (46%).
[OP]
Deal Fanatic
Feb 15, 2006
6701 posts
1325 upvotes
Toronto
ShuttleBoy wrote:
May 17th, 2017 10:28 pm
I should have indicated that i am talking about canadian blue chips and not US or international. I haven't started investing in my RRSP yet so my US and international exposure is only through index funds.

Since we are talking reality lets first apply it on REIT. I did some research on some REITs 6 months ago and my conclusion is as follows:
- Only 3 REIT met my criteria of diversification, past performance and payout ratio
- The highest yield is 5.5% and the lowest 3.5% (not 6 to 8% as mentioned)
- 2 of them increase distributions by 2-3% every 3 or 4 years, the 3rd increased distributions 5 consecutive years and cut it in the 6th
- only one provided cap appreciation ~30% over 5 years
You haven't invested in RRSP, and your blue chips are only in Canada not US or international. So your investing is very limited. I started the thread asking about the REITs paying 6-8% distribution. You didn't look at those, and answered with your findings of other REITs paying lower.

There are many REITs that gave 6-8%. Since you said you did research 6 months ago, you should've seen (but ignored) SMU or APR, or others.

SMU.UN at 6 months ago was at $6.1. I bought SMU.UN at $6.2 around that time. Based on $6.2, It's distribution was 8.32%. If based on $6.1 it would've been higher. SMU's price has been increasing, just closed at $6.78. I had been receiving distributions, but recently sold it at $6.74, to buy Home Capital (was too good to pass).

Another example is APR.UN. 6 months ago it went briefly below $10, but was mostly just above $10 when I bought it. It returned about 8% in distribution. It also increased in price. Even at recent price of just above $11, it still distributes >7%. I could've held it longer, but sold it recently at $11.25 (then bought Home Capital and others).

There are other examples, and if you did real research before, they were there.

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