Canadian Money Forum banner

1 - 20 of 25 Posts

·
Banned
Joined
·
13 Posts
Discussion Starter #1
I found lots of info on reits ,but have one question left .. With the income trust funds tax breaks ending ,doesn't it make sense that these investors would be pelling and buying reits,and driving the price up?? I know theres no answer to this except "maybe" . but is there a reason why this isn't likley to happen?
Neil
 

·
Registered
Joined
·
420 Posts
I think the income trust tax situation is already factored in (for the most part) to the price of REITs and income trusts.
 

·
Registered
Joined
·
5,464 Posts
Well, just as an example, me. I don't hold REITs because I have a mortgage and I'm already concentrated enough in real estate.
 

·
Registered
Joined
·
7,252 Posts
Well, just as an example, me. I don't hold REITs because I have a mortgage and I'm already concentrated enough in real estate.
But your personal residence and the mortgage on it is not the same as owning a REIT.
If you have other investments in RE like investment properties, multiplexies, etc. then yeah I would say you have enough of RE.
Your personal residence and the mortgage on it could move in the other direction as commercial or rental RE.
For example, if interest rates rise and you are suddenly forced to pay 2, 3% more on your mortgage, it could be good for REITs that own apartment complexes, commercial space and multiplexes for lease.
 

·
Registered
Joined
·
2,054 Posts
For example, if interest rates rise and you are suddenly forced to pay 2, 3% more on your mortgage, it could be good for REITs that own apartment complexes, commercial space and multiplexes for lease.

That is a very bad example..... REIT's are more heavily leveraged than the average Joe. Rising interest rates will be bad for REIT's actually. They will not be able to pass this heavy cost increase on to their tenants who have existing leases so their cash flow will be severely hit.

But generally apartment buildings and commercial real estate are much more stable investments then most houses because their value is linked to their income generating power rather then market value.
 

·
Registered
Joined
·
5,464 Posts
HC: yes, I am perfectly aware that REITs and commercial real estate are not the same thing as my personal residence. I just don't want any more exposure, positive or negative, to domestic real estate.

Edited to add that I own real estate beyond my personal residence.
 

·
Registered
Joined
·
7,252 Posts
That is a very bad example..... REIT's are more heavily leveraged than the average Joe. Rising interest rates will be bad for REIT's actually. They will not be able to pass this heavy cost increase on to their tenants who have existing leases so their cash flow will be severely hit.
I meant with high interest rates, more people are expected to rent rather than own.
It's good for occupancy, I assume.
I bow to your wide knowledge in this area, but you state that REITs are more leveraged than the average Joe homeowner?
Do you mean the RE trust company or do you mean the underlying property?
If it's the underlying property, that doesn't sounds reasonable.
Why would they do that?
The average Joe homeowner usually begins with a leverage of at least 80% (those without CMHC mortgage insurance), and often more (with CMHC).
Are properties owned by REITs leveraged more?

If it's the actual REIT company, and they are taking on more than 80% debt, then their balance sheet would reveal that fact.
And that would be bad news for an investor for sure.
It almost tantamounts to a Ponzi scheme for the REIT if it's having to pay distributions by taking on more and more debt, rather than through its income.
 

·
Banned
Joined
·
13 Posts
Discussion Starter #10
Thanks for all the info ,I didn't really get my question answered ,but learned quite a bit..
I'm buying 570 REI-UN and 400 D-UN tomorrow with the thought in mind that if they stay where they are I'll be happy .I think though that when the income trusts fold and become corporations without the tax breaks REITs have ,those selling ( and liking their income trusts) will look for more of the same ,thats where REIT come in ..They seem to me like a natural place to switch money from income trusts into .. If this pushes the price up ,thats great ,if not 7%-8% div will make me happy .
What do you say to this??
 

·
Registered
Joined
·
1,196 Posts
RioCan has already stated that they will remain as a income trust and the new taxation will not apply.

Read your prospectus before you buy.
 

·
Banned
Joined
·
104 Posts
The income trust tax does not affect real estate income trusts, mutual fund investment trusts, or privately run trusts.

The reason we saw such a crazy dip after the Halloween 2006 announcement was in part because of widespread fear relating to everything trading with the income trust stock suffix.

I have never been angrier in my life about a tax policy reversal, and the manner they went about implementing it. Flaherty may have felt cornered by the big corporations announcing their conversion, but they should have frozen all trading on income trusts for a few days and given people a chance to calm down first. They knew exactly what would happen -- it happened in the USA. And the massive market shock did NOT happen in Australia, because they gave a 10-year grace period before implementing the tax. I even cancelled my subscription to the National Post after Mr. Chevreau made some callous comments about income trust investors "whining". Diane Francis' rebuttal articles weren't enough to make up for that. That announcement was a bloody gong show.

Also: the trust tax applies to oil & gas exploration trusts, which is total bull****. Why REITs and not oil & gas trusts? What a joke.

Sorry for the rant, xcaret. Rest assured your purchases should be unaffected by the 2011 implementation of the tax. There may even be a (mild) additional buying opportunity when implementation time rolls around, the tax gets a bit of media play again, and the market has another knee-jerk reaction.

Best of luck to you.
 

·
Registered
Joined
·
105 Posts
RioCan is one of my personal favourites and core holdings, and should perform well in the long run. My entry point last year was at a 9.2% yield, which provides enough cushion for any distribution cut if the economy really deteriorates. They are, however, a very solid name and have kept up the 11.5 cent per month distribution. Their management team (especially Mr. Sonshine) are excellent. Plus they have many strong national companies as their tenants, and they may be out looking for some acquisitions at depressed prices. I plan on holding RioCan essentially forever, and every year's TFSA contribution will be plowed into another $5K investment in that name, unless the situation changes.

In other words, RioCan is a good name and can be a solid part of any portfolio. The yield is attractive and the price has dipped a bit recently.
 

·
Premium Member
Joined
·
2,686 Posts
Thanks for all the info ,I didn't really get my question answered ,but learned quite a bit..
I'm buying 570 REI-UN and 400 D-UN tomorrow with the thought in mind that if they stay where they are I'll be happy .I think though that when the income trusts fold and become corporations without the tax breaks REITs have ,those selling ( and liking their income trusts) will look for more of the same ,thats where REIT come in ..They seem to me like a natural place to switch money from income trusts into .. If this pushes the price up ,thats great ,if not 7%-8% div will make me happy .
What do you say to this??
Are you sure your insight isn't already baked into the price of REIT units? I think that pretty much every investor out there already knows that money coming out of income trusts will flow into REITs. It's not as if the conversion date was a secret. It's been public knowledge since October 2006.
 

·
Banned
Joined
·
13 Posts
Discussion Starter #15
I agree C C ,but I'm seeing a lot of people still owning income trusts,and have not bailed out of them.Once the tax breaks are gone they may be looking for REITs is my hunch. Regardless from the little research ( I couldn't find a lot ) I did on REITS most gurus were writting encouraging reports on them.. I'm planning on holding them for quite some time ,so with any luck I'll do ok in the end. With good luck I'll do real good right off the bat ..with no luck ....well um ...
Neil
 

·
Registered
Joined
·
7,252 Posts
I agree C C ,but I'm seeing a lot of people still owning income trusts,and have not bailed out of them.
Why should they?
It's not like the underlying businesses are disappearing.
The trust is being converted to a regular corporation and will have to pay taxes as such.
There'll still be distributions (dividends), just less.
 

·
Banned
Joined
·
13 Posts
Discussion Starter #17
Harold ,my point is that they will pay less dividends as you said.. REITs will pay the same high divs as before . Maybe I'm missing something ,but if I owned a trust that was going to be paying less out ,and could switch to another one that wasn't being taxed as hard I think I'd switch.
 

·
Registered
Joined
·
2,892 Posts
Some people have enough exposure to RE.

Look at AET.UN....perhaps some people will keep it for an energy component of their portfolio. They obviously liked the company in the first place to buy it right, why sell it just because they had to convert, and your distribution/dividend takes a bit of a hit. It is still the same company, just a different structure for accounting purposes.
 

·
Registered
Joined
·
2,626 Posts
Maybe I'm missing something ,but if I owned a trust that was going to be paying less out ,and could switch to another one that wasn't being taxed as hard I think I'd switch.
REITS don't pay 100% dividends. The ROC component will mean you'll get taxed eventually when you sell, and if I'm not mistaken, after you ACB drops to zero, distributions are taxed as income. (I hope I'm not completely wrong here ;))

Also, a company like RioCan, as of their last earnings statement shows they are paying out 144% of earnings. I believe that is as unsustainable as the income trusts maintaining their high payouts after 2011.
 

·
Registered
Joined
·
500 Posts
xcaret said:
my point is that they will pay less dividends as you said.. REITs will pay the same high divs as before ..
Income trusts, REITs included, have never paid dividends ... they pay distributions.

Income trust distributions, REITs included, are generally composed of some combination of income, capital gain, and return of capital (ROC). A few of them have occasionally included very very tiny amounts of dividend among their distributions ... in such cases, those dividends were simply flowing through the trust, they were not paid by the trust. The tax treatment of each distribution-type is different.

The 2011 changes affect ONLY income distributions ... ROC and cap gain distributions will remain unaffected.

Trusts distributions may very well drop, but they will also convert from income to dividend ... for trust units that are held in a taxable account, the after-tax distribution will be essentially unchanged ... this equivalence was known by the government before the announcement of the changes, and by knowledgable investors very shortly after the announcement ... therefore, there should be no stampede out of trusts among that crowd, based on the 2011 rule changes.

Having said that, a large proportion of income trust capitalization is owned by individual investors, and as a group, individual investors can behave extraordinarily irrationally at times ... just look at the chaos following the announcement ... I had thought that the rage would have dissipated by now as reality sunk in, but if the comments in support of the so-called “Marshall Savings Plan” are any indication, many of those individual investors haven’t come to their senses yet ... so there very well could be an irrational movement in the short term ... is it this irrational response you’re hoping to capitalize on?

Sampson said:
REITS don't pay 100% dividends.
REITs don’t pay dividends at all ... see above.

The ROC component will mean you'll get taxed eventually when you sell, and if I'm not mistaken, after you ACB drops to zero, distributions are taxed as income. (I hope I'm not completely wrong here)
After ACB drops to zero, any further ROC distributions would be taxed as capital gains.
 
1 - 20 of 25 Posts
Top