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Canadian Real Estate Investment Trusts (REITs)





A lot of investors consider income trusts a big no-no or even a taboo subject. There are many reasons for this, among them include the fact that a lot of income trusts pay more in distributions than they receive in earnings. The biggest reason for their recent demise is that they will be faced with corporate taxes in a few years, thus a likely decrease in distributions.

There is one sector within the income trust world that managed to dodge the new federal tax rule, and those are Real Estate Investment Trusts (REITs).

What are REITs?

Real Estate Investment Trusts or REITs are companies that invest in real estate assets and distribute their income (primarily from rent) to their shareholders. The distributions are usually in portions of dividends, return of capital, and income.

How can you buy a REIT?

Equity REITs can be purchased like any other public company/stock through the stock market. If you are interested in REITs, and you haven’t opened a discount brokerage account yet, check out my Review of Canadian Discount Brokerages.

What are the different types of REITs?

As you know, there are many types of real estate investments, and there are REITs that cover them all.  They can range from residential rentals, hotels, super store leasing, apartment buildings and seniors housing.

What are the benefits of a REIT? Why wouldn’t I buy my own property?

The biggest benefits of REITs is that you can get exposure to the real estate market without being a landlord yourself. From my experiences as a landlord, it can become a second job and sometimes not a very fun one at that. On top of that, although hard real estate assets can mean high profits, they will never have the liquidity of a REIT (liquidity means to ability to buy/sell with relative ease).

Some Popular Canadian REITs are listed below:

Where do I start?

Those of you new to the REIT market, I realize that this can be a little intimidating. If you’re looking for a decent place to start, check out the iShares CDN REIT Index ETF. This REIT index is market weighted meaning that their position sizing/holdings depends on the market capitalization (size) of the REIT.

I personally would start my reading on the largest REIT in Canada, which is currently RioCan Trust – REI.UN. If you’re looking for some more info on XRE, Canadian Capitalist has some more info that you should read up on.

Which REIT do I like best?

That is out of the scope of this article, but I will post about this in the future. In the meantime, do some reading on the REITs listed above. If you already have a favorite REIT, please post your suggestion in the comments.





38 Comments, Comment or Ping

  1. Funnily, I made a post on the same topic today. Fortunately, though there isn’t much of an overlap. Otherwise, I would have had to write a new one entirely :)

  2. You know what they say CC, great minds think alike. ;)

  3. 4. nobleea

    Does the iShares ETF pay out distributions? I would assume so. What is the ‘yield’? What’s the percentage breakdown in terms of dividends and other?

  4. Nobleea, Yip, XRE pays out distributions at a current yield of approximately 4.6%. In terms of % of dividends, ROC and income, that is unknown until the end of tax year (which sucks) (http://ishares.ca/product_info/fund_history.do?ticker=XRE).

    Might be best to hold these guys within your RRSP.

  5. I’m still kicking myself in the rear when Rob Carrick screaming his lung out to buy RioCan when they were distributing > 7%. Duh!

  6. FJ, that’s hilarious. Riocan is always on my watch list and is among my favs. How about you? Do you own any REITs?

  7. RioCan is on my watchlist, but I currently don’t hold any REITs as I need to do a little more homework in this sector.

  8. 10. Jason

    I have a couple of questions. 1) Where does one find out if a given REIT pays out more in distributions than it’s earnings? 2) How is that even possible? 3) Is it only Canadian REITS that will be forced to pay corperate taxes, or is that a US thing too?

  9. 11. Jason

    One more thing…I like SRQ. It pays monthly dividends between $.10-$.16 a month per share, and usually a year end dividend around $1+.

  10. Jason: You’ll have to look at their balance sheets. Stockhouse.ca is a great place to find financial info about a company. Just take a look at the companies report earnings/share (EPS) and compare it to the annual dividend payout. You’ll notice that with income trusts, A LOT of them have a higher dividend than their EPS. How do they do this? It’s called Return on Capital, they basically pay out a portion of what they make by issuing more shares of the company. Kinda like a ponzi scheme.

    With regards to corporate taxes, REITs (that are primarily Canadian based), are exempt. However, all other income trusts will face corporate tax in a approximately 4 years.

  11. I think REITs should be treated differently even though they distribute tons of Return of Capital.

    The earnings in REITs are abitrary lowered, because they depreciate appreciating assets when filing for taxes. That’s my understanding.

    For example, they may depreciate a building, even though:

    - The replacement cost is higher due to rising labour and material costs.
    - The land value is appreciating.

  12. Any thoughts about the REIT income trust exemption?
    Does anyone know why were they exempted and is their tax status likely to change in the future?

    Mike

  13. Taking RioCan as an example, half their distribution is Return of Capital and the other half is income.

    If you hold RioCan outside of RRSP and live off the distribution, only half the distribution is taxed. If you hold RioCan inside RRSP and live off the distribution by withdrawing from RRSP, 100% of the distributions is taxed.

    The new tax rule won’t affect non-registered investors, because dividend tax credits will offset the lower distributions. This is especially true for Return of Capital because they are not taxed regardless if RioCan is exempted.

    In summary, trusts with high Return of Capital ratios should be held outside RRSP. Save your precious RRSP room for tax-inefficient securities like bonds, US dividend-paying stocks and trusts with high proportions of interest incomes such as Bell Aliant. If I hold RioCan outside RRSP, I’m indifferent whether RioCan is exempted or not from the new tax rule.

  14. 18. Jason

    I was looking for more information on the new tax on REITS at Google, and guess which article is #1. This one! Congrats. You know you have accomplished something as a human when Google puts you up top.

    Speaking of which is their a link or something where I can learn more about that new tax and how it could impact the value of the REIT?

  15. Jason, as of right now, REIT’S are excluded from the new income trust laws. There are specific criteria that the REIT has to meet though. You can reference this article by TD bank:

    http://www.tdwaterhouse.ca/insights/jan07/article1.jsp

  16. 20. Jason

    Perhaps I am confused. You said ” The biggest reason for their recent demise is that they will be faced with corporate taxes in a few years, thus a likely decrease in distributions.”

    Where can I find more information about thos new taxes that they may be facing?

  17. 21. Ed Rempel

    REIT’s are unlikely to be affected by the new rules even in the future. My opionion on why they will be continue to be exempted is for 2 reasons:

    1. There is a long history of REIT’s and they exist in the US as well. They are generally
    accepted both in Canada and internationally.

    2. They help promote liquidity in real estate investment, which is useful since it is so illiquid. For example, in the 80′s, quite a few mutual funds invested in real estate, but all of them were forced to suspend redemptions in the early 90′s. This is because they were being redeemed in mass – much faster than the underlying real estate could be sold. By the mid-90′s, I don’t think a single real estate mutual funds was left.

    Some REIT’s survived this period. Investors held them despite years of declines because they were still getting some cash flow.

    All other equity investments don’t have this liquidity problem, so they don’t need the same help.

    Ed

  18. Jason

    A lot of investors consider income trusts a big no-no or even a taboo subject. There are many reasons for this, among them include the fact that a lot of income trusts pay more in distributions than they receive in earnings. The biggest reason for their recent demise is that they will be faced with corporate taxes in a few years, thus a likely decrease in distributions. There is one sector within the income trust world that managed to dodge the new federal tax rule, and those are Real Estate Investment Trusts (REITs).

    Above I stated that there was a new tax coming to INCOME TRUSTS, then at the bottom, I said that REITs will avoid them. As of right now that is. Basically, income trusts (except reits) will face corporate tax in 2011. Please read the article on TD water house that I posted above.

  19. 24. Jason

    I finally get it! I am more than a little slow apparently, but I’ve got it now. It’s only Canadian income trusts that are affected. I didn’t understand the difference until I did some research and wrote my own article about trusts. If anyone is interested it is at http://finance.jasoncrews.name/2007/07/31/what-the-heck-is-an-income-trust/

  20. 27. cannon_fodder

    FT,

    Do you know anyone that has posted a step-by-step process to analyse the Canadian REITs for long term purchases? I’m finding it more difficult to know what metrics I should use for analysis.

  21. 31. Denis

    What are your thoughts on Dundee D.UN. They have been paying distribution of 0.183 cents since 2003, do you think they can maintain this distribution? I also like INN.UN, and HR.UN.

  22. 32. Snowburn

    Any thoughts on League Assets?

  23. 33. Joe Ross

    I get highly suspicious of any so-called investment that posts Youtube videos with titles like “Is League Assets REIT a Scam?”, along with other fake blogs with similar titles, and tiny Google ads all over the place promising 14% “ROI.” This does not strike me as a method by which a legitimate investment would be marketed.

  24. 34. Shiraz

    While I personally invest in real estate I don’t like the idea of REIT’s. Between cash flow, mortgage pay down and appreciation, it isn’t uncommon to make a return of 10-15% in real estate if you purchase the right property. However, when I purchase the property myself at least I know what I’m buying and I’m doing my own research on each property.

    Of course, a lot of investing comes down to personal preference and comfort levels. My own preference is to be more hands on.

  25. 35. Betty

    I transferred my REIT into my husband’s name. No money changed hands – just paperwork. Do I have to claim this on my taxes or can we wait until my husband sells.

  26. 36. Mike

    I have heard that a Canadian REIT is involved with new Walmart stores leasing land. Do you know which REIT is doing this commercial leasing? Mike

  27. @mike, I believe that Riocan (REI.UN) is the biggest landlord of Walmart stores.

  28. 38. Paul

    Mike…..you may want to check out Calloway REIT (CWT.UN). They have 76 properties in which Walmart is a tenant. http://www.callowayreit.com/Properties/Retail-Properties/

    Cheers Paul

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