Creating a Diversified REIT PortfolioPosted: December 6, 2012
It has been a busy month, but some ideas have been fermenting the on the back burner during that time, and one of them is REITs. REITs, or Real Estate Investment Trusts, offer a great vehicle for regular income, and often offer high yields relative to regular equities. A REIT is several things at once, as indicated by its name:
- It is an investment trust. As a trust, income from REITs is often categorized as interest income1, and as such is treated different for income tax purposes. However, one key advantage to interest income is that when you use it in a TFSA, none of that interest is taxable.
- As a trust structure, ownership of the REIT is accomplished through trust units, which differs from equity shares of a typical dividend paying firm.
- REITs invest in some type of real estate, as indicated by its name.
Artis REIT was my first REIT investment, and in terms of an income stream has treated me incredibly well. While the distribution payout has been flat — the actual distribution has been a consistent $0.06/month for the 2+ years that I have owned it — given the yield that it has provided, I cannot complain. However, one key challenge with holding only one REIT is that you are subject to the properties that the REIT itself invests in. Here is a map, which I pulled from Artis’ own website, which shows its current property distribution:
As you can see from the above, Artis is heavily concentrated in Central Canada. Not that this is a bad thing, but remember that one of the key qualities of a good portfolio is diversification. One of the easiest ways to diversify a REIT portfolio would be to simply invest in a REIT ETF, such as the S&P/TSX Capped REIT Index Fund, XRE.TO, or Bank of Montreal’s Equal Weight REITs Index ETF, ZRE.TO. One minor challenge with this is that you are still victim to the ETF’s investing strategy. However, the bigger challenge is that the relative yields between an ETF and a hand-picked portfolio of REITs is pretty wide. For example, the latest distribution yield (as of December 6, 2012) on XRE.TO was 4.58%. However, if you were to hand-pick an equal-weighted portfolio of four REITs, AX.UN, BTB.UN, CUF.UN, and HR.UN, you could achieve an effective yield of 6.92%!2.
With that thought in mind, I have been doing research lately on the different REITs available in Canada. My goal is to create a small (sub-)portfolio of REITs that will allow me to beat the yields of the major ETFs, while allowing me to customize the focus of the (sub-)portfolio, and diversify away any geographic concentration risk. There are few articles which are specific to Canadian REITs, but here are some useful links to start with:
- Avrex Money
- Series on Canadian REITs at Seeking Alpha
- Deloitte’s 8th Edition REIT Guide
- The Loonie Bin
For my own research, I headed over to my discount brokerage and ran a quick screen on all Income Trusts which are traded on the TSX. From there, I stripped out any trusts that were not REITs, and came up with the following list:
|AAR.UN-T||Pure Industrial Real Estate||Industrial||link|
|AP.UN-T||Allied Properties REIT||Office||link|
|AX.UN-T||Artis REIT||Diversified I (Office/Industrial/Retail)||link|
|BOX.UN-T||Brookfield Canada Office Prop.||Office||link|
|BTB.UN-T||BTB REIT||Diversified I (Office/Industrial/Retail)||link|
|CRR.UN-T||Crombie REIT||Diversified II (Office/Retail)||link|
|CSH.UN-T||Chartwell Seniors Housing REIT||Retirement/Nursing/Healthcare||link|
|CUF.UN-T||Cominar REIT||Diversified I (Office/Industrial/Retail)||link|
|DI.UN-T||Dundee International REIT||Commercial||link|
|DIR.UN-T||Dundee Industrial REIT||Industrial||link|
|HLP.UN-T||HealthLease Properties REIT||Retirement/Nursing/Healthcare||link|
|HLR.UN-T||Holloway Lodging REIT||Hospitality||link|
|HNT-T||Huntingdon Capital||Diversified I (Office/Industrial/Retail)||link|
|HR.UN-T||H&R Real Estate Invest. Trust||Diversified I (Office/Industrial/Retail)||link|
|IDR.UN-T||REIT INDEXPLUS Income Fund||Fund||link|
|MRG.UN-T||Morguard North American REIT||Residential||link|
|MRT.UN-T||Morguard Real Estate Inv Trust||Commercial||link|
|MSN.UN-T||Morguard Sunstone Real Estate||Fund||link|
|NPR.UN-T||Northern Property REIT||Residential||link|
|NRF.UN-T||North American REIT||Fund||link|
|NWH.UN-T||Northwest Healthcare Prop REIT||Retirement/Nursing/Healthcare||link|
|PMZ.UN-T||Primaris Retail REIT||Retail||link|
|RCO.UN-T||Middlefield Can-Global REIT||Fund||link|
|REF.UN-T||Cdn. Real Estate Investment||Diversified I (Office/Industrial/Retail)||link|
|REI.UN-T||RioCan Real Estate Investment||Diversified II (Office/Retail)||link|
|RIT.UN-T||First Asset Canadian REIT IF||Fund||link|
|RIU.UN-T||Canadian REIT Income Fund||Fund||link|
|RMM.UN-T||Retrocom Mid-Market REIT||Retail||link|
|RRB.UN-T||Connor Clark & Lunn Real Ret||Fund||link|
|TGF.UN-T||Timbercreek Global Real Estate||Fund||link|
|USM.UN-T||US Agency Mortgage-Backed REIT||Fund||link|
For the sectors, I borrowed (and slightly expanded) the list found in the Seeking Alpha article listed above. The list above focuses purely on the TSX, and ignores REITs which can be found on the TSX Venture Exchange, some of which were pointed out in a post I put up on the Canadian Money Forum3
Because I already own Artis REIT, I am looking for other REITs to balance the geographic distribution in the Diversified I sector space. The above is just the first cut at the research, and in later blog posts I will document my selection methodology and progress.
1 As with a dividend paying corporation, occasionally this income may be in the form of Return of Capital.
2 For the 6.92% yield, I used the incredibly scientific method of randomly selected the four highest yield fully diversified REITs.
3 Not that there is anything wrong with the TSX Venture Exchange, however it is not an area that I have ever really looked into.