It’s been a while since I’ve written about my recent buys. The reason being, I haven’t purchased any positions recently, other than purchasing shares of TELUS in June. However with the RRSP deadline approaching, and some tax payable, I was able scrape nearly 1K to contribute to my RRSP. That gave me enough cash in my RRSP to top-up or purchase something new. In early September 2013, I had mentioned in a weekly lineup I was thinking about REITs.
For those who don’t know what REITs are, they are Real Estate Investment Trusts. Under the trust structure, REITs don’t pay corporate income tax. They pass the full taxable amount of distributions onto unit holders. That results in a much higher yield. Bingo! Since the distributions from Canadian REITs can be sheltered in a TFSA or RRSP, they make a great income investment.
It’s no surprise that investors are again interested in REITs. Many of these companies came off their highs sharply in 2013. Even considering a potential rise of interest rates, the larger REITs currently appear to be a good value play. They also offer a generous yield. Ben Carlson wrote a post in September 2013, and asked are REITs a Buy?
A Quick Comparison
In his post, Ben looked primarily at the largest REITs, RioCan (OTCPK:RIOCF) and H&R REIT. He also looked briefly at iShares XRE, the ETF which holds Canadian REITs. As Ben pointed out, the two largest holdings for XRE, RioCan and H&R REIT, make up nearly 35% of the entire ETF.
RioCan has a current yield of 5.36%, which is considered low for Canadian REITs. H&R has a 6.29% yield, and XRE has a yield of 5.38%. XRE actually has a total yield closer to 6%. However a high annual MER (Management Expense Ratio) of 0.6% pulls the yield down.
I would be fine buying either REIT or XRE. Simply put H&R REIT offered the higher yield without an ongoing MER. Also I much prefer to own companies directly, even with a small stake.
H&R REIT is a 5.8 billion dollar company, with 323 properties comprising a 13 billion dollar assessed value. Their portfolio consists of 42 office properties, 167 retail properties, 112 industrial properties, and 2 development projects. H&R REIT spins off 1.8 billion in annual revenue. It currently has a net profit margin of 35.3%, a debt to capital ratio of 50.3%, and a payout ratio of 52.3%. The current distribution (dividend) yield is 6.27%.
For those living in Vancouver, they will recognize one of H&R’s iconic properties, the TELUS building at Kingsway and Boundary. They also own the Bow Center in Calgary, the Scotia Plaza in Toronto, The Bell Canada Complex in Mississauga, and the Trans Canada tower in Calgary, among others. 
In addition they rent retail space to may well-known companies. The list includes: Wal-Mart (NYSE:WMT), Staples (NASDAQ:SPLS), Rona (OTC:RONAF), Sysco Food Services (NYSE:SYY), Walgreens (WAG), Shell (NYSE:RDS.A) (NYSE:RDS.B), Home Depot (NYSE:HD), and Finning (OTCPK:FINGF) among others. All of their tenants are large-cap and established companies, giving H&R REIT a solid foundation.
Moving forward, as funds are available, I would like to significantly increase the REIT holdings in my portfolio. I’d like to buy more shares of H&R REIT, RioCan, and a position in Dundee REIT (OTC:DRETF) as well.
Readers, do you own RioCan, H&R REIT, or other REITs in your portfolio? Are you currently buying REITs?
1. From TD Waterhouse Market Research (online brokerage).
2. From the H&R REIT website, home page: www.hr-reit.com.
3. From the H&R REIT website, properties list (CSV file).