All dividends were re-invested, all returns do not include any fees, which can impact returns significantly.
If dividends were not re-invested, all returns would be significantly lower
Excluded were the REITs that “graduated” from the venture to the senior exchange, and corps that changed into REIT’s (eg:plaza reit) during this time period
TSX REIT Return Summary (2011-2016)
Out of 23 of the listed TSX REITs and Corporate Real Estate Entities:
Median per year yield with dividends was 8.15% per year
Median per year dividend only yield was 5.29% per year
52% didn’t meet the median yield
13% didn’t outperform the Canadian Consumer Price Index (CPI) benchmarked at 2.2% year
30% resulted in having the dividend over perform the stock appreciation. (that’s with the dividend reinvested)
Only 3 companies had 5 year negative yields; Partners REIT at -28.47%, DREAM Office REIT-22.53% and Cominar REIT -8.86%
Are you buying real estate stocks for the dividends or the stock?
For us, the only reason to buy a stock is price appreciation, hats off to you Mainstreet (never issues dividend) at double the median return over the 5 years. When a stock issues high dividends it is to inventive shareholders to buy as the underlying financials are weak (BTB REIT, Cominar, Dream Office REIT). If you are choosing stocks based on dividend yield only buy if you are looking for regular income. If you are looking to always reinvest the dividends- there are other stocks that perform better and should start buying on stock appreciation. If you are buying on stock appreciation, don’t buy a stock yielding dividends, it only serves to create drag on the company. Trust management teams that are tight with cash and re-invest a large percentage into near-term R&D or strategic acquisitions.
We believe that public company mangers should be put money back into the company to enhance its overall value, leading to increases in market capitalization.
Regular readers know that we believe structure trumps all other variables in a fund or company with outside investors. A smart management team could game the TSX (eg: by the stock actually going up) by leading a DPO taking 1st year bank analyst opinions out of the equation and the huge burden of ridiculously high totally unsustainable dividends that forfeited any chance that some of the listed venture real estate companies had.
How a team would do this is:
Aquire arms-length properties. Typically in the favorite Canadian management game is called Dump & Dump (dump management’s old properties into the entity, then exit (dump) the majority of mgt’s shares for the equity raised. For examples: see every TSX RE IPO over the last decade) The Americans at least have a pump before the dump.
Tight float; sub 35m, sub 85m fully capitalized.
Non-REIT entity (there is no benefit anymore to being tax free as corporates don’t pay taxes and keeps any building the company does transparent and accountable)
Keep it a pure stock appreciation play
Management team stays very lean, part time CFO, CEO paid under market value.
Have a very savvy tax accountant (to pay a sub 3% tax, see first capital for unparalleled low tax)
Canadian or USA Property, tight geographical focus, resulting in lower monitoring overhead
Pay property sellers in stock with a non-transferable 3 yr cashless warrant, to incentivise holders not to sell until listed entity can pay-down its mortgage, adjust math so that management can re-fiancane the paid down properties pulling out a majority of that paid down equity to cancel the selling of the warrant conversions.
Credit does go to Mainsteet Equity, as they followed this recipe very similar very early on (2004), and are still a stock play rather than a dividend yielding entity and are a 5yr top perfomer.
How to play Listed TSX RE Entities
Regular or lower dividend group gains are seem to be better historically, with less volatility at the “cost” of a low dividend.
Its one or the other, high dividend with poor stock appreciation or low dividend, good stock appreciation.
Of the entire group, the 3 highest 5 year yields came from no dividend yielding companies or very low dividends half were not REITs.
Which is counter intuitive what analysts and other pundits write about to efficient REITs are. We have written about this in the past, here, here.
Low Real Estate Dividend Group:
Mainstreet Equity Corp.
Melcor Developments Ltd.
Madison Pacific Properties Inc.
Canadian Apartment REIT
First Capital Realty
Allied Properties REIT
Brookfield Canada Office
CT REIT Trust
Killam Apartment REIT
Riocan Real Estate Investment Trust
A Better Way
So if you are buying to use stock dividends as income, this income can vary as the company dicates or as the marekt does with the underlying stock price. Private funds on the other hand, are worth looking at because of this lack of volatility. The other issue not addressed here is when to entry/exit we just picked an arbitrary 5 year period based on when this article would publish, a bad entry or exit could decimate public REITs and real estate companies returns, even ones with a low dividend or distribution.
Here are some keys, if you are thinking of investing in a private real estate fund and how they could outperform listed entities:
Keep overhead/fund administration costs low
Keep public company governance obligations but lower the cost of doing that
Build in a profit share component when the fund winds down
Keep development in separate funds unless the fund has significant scale (over $400m leveraged) and low distribution obligations, but do modest “value adds”
Focus on revenue & metrics profomas or actual financials, compare them asset class to asset class with your current public holdings.
Table showing TSX reits and corporate entities performance 2011 to 2016
This material is contains information from publications prepared by the Trebuchet Capital Partners and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of June 2015 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by Trebuchet to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Trebuchet, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.