Why Long-Term Investors Shouldn't Sweat a Defeat in REITs

Why Long-Term Investors Shouldn’t Sweat a Defeat in REITs

Why are real estate investment trusts like Canadian Apartment Properties REIT (CAR.UN) dropping so much? Are high interest rates the only reason? If so, we are on a long and hard road. Can you comment on this please?

It’s important to put low CAP REIT into perspective. Yes, units are down about 22 percent after hitting a record high in September. But even after the recent decline, they’re still generating a total return — including distributions — of about 10.7 percent year over year over the past five years. As a long-term unit owner, I certainly don’t panic.

Are high interest rates the main culprit here? probably. REITs are usually a slow-growing business and generate steady, bond-like cash flows. This makes them vulnerable, like bonds, to higher interest rates. Unlike bonds, CAP REITs have ways of increasing their cash flow, thus increasing their monthly distributions to unit holders. It can acquire additional real estate, for example, or increase rents on its existing premises.

Rent controls limit the size of annual increases for existing tenants, but when a new tenant moves into a CAP REIT, rent can be raised to market rates. With the mitigation of the COVID-19 pandemic, CAP REIT saw a 10.2 percent increase in rental rates on suite sales in the first quarter, an increase of 3.4 percent in the same quarter a year earlier.

But rising interest rates isn’t the only reason CapRit is facing. In its first-quarter results, the Real Estate Investment Trust said it was hurt by rising utility costs due to cold winter weather and a big jump in the cost of natural gas. It also faced rising property taxes and rising weather-related maintenance costs.

Regardless of these challenges, CAP REIT appears to be in solid shape. As of March 31, the portfolio’s overall occupancy rate is 98 percent, with rents collected at 99 percent.

Furthermore, the REIT continues to grow. In 2021, it acquired 3,744 condominium units, townhomes, and manufactured housing (or land rental) sites in Canada and the Netherlands for a total cost of approximately $1.05 billion. In the first quarter, CapRit added 1,015 suites and other locations, valued at $439 million.

“These new properties will make a strong, growing and growing contribution to the coming months and years,” CapRit said in its report to unit owners.

Cap Reit cited a rise in immigration and the return of international students with the easing of pandemic restrictions, an increasing number of elderly people and rising rents as reasons for optimism.

For what it’s worth, Bay Street is still bullish for CAP REIT units. Of the 15 analysts who follow the company, 14 have buy, 1 hold and no sell ratings.

In light of the above, I won’t lose any sleep over the low price of a CAP REIT unit. If anything, it may represent an opportunity for long-term investors to add to their positions.

How would one try to identify those “boring and fixated businesses” that I recommended last week’s column? Is there a source for such advice other than reading your articles religiously?

Reading my columns is definitely a good start. I frequently discuss companies that I believe are suitable for investors seeking income and capital growth, without excessive risk. I am particularly fond of utilities, banks, energy producers, real estate investment trusts (REITs), and infrastructure companies that have a proven track record of increasing their bottom line and profits.

I own many of these stocks personally and in the dividend growth portfolio model I use Yield Hog Dividend Growth, which Globe Unlimited subscribers can view at tgam.ca/dividendportfolio. The purpose of the form clipboard is not to provide an exact template to be copied; Instead, it is meant to be a source of ideas and serve as a real-time illustration of the profit investing in the business.

If you are not comfortable buying individual companies, you can save a lot of time and effort by buying a handful of exchange-traded funds. This could include a low-cost ETF that holds stocks of the S&P/TSX Composite Index, another that tracks the S&P 500 and possibly an ETF to generate additional income, if desired.

Whether you’re buying individual stocks or ETFs, your behavior as an investor is critical. After creating your portfolio, resist the urge to trade. Investing is a long-term commitment that rewards patience, not repetitive buying and selling. As the old Wall Street saying goes: “A wallet is like a bar of soap. The more you handle it, the smaller it gets.”

How can I invest in the Dividend Portfolio Model?

You can not. It’s a typical wallet that uses virtual dollars, not real money. If you are looking for a dividend fund to invest in, there are several ETFs to choose from. You will need to open a discount brokerage account to access it.

Some noteworthy examples include the BMO Canadian Dividend ETF (ZDV), iShares Canadian Select Dividend Index ETF (XDV), and Invesco Canadian Dividend Index ETF (PDC), among many others. There are also plenty of ETFs covering the US market, including the iShares Core Dividend Growth ETF (DGRO), which I have in my sample portfolio.

Email your questions to jheinzl@globeandmail.com. I can’t personally reply to emails but I chose some questions to answer in my column.

Be smart with your money. Get the latest investment insights delivered straight to your inbox three times a week, with Globe Investor’s newsletter. Register today.

2022-05-20 19:57:52

Leave a Comment

Your email address will not be published.