Investing in REITs

[Thomas Beyer]

[quote user=TangoWhiskey]No one knows what the future holds but sooner or later a reversion to the mean for interest rates is in the cards.
Says who ?



The price of money, like cars or shampoo, is set by supply and demand. Supply by aging baby boomers and the government printing press is HIGH to VERY HIGH. These days, you don't even have to print anymore, you just have to "easy quantitativly" i.e. the central banks authorizes more money and boom, it is there.



Debt demand by governments will eventually shrink, as we start to see in Europe now as countries cannot afford it anymore. This deleveraging process will be slow and painful and will take a decade or 3.



[quote user=TangoWhiskey]Conservative leverage and cashflow will allow owners to survive the lag phase as interest rate increases eventually show up as reduced home ownership and rent growth.

I agree here wholeheartedly.



[quote user=TangoWhiskey]Higher inflation means higher rates.
Says who ?



High inflation means: high inflation, i.e. price for REAL stuff goes up, and as such value of UNREAL stuff, like money or wages or debt, goes down. Wages have not gone up meaningfully for 30 years in real terms, and actually shrunk in the last decade.



Thus, where do I invest in: in REAL stuff, such as REAL estate with income (both REITs Andrea buildings and a few houses and condos), land ( as they are not making any more, both some farmland as well as industrial or residential raw land to be developed at some future point), silver (cheaper than gold and real industrial use) and oil companies, initially with fairly hi, now with lower and lower leverage as I shift from wealth creation to wealth protection.

 

[tonyla]

A huge driver of interest rates and future interest rates is the huge debt load that consumers have on their balance sheets. We are more interest rate sensitive then we have ever been in history. Everything equal there is no reason for the government to significantly raise interest rates. As the negatives to this are huge. If we were to raise rates 2 points it would seriously and negatively affect the economy.



For the foreseeable future they are going to have to balance managing inflation (including asset inflation) against growth. If there is significant inflation to warrant elevated interest rates that will be driven by economic expansion which everyone benefits from.

 

[Thomas Beyer]

[quote user=tonyla]elevated interest rates that will be driven by economic expansion which everyone benefits from.


you honestly think this will happen ? It will be very modest, at best. Look no further than Europe or Ontario or Quebec or the US to see where this economic "expansion" is not coming from !!



Most coddled western welfare states running by overpaid bureaucrats with strong unions are bankrupt and going downhill fast due to excessive government and social spending, at the expense of the real economy.



Economic expansion is ONLY coming from fiscally responsible states or regions, such as: India, China 9for now), Alberta, Sask., Manitoba, pockets of Germany, some S-American states .. that is where you should invest, be it in REITs that have a concentration there or in real assets, such as gold / uranium / silver/copper/potash/nickel mines (or shares of firms) farmland, real estate with income ..

 

[tonyla]

I don't think we are in disagreement at all. This is why places like the US has committed to not raising their interest rates until at least the 2nd half of 2013. There is a pretty convincing argument that we are going to have a very low interest rate environment in Canada/US for the short to medium term.

 

[Thomas Beyer]

[quote user=tonyla]US has committed to not raising their interest rates until at least the 2nd half of 2013


more like 2023 ..



where is a robust economic recovery coming from ? not from the indebted consumer and certainly not from the indebted (all three !!) government levels ..



The US, like Greece, has far too much government spending and too low a revenue to allow meaningful course correction.



If they allowed in 14-25 million immigrants with cash to buy houses and to invest in the economy .. that might work .. as does the additional oil and gas recoveries as the US has huge gas and coal and oil reserves .. but just look at this weeks bickering over Keystone XL coupled with a minor 2 months payroll tax extension and you see the depth of their government gridlock.



A country that spends $4T and takes in only $2T cannot be taken seriously anymore until they fix their economic engine, social welfare and entitlement mentality . Ditto Europe .. ditto Quebec .. ditto Ontario.



The cradle to grave bog government systems have failed, and it'll be decades to fix it.



Canada overall is in somewhat better shape, but election results in Ontario show me that all is not well here either !



Educating kids until they are in the late 20's and then working until the 50's is not sufficient for a state.



Thus invest only in hard assets in areas with strong balance sheets: MB, SK, SB, India, NZ, some S-American states, some Asian countries.

 

[gwasser]

I disagree with the long term low interest expectation as expressed by many during this discussion.

The reason is simple: supply and demand.



Yes deleveraging and higher savings rates amongst babyboomers may reduce demand for debt. But, if you have followed the Canadian stats lately, the opposite is happening. Maybe not in consumer debt, but rather in real estate debt. I am talking about mortgages because many babyboomers do not scale down as expected; many also buy recreational properties or are about to buy them. Furthermore, many babyboomers are working beyond early retirement age and even beyond 65 year age. They cannot afford to retire or they want to buy more because or they plan to work longer because of social reasons. Either way they likely will spend more and longer than previous generations (that is the nature of the Babyboomer beast).



The whole idea of demographic behavior patterns is thrown out of whack because boomers behave differently than previous generations. I would nearly like to say: "What else is new - baby boomers seem always to go against the grain!"



Secondly, the current low interest rates are Central Bank induced not investor induced. Whith stock dividends significantly higher than short and even longer term interest rates, especially on an after tax basis, who would want to invest in Treasury bills? For now the markets are shaky and investors flee to 'safety' but this will not last much longer. The U.S. may grow slowly but it is not likely to go into recession; neither will Canada. Asia will likely experience a soft landing - China just cannot afford a recession or low growth scenario because it would destabilize its government. Europe may experience a minor recession but it will likely be short, if you haven't noted apart from Greece, Italy, Spain and Ireland many other EU countries still experience robust growth off setting the PIIGs.



So with stock markets undervalued, and no matter what the perpetual bears say, it is definitely undervalued, where will the money go? Real Estate - maybe but think Toronto and Vancouver - more likely it will go into the stock market. So over the next year; and evenmore so in 2013 I expect the stock market to do well.



Guess what, in that scenario nobody would like to invest in 1% yielding treasuries. Duuh!!! So the only way new debt will be issued or old debt will be sold is at higher interest and bond yields. Even if the interest rates would rise to normal levels in relation to current inflation levels, interest would still have to rise.



I am not so concerned about Canadian household debt since a lot is in mortgages and real estate prices are even in Toronto and Vancouver not severely overpriced. Condos may be the expection. So, along with rising debt is rising net worth - maybe not salaries (except in Alberta and Newfoundland). So, things won't be that bad as the doom and gloomers predict. In my books, rising interest are not much more than a year away.



Here is another forecast against the grain: Oil price upside is limited and the downside risk is higher due to new technology! So, unless natural gass prices revert to economic viable levels, Alberta's growth will slow. The winners will be Morth American manufacturing and electric utilities that use natural gas. The problem with natural gas is the infrastructure that is not in place yet to take advantage of low and relatively low prices. But now that the low gas price story is nearly four years old, this may change sooner rather than later.

 

[bizaro86]

[quote user=gwasser]Here is another forecast against the grain: Oil price upside is limited and the downside risk is higher due to new technology! So, unless natural gass prices revert to economic viable levels, Alberta's growth will slow. The winners will be Morth American manufacturing and electric utilities that use natural gas. The problem with natural gas is the infrastructure that is not in place yet to take advantage of low and relatively low prices. But now that the low gas price story is nearly four years old, this may change sooner rather than later.





I'm starting to try and hedge my oil exposure to the downside, as I'm constantly seeing how new technologies are unlocking vast new oil supplies. That's a real risk to Alberta, IMO.

 

[gwasser]

[quote user=bizaro86]

I'm starting to try and hedge my oil exposure to the downside, as I'm constantly seeing how new technologies are unlocking vast new oil supplies. That's a real risk to Alberta, IMO.






Tell me, how would you hedge your Alberta real estate against a down trend in the oil and gas industry?

 

[bizaro86]

[quote user=gwasser]Tell me, how would you hedge your Alberta real estate against a down trend in the oil and gas industry?



I haven't figured it out yet, but it's definitely something I worry about. I'm slowly selling off my oil and gas stocks, to reduce my extra exposure to oil and gas from the stock market, and trying to replace them with companies that would benefit from lower oil prices. The companies with the largest sensitivity to oil prices are airlines and trucking companies, and I'm not too excited about buying airline stocks... I did buy some bonds in American Airlines after their bankruptcy, so we'll see how that works out.



While not a true hedge, I'm also reducing the leverage in my portfolio, as lower LTVs and greater access to cash should allow me to better weather any potential downturn.



I would be very interested in hearing creative ways to hedge low oil prices from anyone. (I don't like the bear ETFs, due to their short term bias and tracking issues)



Regards,



Michael

 

[gwasser]

Hi Michael,



I have been struggling with the same question. On my blog I created a Low PE and moderate dividend portfolio based on equal weighing each stock. Some of the stocks may still be affacted by oil prices but there is a lot of protection in the good dividend yield and low stock price evaluation. Some may also benefit from a pick up in U.S. housing. If your want the full rational of this portfolio, I suggest you go to my blog (see below).



Here are the stocks:


Toromont TIH

Sherritt International S

Rogers Sugar Inc RSI

Churchill Corp CUQ

Brookfield Office Properties BPO

Cannaccord CF

Canfor Pulp CFX

Bird Construction BDT





9 Stocks! I also searched for stocks with a P/E below 11% and a yield between 3% and 6% which counted 45 stocks, including many banks which I already owned in my other holdings as well as several of the stocks above. But 3 new stocks stood out:


Canadian Helicopters CHL.A

Cervus Equipment Corp CVL

Corus Entertainment CJR.B

Furthermore I have been considering oil services companies in particular frac companies. They will probably not suffer too much because they stand in the center of the technology storm. I also think that manufacturing stocks will do well with weak oil prices, I always suspected that the U.S. bull market of the 1990s was not only based on demographics but also based on low energy prices. Thus, I think that east Canadian manufacturing and the overall U.S. market may do well.



When interested in ETFs, consider DOW Jones Spiders or those of the S&P500. I prefer the Dow because these are fantastic companies; many with exposure to emerging markets.



I am sure interested to hear some other ideas.

 

[TangoWhiskey]

This thread seems to have run off topic a little and to try to bring it back a retired family friend asked me what I thought about Allied REIT. This is a smaller REIT that seems to turn older buildings into more desirable boutique style office space. He is disenchanted with mutual funds and is considering investing. Does anyone have any thoughts? Thomas? Michael/Bizaro?



Thanks



Tris

 

[gwasser]

[quote user=TangoWhiskey]This thread seems to have run off topic a little and to try to bring it back a retired family friend asked me what I thought about Allied REIT. This is a smaller REIT that seems to turn older buildings into more desirable boutique style office space. He is disenchanted with mutual funds and is considering investing. Does anyone have any thoughts? Thomas? Michael/Bizaro?








There are numerous REITS listed on the TSX and knowing all their in and outs is too much unless you're specialized in it. To choose which one is better is even more difficult.In general the largest REITs are usually of the best Quality and many have their own specialty such as RioCan for shopping malls, BoardWalk for Western Canadian Apartments, Canadian Real Estate Investment Trust (symbol REF.UN) for high quality retail, office and commercial real estate, Calloway for Senior Housing, Brookfield Office Properties (well this is a corp not a REIT), etc.
If you want to learn more about specific REITs check the internet or watch BNN Market Call that feature sometimes money managers that specialize in REITs and Real Estate investments. They discuss many of those REITs including the latest gossip. That is a great starting point.




The point I was trying to make earlier though was/is that REITs are dependant on a healthy real estate market, some inflation and low interest rates. In the last year or so, many of those REITs have provided above average profits and now they are becoming a bit expensive. Yields are modest compared to the past and the payout ratios of several are streched. In other words, you may be buying high or near the top of the market and the risk of disappointment is high. REITS, Utilities, Pipeline and communication companies such as BCE are all priced at high PEs (prices that do not allow for any earnings disappointment). A trigger for a significant down fall may be increased interest rates and those, as discussed earlier, may not be that far off.




FInally, REITs such as Boardwalk and Main Street Capital are western based apartment operators. Oil prices may not have much upside in this economy and with new technologies North American markets may become oversupplied as happened with natural gas. Our markets are landlocked and with new pipelines to the West Coast and the Gulf of Mexico being the focus of much controversie, oil markets in North America may weaken significantly. This would undoubtedly also reflect in less Alberta jobs and rental demand, which in turn make investing in REITs such as Boardwalk riskier.




In my books, REITs, especially Western Canadian REITs, are a hold NOT A BUY. Hope this helps.

 

[housingrental]

Good post Mr. Wasser!

 

[david123]

That's Great information,,

I really got more much from here,

Thanks

 

[bizaro86]

[quote user=gwasser]Furthermore I have been considering oil services companies in particular frac companies. They will probably not suffer too much because they stand in the center of the technology storm. I also think that manufacturing stocks will do well with weak oil prices, I always suspected that the U.S. bull market of the 1990s was not only based on demographics but also based on low energy prices. Thus, I think that east Canadian manufacturing and the overall U.S. market may do well.





I'd be a bit careful with the frac companies. Last year we couldn't find anyone at any price to do frac jobs, and that's not the case anymore. I'm not saying they're not good companies, but their pricing power has started to come down as more frac crews are getting built/trained staff, and low gas prices are affecting demand.



Regards,



Michael

 

[bizaro86]

[quote user=TangoWhiskey]This thread seems to have run off topic a little and to try to bring it back a retired family friend asked me what I thought about Allied REIT. This is a smaller REIT that seems to turn older buildings into more desirable boutique style office space. He is disenchanted with mutual funds and is considering investing. Does anyone have any thoughts? Thomas? Michael/Bizaro?



Thanks



Tris




I took a very cursory look, and am unsure what makes this a good investment compared to other REITS. Their recent acquisitions have been heritage buildings that are already restored and tenanted, so there doesn't appear to be a chance to add value there. They're also registered historic buildings, which limits potential upside from future redevelopment. I'm familiar with their Calgary portfolio, and while the buildings are in excellent locations, they're at their highest and best use currently, as redevelopment is constrained due to the heritage designation.



I would say it seems like the upside and downside are about the same as other REITs, so I wouldn't pick this one over others necessarily, as it seems slightly more risky due to its niche. If your friend is looking for RE exposure, do they want it in that specific niche for some reason?



Regards,



Michael

 

[gwasser]

[quote user=bizaro86][quote user=gwasser]Furthermore I have been considering oil services companies in particular frac companies. They will probably not suffer too much because they stand in the center of the technology storm. I also think that manufacturing stocks will do well with weak oil prices, I always suspected that the U.S. bull market of the 1990s was not only based on demographics but also based on low energy prices. Thus, I think that east Canadian manufacturing and the overall U.S. market may do well.





I'd be a bit careful with the frac companies. Last year we couldn't find anyone at any price to do frac jobs, and that's not the case anymore. I'm not saying they're not good companies, but their pricing power has started to come down as more frac crews are getting built/trained staff, and low gas prices are affecting demand.



Regards,



Michael




Good point. Thanks.

 

[bizaro86]

[quote user=bizaro86]<snip>In summary, this Lanesborough Reit is extremely risky, but has a high potential for gain as well. It's certainly not suitable for money you can't afford to lose, or for a big portion of your portfolio. I'm only mentioning what I've done, and so this shouldn't be construed as advice to anyone, do your own research and get professional advice if you require it.





I thought I'd come back to this thread and mention that I've sold a significant portion of my position in Lanesborough. I still believe the potential outcomes here are 1) things work out and the shares end up at ~$2.00-3.00, or 2) Bankruptcy, shares go to zero.



But now that they've appreciated from $0.34 when I bought them (and $0.36 when I made the post here) to $0.54, the risk/reward ratio isn't as good. I sold enough to cover the cost of all of my shares, and am going to let the remaining position ride as "free" shares. Might be something to think about for anyone who made a similar move when I suggested it. As always, if you require professional/investment advice, be sure to get it.



Regards,



Michael

 

[MaximeValmont]

Well first of all,



There are 3 kinds of Reits;

1) Equity Reit

2) Mortgage Reits; They purchase mortgage obligations. So they become Real estate lenders. They make money on the spread between the interest income on mortgage-backed securities owned by Reit and the costs of borrowing to finance their acquisitions.

3) Hybrid, combination of the two.





Reits are often compared to mutuals funds in that they afford the same advantages : Portfolio diversification and liquidity.



Now, not every Reit invest in the same kind of property. This is why you have to do your homeworks. Some are specializes in Commercial, some residentials, Some hotels, etc. You've got to judge by the economy in what kind of Real estate you should invest in.



By exemple, Hotels are the most volatile type of real estate that I know. They are the first to go down during a financial crisis, but they also are the first to go up after a recession. Residential towers, on the other hand, are probably the most secure type or RE.





By the way, I would not invest in any REIT in Canada right now. I would rather invest in a REIT in the USA. The market reached the bottom over there.





Valmont.

 

[Thomas Beyer]

A REIT is as volatile as a stock .. Thus same caution as stocks ie they trade on rumours and sell off on a big market sell off .. Many Canadian REITs, say Boardwalk, have gained over 100% in the last 2 years ... And will drop with rising interest rates but likely not before 2013.



Some ( private or public ) REITs over distribute ie over and above their FFO (funds from operations) ..



So erosion of principal is a potential issue if asset growth is not compensating for over distribution ! So, get an 8% yield but price drops 12% .. Overall ROI is then -4%.



Thus, look for sustainability of distributions based on FFO, and, in a private REIT some thorough justification for their NAV (bet asset value)