What is a REIT?
A real estate investment trust is a collective fund that pools the capital of investors to invest in various forms of real estate, usually income producing assets like apartments, shopping centers, offices, nursing/retirement homes and hotels that are structured to generate regular distributions of cash. REITs actively manage real estate assets.
- a form of equity - distributions are not guaranteed like debt, hence riskier
- frequent (often monthly) and substantial cash distributions - useful to investors for regular income
- traded on a stock exchange but are called units not shares and are distinguishable by the addition of the suffix UN to the symbol, e.g. CWT.UN
Why have REITs in a portfolio?
- Diversification -REITs tend not to move with the overall stock market, which reduces the volatility of a portfolio; see links to tables of correlation coefficients on Bylo Selhi
- Attractive Yields of 5% to 11+% - This table from Investcom.com shows a sample of REITs and their yields as of June 23
That's not the end of the story, however, since cash distributions can be and might be suspended or reduced. Globe and Mail columnist Fabrice Taylor recently expressed skepticism of current value in It's getting harder to see the value in REITs.
What are the risks to distributions?
- Payouts too high to sustain the business' underlying needs to service debt and make capital expenditure re-investments. REITs may pay out 50-90% of profits on an on-going basis; when it is over 100%, watch out, that will deplete the business if more than temporary or short-term. Some businesses grow their distributions, they are not just stagnant "cash cows" though most of the expected return will be distributions, not gains on the unit price.
- Leverage - if the underlying business has a lot of debt relative to revenue, downturns can be fatal.
- Rising interest rates - can damage two ways: a) the underlying business runs into debt servicing problems and b) the fund units lose value since the distribution is less competitive with other sources of regular income like bonds; though the distribution may not decline, its value is less.
Where to find REITs
- Investcom.com - Comprehensive listing of 34 Canadian REITs, shows their distribution yield and whether it has recently gone up, down or stayed the same as well as news and links to background reports and books
- ETFs - REIT Sector Index Fund (XRE) and BMO Equal Weights Index ETF (ZRE). There are also ETFs available through US exchanges for US and international REITs (see list on Stock Encyclopedia), though the distributions from these are not tax-advantaged as they are from Canadian REITs
- Mutual Funds - Use GlobeFund's filter set to Real Estate Equity to find funds that invest in REITs