Hi all, thanks for joining our live chat today with Derek Warren. We'll get started in about 10 minutes, but in the meantime, feel free to start submitting your questions.
Thanks for joining us this afternoon Derek. To start things off, how do you feel about the REIT sector in general these days?
We are feeling very positive about real estate right now. The properties are performing very well, and this is showing through in the earnings releases of the REITs and real estate companies. Many are raising dividends, and in general are in very good financial health.
REITs have enjoyed a lot of growth in the past few years, but some investors are getting skeptical that the value is still there. What would you say to these investors?
The great thing about real estate, and the reason that it is becoming a greater part of the portfolios of large pension plans, is that it offers strong cash flow yields. These rent cheques continue to come despite how the market moves up and down. While we are not expecting to see the same double digit returns this year as last, we still see strong support to the yields, in fact we think that we will see dividend growth this year. Additionally we continue to see REITs being able to pass through significant same store cash flow increases, and finally the refinancing being done this year is putting money in investor's pockets. I think that this will turn out into returns in the 10% range.
The 10 year history of the IPD - the direct property index in Canada is over 11%, and the 23 year number is over 9%. That is what investors should be looking for going forward.
A few readers have submitted questions on Artis REIT, so let's follow up with this one.
Artis is a great name for yield focused investors, with a great 6.8% yield supported by a diverse core of property investments. The payout is 91% this year's cash flow, so the distribution is safe. The stock has underperformed its peers, we feel, due to managements aggressive aquisition strategy that in the mind of some investors was 'too much too fast'. We feel that this year will be a good year for Artis holders as the company focuses on integrating these new properties. We also feel the company has good opportunities within their existing portfolio for improving operations. This is one of the safer of the higher yielding REITs.
This is a very important question Darcy. I've already mentioned why the core yield of Canadian REITs is so important, and how I feel that will be a source of stable returns this year. What is missing is the capital appreciation i.e. the value of the buildings. The increase in value is what made 2012 such a great year for Canadian REITs, though I think much of that is priced in now. In the US however, there are still many more opportunities to participate in the upside movement in valuations as their economy is recovering. US REITs have much lower yields of course, so I think the best solution is to focus on Canada as a source of stable yield, and look to the US for a growth boost.
We do have an underweight position in the CIBC Canadian Real Estate Fund as it is a growth mandate, but not in the MSN.UN due to its yield focus. The reason we are underweight is that we feel management is not focusing on shareholder returns so much as growing for growth's sake. While we are not entirely against externally managed companies, we like to see more evidence of a shareholder friendly structure. The real estate assets are great quality, and the stock is starting to look cheap, however I think that until the noise of the Primaris bid clears away the stock will underperform. I would encourage investors to own CREIT instead for a diversified portfolio or RioCan if they want retail exposure.
That is an important question. As you may be aware the Canadian model is to have higher payout ratios... the public appreciates the higher yields. The trade of is to lower risk by having less debt. RioCan for example has a 100% payout ratio, but their debt is low (40% of total capitalization) and they have great access to multiple sources of capital so this isn't really an issue. If however the payout is high and debt is high, then you are at risk. The best is low debt/low payout like REF.UN, AP.UN etc, but then you have lower yields.
If you want higher yield, lower risk, I like AX.UN, and also LW. Leisureworld is a corp not a REIT, with a ~70% payout, 54% debt, and a 7% yield.
True North is a newer apartment REIT. I would recommend a shift into one with a bit more history such as Canadian Apartment REIT. If you need yield and want to stay small cap, try Pure Multifamily REIT. This is a Canadian entity but is all US apartments. You get a good yield of 7% and I think the US apartments will have more upside than the True North assets.
Agellan is a brand new REIT that is a collection of Canadian and US assets. There is no analyst coverage as of yet. We like this name and I think it is a good way to play the US recovery as most of the assets are in growth areas of the US such as Texas. The issue has traded down slightly, and in my view the market is looking for some US aquisitions. The management is very good, and it is just a matter of time to see some activity. In the meantime you are being paid 7.75% to wait. Its a great deal.
Well Howard, we also own US homebuilding stocks that are very liquid, yet have moved 7% down and 7% up in the last few days, so I don't mind the Canadian experience too much! I find that keeping a longer term focus on valuation trends, and a keen eye peeled for my monthly distributions, helps ride through volatility. Your point is valid and one of the reason that small cap real estate corps with no (or low) yield trade at such a discount. Stick to the larger names.
Since we're at the top of the hour now, I'll pass along one more question before we end things here this afternoon.
Long term: stick to Canada. Our market is much more disciplined and less volatile than the US. You can get a nice ~7% yield, with some internal growth and you get a very 'un-sexy' 10% tax advantaged return. That is the attraction of Canadian real estate.
Great. Thanks so much for joining us today, Derek. And thanks to the many readers who submitted questions!
Thanks to all for the opportunity to talk today. Please note we own many of the stocks we discussed today. I wish you all a great 2013 of real estate investing.