Real Estate Investment Trusts

Real Estate Investment Trusts (REITs) are income-producing, diversified real estate investments. They invest in revenue-producing real estate including apartments, office towers, shopping centres, hospitals and retirement homes. Most Canadian REITs are exempt from the new rules regarding income trusts and will continue as-is beyond 2011.

The most conservative REITs invest only in apartments. They are considered to be the least volatile mostly because they do not suffer from “anchor tenant risk”, namely that no individual tenant leaving an apartment building can materially affect rents in the same way that a big box chain could in, say, a shopping centre REIT. Distributions from REITs can be very tax efficient; they offer a “return of capital” model, the product of CRA-approved accelerated depreciation on leveraged properties. In many cases, distributions are tax-deferred for many years.

All REITs operate as mutual funds, are governed by boards of trustees, and produce audited financial statements. The two main categories of REITs in Canada are public REITs and private REITs. Public REITs trade on markets such as the TSX, and provide investors instant liquidity (meaning they can buy or sell units every day). This liquidity has a negative side-effect on these investments: they tend to mirror the volatile movements of the stock markets very closely (meaning that when the stock market is down, chances are your REIT units are down as well). Conversely, private REITs can maintain their value even during the most turbulent periods in the stock market. While generally offering only 30-day liquidity, redeemed units fetch a prorated portion of the last-struck NAV of the fund, resulting in little, if any, volatility in the value of the underlying assets.

Since the investments that Westcourt targets for recommendation are designed to have little correlation with the equity markets and provide predictable capital preservation, Westcourt prefers private REITs to public REITs, as the upside of private REITs far outweigh the downsides.

Historically, Canadian private REITs have provided total returns (income plus capital growth) of between 7-10% per annum, and typically pay distributions monthly. Canadian public REITs have endured a roller-coaster ride in value over the last 3 years, losing as much as 40% of their value during 2008 alone.

There is one private REIT currently recommended by Westcourt: Centurion Apartment REIT. As a "pure play" apartment REIT, Centurion offers its investors stable, tax-efficient distributions (targeted at 8% per annum) with very low volatility in the value of the underlying apartment complexes that for the REIT's asset base.

Note: Investors sometimes ask us whether they can receive better terms if they invest directly with the managers of the product we recommend. Westcourt's clients will always receive equal or better terms investing through Westcourt than investing directly with one of the funds we recommend. Find Out More

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