Investment Q&A

Q: Hi 5i Guru's

Re; Rei.un (Riocan)

I am considering adding RIOCAN to my TSFA. It has been beaten up with the REIT sector and looks like a reasonable entry point now. I think Shopping centers are in the cards for the long term, providing a secure revenue stream. The close to 6% dividend is therefore likely sustainable and subject to increases. And lower interest rates seem to be here for some time to come.

Would you recommend RIOCAN, or do you see a preferable name in the REIT sector.

Thanks so much,

Q: Chartwell (csh.un) has dropped more than other REITs. Could you comment on the company and do you think it is a good time to buy this or other REITs such as HR.UN or REI.UN. I have a well diversified portfolio and I am not overweight in REITs. I greatly appreciate your advice. Thanks

Q: Hi, Peter and Team: HLP.UN has been sliding and has a payour ratio in the nineties. I notice on their Web page, under the News Release section, that they've posted a dividend disclaimer. Any cause for concern?
Thanks, Dale

Q: Good Morning,

You commented on Leisureworld (LW) yesterday before the release of their quarterly results. The stock plummeted at the open this morning but has since made a slight recovery, although still down. Do you continue to stand by yesterday's comments? Many thanks!

Q: Peter, your opinion on Dundee Industrial Reit please. Thanks Ken

Q: Wondered if you had any thoughts about the decline of Leisureworld (LW: TSX) with no news lately, and earnings release after close today?

Q: Can you comment please on the down-grade of Dundee (D.UN) by CIBC today? TIA
Gary

Q: Hi Peter & 5i: regarding Blaine's question on Partners REIT. There was a fire that destroyed one of their multi unit buildings at the Evergreen Shopping Centre in Sooke, BC, on July 31st. I believe that is a substantial reason for their continued descent the last week, while many other Canadian REITs appear to have been stabilizing a bit. The fire was "suspicious." Haven't heard anything on insurance coverage or dollar value loss estimates yet. Presumably they'll have some comments about it when they report later this week.

Q: Hi , the share price for Partners REIT (PAR.UN) has continued to fall throughout the summer and now yields about 10.35%. Any idea what might be going on here? Thanks

Q: Hello,

RLC.TO, Buy, sell or hold.

Thanks

Q: I recently bought HCP Inc "HCP" at $ 45.50 since it has been going down. Would you have any opinion on this stock.

Thanks

Q: Hi Peter,

Your latest reports on FCR (B+) and H&R (A-) were positive but since then, the shares of each of the two companies have decreased significantly (in the past few months). Can we expect further volatility given the "threat" of tapering and interest rate hikes? Good entry points at these levels or wait and see?

Regards,

François

Q: Hi 5i team. I'd like to put in my 5 cents worth to give contrast to Lance's question on REIT's and specifically Riocan (REI.UN). From my perspective as an income invester, the pay-out and it's ability to keep up with inflation is more important than the value of the shares. I bought REI in 1997, soon after its debut for $8.75. Over the years, the ACB has declined to zero and the yield at cost (present yield divided by original cost as percentage) has gone up to 16.11%. Depending on how you calculate inflation, it has done pretty well as a taxable investment and because of the ACB situation, it is difficult for me to sell. I don't think it has done too badly compared with the TSX. Going forward is a different matter because, as Lance has pointed out, we are going the opposite direction as far a interest rate is concerned. Should I sell and paid the hefty tax bill? Thanks. Henry

Q: Hello folks. I’ve sold off most of my REIT positions but continue to hold a few that are down with the rest of the sector. These are CUF.UN (-8.5%), HLP.UN (-6.0%) and RMM.UN (-9.9%).

I’m comfortable holding these long-term for income (current yields are 7.2%, 8.3% and 9.0% respectively), unless there’s a good possibility that unit prices will continue to decline as treasury yields creep up. Would also be concerned if unit prices are unlikely to recover over the next 2-3 years, especially if they keep dropping. And a possible cut in distributions wouldn’t help either.

Hope it’s not asking too much to get your thoughts on these 3 REITs. In the meantime, thanks as always for the great service you fine people provide to retail investors like me. So glad I became a member!

Q: I currently have no direct holdings whatsoever in either the Canadian REIT or Utility sectors (other than a large index position via XIU). What would be your top 1 or 2 names in each of these sectors suitable for new buying right now? Rather than holding just 1 or 2 names would a sector ETF be more advisable and if so which ETFs for each would you recommend? Thanks and great service.

Q: I own morguard north american reit.It keeps dropping in price.
Today alone more then 4%
Whats going on.Is it a sell or hold?

Q: Hi Team,
Can you comment on the current drop in price of Artis REIT (AX.un).
It's dropped another 5% recently, and I'm wondering what's up?
Thanks for all your great advice!

Q: Hi Peter & 5i:
(This may be too long and unwieldy for posting so I’ll leave it to you – please post away if you want to.)
Can you please check my thinking on this stuff. I hold several Canadian REITs and have done well with them but, after holding through the recent top, I am wondering if I should strip down my positions or even exit them entirely. Here is my thinking:
Over the years I’ve noticed that they tend to separate out into tiers based on perceived risk/quality. Occasionally one moves significantly relative to the rest of the REITs but not usually. Usually the REITs stay within their tiers, the tiers maintain their relative positions and the market tends to move the whole group up and down together. With the recent topping and pullback, I have been thinking about what is going on with bond interest rates, wondering about REITs’ present valuations and to what extent the REITs are discounting, or susceptible to, further movements in the bond markets.
It seems to me that it is useful to view REITs in terms of the spread between a REIT’s yield and a bond yield (eg. Cdn 10-yr). The market requires REITs to have a higher yield because they have equity risk, among other things. Taking REI.UN for example, right now its yield is about 5.8% and 10-yr Cdas are about 3% so you have a yield spread of 2.8%. During very turbulent times like the tech boom and bust or the 08-09 financial crisis the spreads get significantly wider – with REIT valuations compressed and very high yields available to investors who can be comfortable with the perceived risks amidst the turmoil. I tried to select a couple of “mid-points” in REI.UN’s unit value over the last 10 years and came to the view that the current spread of 2.8% is just about “normal” (not exactly “average”, but more like “reasonable for non-crisis times and potentially relatively stable”). It doesn’t matter if I have the “normal” number exactly right for what I am thinking, just so long as I am somewhere around right. So one suggestion is that you could look for REI.UN to find its way toward a 2.8% spread, if the broader markets aren’t either on a rocket ride or in a free-fall.
I kind of expect that over the next 3 to 5 years the 10-yr bond rates are going to rise. And it wouldn’t surprise me to see them moving back into the range of 4-6% . On the way down, the move from 6% to the 4% range spanned from mid 2000 to 2007. REITs, fueled in part by the ever lower interest rates, moved steadily higher over the same time span. As a touch point along the way, in January 2005, REI.UN’s spread over 10-yr Cdas was about 2.8%, but with the bond at about 4.2%, that meant REI.UN’s yield was 7%, with a unit value of about $18.00.
Today, with a spread of about 2.8% and a yield of 5.8%, REI.UN’s unit value is about $24.40. Now I know that not everything tracks its own history perfectly, REITs can kick in the odd small distribution increase, and endlessly many other variables may have some impact. However, based on the current distribution level, on the 2.8% spread metric, a move to a 10-yr Cda rate stabilizing at around 4.00% would imply a unit price of under 21.00 for REI.UN. Similarly, a 10-yr Cda rate stabilizing at around 6.00% would imply a REI.UN unit price of about $16 – a long, long way down from over $24. Moreover, because what I am considering has absolutely nothing to do with Riocan’s operational performance and because the market tends to move the group of REITs in tandem, it is likely that if REI.UN units trade lower on the yield spread over rising bond rates, then the rest of the REITs will do the same thing.
The conclusion seems to me to be that it would be prudent to underweight REITs now, if not exit them entirely. But it all depends on the interest rate call. If something happens to push 10-year Cdas back down to 1.6% (like ca. June 2012), REITs could provide another significant top, and a great exit point. If interest rates trend steadily higher from here, then we probably don’t see another top like the one we just recently had. Interest rate trends can be very long (and scary). With relatively few peaks and valleys along the way, the trend on 10-yr Cdas was down from 1982 to 2012 (30 years!).

Q: CWT.UN/REI.UN Looking at the REITs I see a rather large yield of around 6% on these two blue chips. I own very few bonds at this point (or REITS for that matter - HLP.UN/HR.UN). The bonds I do own are of short duration with half the yield of the REITs. I do not see US 10 year going above 2.5% and this should hold back Canadian yields. Time to buy under that scenario?

Q: Good morning Peter and the 5i team, Another question about FCR. Would it be advisable to switch a 5% holding in Riocan (REI.UN) to FCR? The price of FCR appears to be at a good entry point. (I've held Riocan for several years, and am up about 12% with reinvested dividends). Thanks.