There's Signal In The Noise

Ok, so maybe adding some factor for the income breakdown of a reit wasn't a good idea after all. I quickly discovered that for many reits, those don't stay very consistent year after year. They actually bounce around quite a bit. There's probably still some useful measure in there, but it seems like there's far more noise than signal. I wonder what else I might be able to consider for a mkII reit index.

Adding an Additional Consideration to my Indexing

During one of my many dull moments at work, I realized that there was another factor that I could easily add to my indexing, other taxable income. In general, distributions are split between capital gains, return of capital and other taxable income. As much as tax rates are higher, marginal rates, for other taxable income, compared to half of marginal for capital gains, I want to see other taxable income. If you don't have more taxable income than your depreciation, then you're not doing a good job of recuperating your capital costs. Question of the day is how do I want to scale this one. Maybe I want to increase the weighting of growth as well since price volatility seems to throw yield around wildly and growth provides a measure of long term stability as well.

Reflections on MK1 REIT Index

I wonder what a table looks like if I just paste it in here?
Value Growth sum
name price current distribution current yield 2008 2007 2006 2005 average Quintiles
allied properties 19.1 1.32 6.91% 4.76% 2.94% 3.76% 3.47% 3.74% 10.65% 3
artis 14.28 1.08 7.56% 2.27% 0.00% 0.57% 0.57% 0.85% 8.42% 2
boardwalk 34.05 1.8 5.29% 12.53% 8.11% 17.43% 1.94% 10.00% 15.29% 5
canadian apartment properties 16.2 1.08 6.67% 0.00% 0.00% 0.00% 0.00% 0.00% 6.67% 1
crombie 10.65 0.8904 8.36% 4.51% 4.41% 1.49% 3.47% 11.83% 4
cominar 21.13 1.44 6.81% 6.19% 10.78% 2.00% 0.00% 4.74% 11.56% 4
calloway 19.15 1.548 8.08% 0.00% 3.20% 3.48% 15.05% 5.43% 13.51% 5
dundee 30.1 2.196 7.30% 0.00% 0.00% 0.00% 0.00% 0.00% 7.30% 2
huntingdon 1.27 0.2796 22.02% 0.00% 0.00% 0.00% 0.00% 0.00% 22.02% 5
H&R 14.87 1.44 9.68% 5.08% 2.70% 2.30% 4.82% 3.72% 13.41% 5
interrent 2.15 0.2604 12.11% -31.55% -31.55% -19.43% 1
lanesborough 5.2 0.564 10.85% 0.00% 0.00% 0.64% 0.00% 0.16% 11.01% 4
morguard 12.15 0.9 7.41% 0.00% 0.00% 0.00% 0.00% 0.00% 7.41% 2
norther properties 23 1.4796 6.43% 0.00% 7.22% 5.50% 4.61% 4.33% 10.77% 3
primaris 16.26 1.2192 7.50% 3.67% 3.16% 0.00% 5.56% 3.10% 10.59% 3
canadian realestate investment trust 28.15 1.3596 4.83% 2.26% 2.59% 1.22% 1.62% 1.92% 6.75% 1
riocan 20.16 1.35 6.70% 0.00% 2.27% 2.33% 2.38% 1.74% 8.44% 2
retrocom 3.5 0.45 12.86% -25.00% 0.00% -26.79% -20.02% -17.95% -5.10% 1
scotts 5.92 0.8496 14.35% 0.00% 0.00% 0.00% 0.00% 0.00% 14.35% 5
whiterock 9.51 1.122 11.80% -0.53% 0.00% 0.86% 0.00% 0.08% 11.88% 4

That's messy to the point of nonsensical. If you can somehow comprehend it, what's interesting about this? To start with my top picks on this method are Boardwalk, Calloway, Huntingdon, H&R, and Scott's. Three of those, I'm ok with. Boardwalk has show good growth and I know they're a big player where residential real estate is concerned. H&R is number two by market cap, so obviously a lot of other people feel that it's worth putting a lot of money into. Calloway as I recall is Walmart's largest landlord in Canada. Very solid anchor tenant. Huntingdon is one that I don't feel comfortable holding a major position in. It scores high on yield, but that's because investors are fleeing. That's something my methodology doesn't work well on, so some tweaking is to be required. I can manually ax it from the list, though that leaves me wondering what to do with H&R, which has taken a considerable slide lately ever since the collapse of Lehman Brothers.
The last name on there is one that I think I like. Scott's, while having a high yield, looks actually stable. It's down considerably from 12 months ago, but it spent the past 5 months hovering around $6. We're in the middle of a major dip in the markets and it is still around $6. There was also a big dip in July, it held steady at around $6. So unlike huntingdon, this doesn't appear to be the result of a distress sale. Latest headlines say that they're making acquisitions and their Q2 earnings report says revenue is up 23% and payout ratio is improving. This might actually be a good name to run with, as the methodology suggests. Granted, they have yet to increase distributions since starting.
In the next tier of stuff, there's Crombie, Cominar, Lanesborough and Whiterock. Four names I don't hear much about. Half of them have shown some growth, the other half hasn't. This raises the question of whether or not all of these are stable/growing. I'll just assume the growing ones are actually growing and cut down the amount of work I need to do. This of course brings to mind another question, if I need to look into almost every company in the list, why bother indexing? Isn't indexing supposed to make things easier? Well, I need to know that my methodology works.
When I look into lanesborough, the first headline on their website is that they're back in the black, which is a cause for concern for me. I like to know why they were loosing money. I also know nothing about what they do, but why they're loosing money has yanked my attention first. The news release claims that a large percentage of their properties are under construction or under lease. A closer look reveals that yes, there are properties that are under construction and some with some very low occupancy rates. It also shows that revenues are increasing quickly. I also see that they're paying out more in distributions than their fund flow from operations. This troubles me. For now, I'm just going to wait and see what happens with it. When converting from play money to real money, this will probably be one of the last ones I buy.
So, what about whiterock? According to the fact sheet on their website, FFO surpassed the distribution rate sometime in Q4 last year. They're landlords to a lot of government offices. Also claim to be making accretive acquisitions and they have access to credit with TD. It's nice having a quick sheet to look at that doesn't force me to wade through financial statements that I still find somewhat cryptic. Though I am looking at them anyway and while I don't feel confident in my ability to read them, things seem decent. I'm hesitant to say they look good, but mainly due to I'm still not entirely convinced I'm fully understanding everything.
Since time is precious, for now I'll refrain from looking up every other name on the list. It's not real money anyway and I can look into things further when I actually have the money to invest.
Another interesting thing to note, Riocan is actually near the bottom of the heap, which I'm not sure I'm ok with. If I had to guess why, I'd assume it's because it's considered a safer place and fewer people have decided to sell off their holdings. Thus it isn't as good of a deal as other reits right now, however remains a high quality investment. Of course, this is all just the uneducated speculation of a first time investor.
Of course, there's still one more next step, translating percentages into actual lots of units. I don't really like the idea of having a lot of odd lots of everything. After that, there's the saving up of money followed by the actual buying of stuff.

Playing with My Own Index

I decided to make my own REIT index since it seems like a good way to get some more income and I wasn't really happy with my current options in that sector. The iShares ETF tracking the S&P TSX REIT index gets a lot of talk for a lot of things. One is for having very few securities, 12 reits and t-bills. The other is for having roughly 25% of it's funds in Riocan and what used to be about 15% in H&R, or about 40% in two securities. Granted, it's not the number of ticker symbols you have in your fund, it's really about what they represent. I can justify having a large position in Riocan simply because it's hard for me to think of a place I lived where they didn't have a very nice looking property nearby and they were always pretty much fully rented out. H&R is also another big name, though they don't proudly post their name on every property they own. In terms of spreading investment dollars amoungst sqft, the two of them do a fairly good job.
One critism that I don't hear all that often is that its holdings aren't adjusted to remove what may not be considered REITs anymore after the big "let's kill off the income trusts" tax change. There's some worry going on over whether or not things like senior's housing and hotels where much of the money comes from the services provided as opposed to the lending of the property. I would like to stick to what is definately going to still be considered a REIT afterwards and still an income trust/mutual fund investment trust.
So, why build my own index? Well, I'm not going to deny that fun is one of the reasons. Also, while those two REITs might spread money over large amounts of rental area, they do not spread money around different management styles, and acquisition philosophies. They're also still only two ticker symbols, so I should be able to reduce volitility with a larger basket. Granted in the bigger picture it's like saying that you don't feel the waves as much, but you're still stuck in the current. So in hopes of getting better returns, I started going about deciding how I'll setup my indext.
XRE is based off an index that uses market share weighting. I am interested in returns and it tends to be a bit of a pain to calculate total returns. Complexity is not something that I'm interested in, keeping things simple is one of the general philosophies of indexing. I decided on a simple scoring process involving yield plus a four year average growth rate. The general idea being if I had a two percent higher yield, I can simply reinvest the difference and wind up with two percent better growth rate, so the two are really interchangable, at least in a taxless world. Four years was kind of an arbitrary decision. The current year is included and counts as a full year even though it's not over, this advantages reits that don't wait till the end of the year to adjust distributions. It's a fudge I'm ok living with. Also many REITs are less than four years old. So I did a simple average of whatever the distribution growth rate was over the age of the REIT. Notably absent is any capital appreciation. I'm less concerned about capital appreciation than I am income. So I now have a MK1 Return Rated REIT index.
It's also getting late, so I'll stop now and leave this post nicely about what I did and follow up tomorrow with a post on what my spreadsheet suggests I do.

REIT Selection PT 1

Well, lets see what I can come up with before reading the REIT guide that I found. So, how do I pick what a good investment will be? Well, it's got to provide a good sustainable return. I guess that breaks things down into two main points, sustainability and return. I don't decide what to buy based of geographical and sector concentrations, but that might weigh in on how much I buy.
What can harm sustainability? From what I've seen REITs are always issuing new units, so dilution is a factor. Then there's how well properties are maintained and whether or not there's new ones in the works. So I guess acquisitions is another thing that I would look at. Another thing that hurts sustainability is that some REITs seem preoccupied with paying out a certain rate. While they're obligated to pay out a certain amount of taxable revenues to unit holders, nothing prohibits them from paying out more. So pay out ratio is another big one. I guess if something is sustainable, it's probably also growing. If it were unsustainable, it would be shrinking and hitting the exact point where it isn't doing either sounds like something that's unlikely to occur.
I suppose value is best summarized in some variation of PEG ratios. They tend to use some slightly different terminology when talking about REITs.
So bit of a summary:
Sustainability and growth
-units issued
-recent acquisitions
-payout ratio
Value
-PEGish thing
Now to read the guide and see if I can refine my ideas further and possibly come up with a comparison table It's a bit of a long document.
Also note, while typing on this laptop, part of me wonders how much smaller the keyboard can get before I have to learn to type again. That shouldn't be much of a concern for someone who can do like 30WPM on a graphing calculator, but relearning typing is an inconvenience. My old machines should probably hold out till there's more competition in the sub notebook market and I can find something that'll suit my style. Hopefully there won't be so much of a trade off too.