Gordon Pape: REITs are losing momentum
REF.UN.TSX, AP.UN.TSX, CSH.UN.TSX, CRR.UN.TSX, MST.UN.TSX, AAR.UN.TSX, SRU.UN.TSX, BEI.UN.TSX, XRE.TSX
After posting big gains in the first half of the year, real estate investment trusts (REITs) appear to be running out of steam. As of the close of trading on Aug. 29, the S&P/TSX Capped REIT Index was down 3.8 per cent for the month, breaking a winning streak that began at the end of February. Still, the index is ahead 15 per cent for the year, so investors can't be all that unhappy.
The upsurge in REITs this year has been fuelled by investor demand for yield. With interest rates at their lowest levels in living memory, any security that provides decent cash flow has been a magnet for new money. REITs distribute almost all their cash flow to unitholders and virtually all have yields in excess of 4 per cent. Compare that with yields of around 1.6 per cent on five-year GICs and you can see why investors have been piling in.
The pullback this month appears to have been caused by growing investor awareness that the sector has become modestly overpriced plus growing concern that the U.S. Federal Reserve Board may move to raise its key interest rate at its September meeting.
Despite the recent retreat, many REITs are still outperforming their peer group, some by a wide margin. Here are a few of the big winners this year. Prices are as of the morning of Aug. 30 and do not include distributions.
Allied Properties REIT (AP.UN-T). Opened 2016 at $31.57. Current price: $37.50. Gain to date: 18.8 per cent.
Canadian Real Estate Investment Trust (REF.UN-T). Opened 2016 at $42.06. Current price: $49.29. Gain to date: 17.2 per cent.
Chartwell Retirement Residences (CSH.UN-T). Opened 2016 at $12.33. Current price: $15.65. Gain to date: 26.9 per cent.
Crombie REIT (CRR.UN-T). Opened 2016 at $12.80. Current price: $15.41. Gain to date: 20.4 per cent.
Milestone Apartments REIT (MST.UN-T). Opened 2016 at $15.05. Current price: $19.58. Gain to date: 30 per cent.
Pure Industrial REIT (AAR.UN-T). Opened 2016 at $4.37. Current price: $5.56. Gain to date: 27.2 per cent.
SmartREIT (SRU.UN-T). Opened 2016 at $30.10. Current price: $36.26. Gain to date: 20.5 per cent.
However, not all REITs have benefitted from this cash inflow. For example, Boardwalk REIT (BEI.UN-T) is up only 6.4 per cent from its 2015 close of $47.25 and has lost more than $9 per unit in the past six weeks. The main reason is its heavy concentration (about 60 per cent of total assets) in economically troubled Alberta.
There are a lot of REITs on the market these days with more coming on stream all the time. So if you're shopping for one for your portfolio, what should you look for? Here are some guidelines.
Increasing cash flow. In REIT terms, this is described as funds from operations (FFO) and it is one of the most important indicators of financial health. Any REIT that has a history of steady FFO growth is worth a look.Distributions. Some REITs increase their payouts on a regular basis. Others do so only rarely and with apparent reluctance. Stagnant payouts may make the share price more vulnerable when interest rates rise.
Geographic diversification. REITs that concentrate their assets in one region are likely to run into trouble if a local economic downturn hits. Boardwalk REIT is a prime example. Choose a REIT that has broad national diversification.
Tax treatment: Some REITs structure their payments so as to provide tax advantages to investors with non-registered accounts. Others are less tax-friendly. Check the REIT's website for details on how the distributions from previous years were taxed.
Look at the underlying assets. Currently, REITs that invest in apartments, retirement residences, and industrial properties are in favour. Those that focus on shopping malls are coming under greater scrutiny because of the shift in consumer buying to e-commerce.
If you'd prefer to simply hold a basket of REITs, the iShares S&P/TSX Capped REIT Index ETF (XRE-T) is a viable option. It is ahead 19.05 per cent year to date and shows an average annual compound rate of return of 7.79 per cent over the past decade (to July 31). I believe you will do better by creating your own REIT portfolio but if you prefer one-stop shopping, there it is.
Check with your financial advisor before making any decisions.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.
Tue, 30 Aug 2016 13:14 EDT