Stockchase Opinions

Hap (Robert) Sneddon FCSI iShares S&P/TSX Capped REIT Index ETF XRE-T WAIT Oct 18, 2019

The run up from $24 was impressive for D.UN-T. He does not own individual real estate -- he holds XRE-T instead. He would like to see it consolidate at these levels for a while before buying.

$20.050

Stock price when the opinion was issued

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BUY
Outlook of REITs in Canada for 6-12 months. REIT markets in Canada boil down to Vancouver, Toronto and the rest of Canada. As an asset class, REITs are a good diversifier as an asset class and are weakly (but not negatively) correlated to the Canadian market. REITs pay a decent risk-adjusted return. He likes XRE.
BUY
A diversified REIT index. It charges the REIT index and charges a low MER. Real estate has performed very well this year as interest rates have dropped. The AFFO for REITs is high, true, but urbanization and concentration is happening. The only sector in REITs that's lagging is retail. Otherwise, you should be in REITs.
WAIT
Had a good run in 2019, but now is breaking trend. He expects higher interest rates in 2021, which will pressure REITs. XRE will head lower in early-2020. He predicts a general market pullback in January.
COMMENT

And REITs outside Canada? Always a good choice if you want broad exposure to Canadian real estate. CAP REIT is the biggest holding, which he really likes, as well as H&R and Riocan REIT (also likes it). However, XRE is concentrated in these names, so you may be better off picking specific names that offer better growth. To answer: Outside Canada, you can look at VNQ and IRR in the U.S. that covers the U.S. REIT market. The US REIT market has more specialized sectors, like towers and data centres.

DON'T BUY
An ETF like XRE combines the good, the bad, and the ugly with different sectors and growth profiles. Look for companies that generate strong, recurring cashflow and grow distributions. Industrials have significant tailwinds for the next few years. Also apartments, which are trading at a discount to NAV, as people still need somewhere to live.
DON'T BUY
Holds some office, some apartments. Some of those areas will be challenged. Try well-positioned retail REITs, ones where vacancies are low, or logistic warehouse-type REITs.
SELL

He'd move on. There's a 48% spread between the top and bottom quartile performers. Can't capture the upside with an ETF. Better to focus on the winners, and avoid the losers. CAR, HOM-U, WIR-U, and Granite are great choices. Look for growth, and at a discount is even better.

DON'T BUY
XRE vs. IYR Totally different products because of the country, given XRE is Canada and IYR is the US. XRE top 31% investments are in retail. IYR has only 9% retail. For residential, it's 25% XRE and only 15% IYR. Largest holding in IYR is AMT. IYR is more diversified, less exposed to retail which is a good thing. Safer place to be at this time is IYR. REITs usually do well from March to October, but this might start earlier this earlier, especially if markets turn down. Wait until February/March.
SELL

Challenging to own REITs in Canada. The 5-year return is slightly negative, even including dividends. Some names in it make sense, some don't. Cumulative inflation has hurt REI.UN, the second-largest holding. Softness in Canadian economy. 

5- and 10-year yields are moving higher, and REITs are very sensitive to higher rates because of their debt. REITs might make sense in a stronger economy, with rates moving down.