Investment Q&A

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.

Q: I would like to take a small position in 1 or 2 of these Hot.un,BTB.UN,TN.UN which would you prefer ?

Q: I have no REIT exposure in my daughters RESP. Was considering adding a REIT ETF such as ZRE or VRE. I like ZRE as each holding is capped at 5%, but the MER is higher than VRE.

Any suggestions?

Q: What is your opinion of HLP? How safe is the dividend?

Q: HR.UN Can you tell me what if any, the impact of the internalization of management will mean.

Q: Dundee REIT has been down lately. Do you think it is a good hold and just suffering from the interest rate noise or is there fundamental problems?

Thanks,
Charlie

Q: Hi, I own Leisureworld (LW)and wonder whether I should consider it as part of my REIT portfolio or not. I know it is officially a corporation, but is it really a REIT in disguise, or should it be considered separately as a long term care provider? If it is quasi-REIT why has it performed so much better YTD than REITS in general. Thanks.

Q: Good morning!
I'd appreciate your take on the Crombie acquisition.
Thanks!

Q: Peter; Could you update your Feb. comments on Dir.un? It's now yielding 7.7 and seems to be in free fall. Thanks. Rod

Q: Peter, looking to buy more Cominar Reit for dependable income. Is the Div. safe. Thanks for the service, Ken

Q: Hi Peter, REIT's seem to have taken a pounding lately. I know they are vulnerable to rising interest rates but do they represent a good value play? I am looking at taking a position in HR.UN or FCR what do you think?

Q: Regal Lifestyle Communities (RLC) - any chance for an update from your last comments in May? It's dividend is now over 9% due to the drop from it's IPO price. Is this a dog to be avoided or worthwhile purchasing for a diversified income portfolio. I already own Medical Facilities Corp (DR) and Leisureworld Senior Care Corp (LW) in my Healthcare sector at 2.8% each weighting. Adding RLC would increase my sector weight to 8.5% Would Chartwell be a safer bet? Thanks!

Q: There is a new issue of Crombie 5.25 % conv.dEBENTURE , 2017. iS THIS A GOOD ISSUE TO BUY?

Q: Hello 5i, Could you comment on Plaza Corp PLZ