I Sold My RioCan Reit

by Mike Holman

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A few years ago when I was on a big asset allocation kick, I bought some REITs (real estate investment trusts) for my RRSP account.  The amount was only about 5% of the portfolio but according to the experts, having some real estate is a good diversifier.

While I accept the idea that REITs are good for your portfolio in theory, I never liked the whole investment trust structure of REITs and their huge payouts.  I had bought some RioCan (REI.UN.TO) which is a reasonable proxy for the Canadian REIT market but started to get nervous when there was some news reports about the unsustainability of their dividend.

The other problem I had with my REITs was that my original investment was now only about 3% so I needed to buy more to get back up to 5%.  But I didn’t really want to buy any more and even if I did,  5% is not that much.  This was the same sort of thinking I had with my former leveraged investment plan – either go big or go home.

So I decided just to sell it and not worry about it any more which is what I did for $18.60 per unit.  I’m just leaving the proceeds in cash for the moment until I can do a proper asset allocation analysis of our investments.  Once that is done I’ll rebalance according to my desired allocation (roughly 80% equity, 20% bonds).

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{ 10 comments… read them below or add one }

1 Sampson

Wooaa, hold on there Mike.

Don’t paint all REITS with the same brush. While the payout structures are common, not all companies are paying out more than they bring in. Obviously it will depend on your portfolio, but I think they still represent an important aspect of a portfolio (see the Ivy League and David Swensen).

Perhaps a REIT ETF is a possibility?

2 Thicken My Wallet

Thanks for the link. I do agree with Sampson- there are good, bad and indifferent REITs out there. With respect to their “huge payouts” are you worried about distribution to adjusted funds from operation or the yield or both?

3 The Rat

I have a position in REI.UN and I’m in it for the long haul, as I am with some of my other REITs I own. A lot of reputable REITs will also have favorable tax treatment come 2011 and this will help. High payout ratios are typically high with a lot of trusts, and despite some valid concerns being brought forth, I’m gonna stick it out. I owned RioCan during the financial collapse/meltdown and it helped carry me through. It’s rebounded quite nicely over the past 16 months in terms of share price too. Best of luck with what it is you decide to buy. Maybe IPL.UN could be a good alternative to ensure your cash distribution changes little.

4 Canadian Capitalist

RioCan is trading at a significant premium to estimated NAV of $16.60. I’m not adding any but I’m not selling either. Even a 5% holding provides some diversification benefits.

5 Jambo411

(roughly 80% equity, 20% stocks). ??

6 Mike

Jambo – I fixed it.

7 Jason R

For real-estate exposure that is a bit less correlated with stocks and is fairly stable you could try an MIC (Mortgage Investment Corporation). For example Fisgard Financial (http://www.fisgard.com) is a pretty small one, but hasn’t had a negative quarter since 1995 (the first year i can get data for).

8 Pacific

Has anyone seen an investment-return comparison with REITs and MICs?
They are not the same in structure, REIT is more-or-less rental returns, while MICs are mortgage interest returns. Both can be held in a registered account (RRSPs, etc.).
I have never owned REITs but have two MICs, Fisgard and Carevest. Over the last 12 years or so, their returns have dwindled lower as they reflect the mortgage interest rates in Canada, which have gone down over the same period.

9 Chip Doss

I have elderly clients who were jammed into non-traded REITs by greedy brokers looking to cash in on this portfolio-balance jargon. Saying a little real estate exposure in these times is good for an 80 year who needs liquidity is like saying a little heroin, say 5% of what you ingest, is good for you. Try selling one of your REITs right now to eat or pay for medical expenses.

These defenseless investors are left holding the empty bag and absorbing the risk that the institutional players foresee as potential systemic failure just around the corner. They promise Ponzi-like payouts to lure these investors in. The brokers involved are no different than the Madoff feeder-fund maggots who divvied up the loot. REITs are the hotel California of the market right now. You can check out any time you want but you aint leaving.

10 jerome mccarthy

I invested in Riocan as an RRSP while living in Canada (citizen). Now I live in USA and file tax here. If I withdraw from Riocan, 25% tax is witheld. Any kind person advise me on how to minimize cost?

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