Opinions
Stockchase Insights
BMO Equal Weight REITs Index
ZRE-T
BUY
Dec 16, 2024
Stock price when the opinion was issued
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Down 11.4% over the last 12 months. Underperformed the TSX since early days of the pandemic. Interest rates moving higher is not conducive for REITs to perform well. How healthy is they real estate market in Canada? Macro environment not favourable, especially in Canada. Still uncertainty ahead. Yield is 4.9%.
Up about 11% last 3 months. Basket of 22 REITs. Underperformed TSX since March 2020, but has started to move with most other dividend stocks. He's starting to warm up to areas of higher distributions like REITs. Yield's about 5%.
Prefers US-focused ones, because of the relative strength of the US economy. Likes logistics, storage, seniors homes, US retail.
The REIT sector is sensitive to the economy and rates. It has not performed so well, with a five-year return of 1.56%. Rates moving lower in Canada should add support, but our economy may be a bit iffy for a period of time. We would consider ZRE OK for general real estate exposure, but not hugely attractive.
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ZRE holds Canadian real estate assets. We like that its holdings are not concentrated in only two assets. The average PE is 13x and it trades below book value. REITs are a good way to diversify your portfolio. The space has been under pressure for a while due to interest rate volatility, but with rate cuts anticipated going forward this is a good time to enter. We recommend setting a stop-loss at $18.50, looking to achieve $24.50 -- upside potential of 18%. Yield 5.25%
ZRE has rebounded well following the negative tariff news and is reiterated as a TOP PICK. In a period of stagnant economic growth, REITs are a good space to provide steady cash flow. ZRE is unique in that it holds an equal weighting of all its holdings and is well diversified. We continue to recommend a stop at $18.50, looking to achieve $24 -- upside potential of 18%. Yield 5.4%
CGR is a global REIT play. ZRE is an equal-weight REIT play. VRE is market-cap weighted.
There isn't a right way, one's not better than another. Looking back in history, in Canada the equal weight has been better than market-cap weighted. That's as a result of some of the smaller REITs doing better than some of the larger ones. Domestic REITs have better tax treatment than global ones. So it depends on whether you're investing in a Canadian taxable account or not. There are a lot of great global REIT dividend plays, but you have to consider the foreign withholding tax.
Any one of these is a great vehicle, but which one will depend on an individual investor's need for exposure and tax situation.
Rates coming down further to help stimulate development activities and housing market activity would likely be key. The recent news of Canada slowing immigration over the next few years could be another headwind to rental growth. Overall, it is mainly rates and general improved economic conditions to help the real estate market improve. This will help portfolios appreciate in value, allow REITs to execute on pipeline opportunities, and grow payouts, but there is still work to be done here.
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