Go North, Young Man, Especially in Taxable Accounts

Interesting income opportunities from a geographically limited Canadian REIT.  Go North, Young Man, especially in taxable accounts.  John Babsone Lane Soule in an 1851 editorial in the Terre Haute Express, offered the phrase: "Go west young man, and grow up with the country."  Investors seeking higher after-tax income may want to look north of the border.  Canadian REITs offer both steady income and have some interesting tax implications that could be favorable to US investors.  

Canadian REIT yields are tax advantaged versus their U.S. counterparts. The Canadian authorities withhold 15 percent on their side of the border, as is the case for all trusts.  However, as with all foreign distributions in non-tax advantage accounts, U.S. investors can recoup a vast majority of these taxes by filing Form 1116 with their U.S. taxes.

Specifically, Canadian REITs are treated as foreign equities for U.S. tax purposes, so their dividends are taxable at a maximum rate of 15 percent like any other qualified stock. In contrast, a U.S. REIT’s dividend is taxed as ordinary income.
There are several Canadian REITs worthy of additional research by US income investors.  One such REIT is Cominar Real Estate Investment Trust (CMLEF, CUF-UN.TO).  Based in Quebec, Cominar owns a wide variety of real estate.  Their holdings include 566 retail, office and industrial/multiuse properties.  Of the 45.9 million sq. ft. owned, 36% is office space, 21% retail space and 43% industrial/multiuse space.  

One risk to CMLEF is its concentration of assets in Ontario.  While it is the third largest Canadian REIT and the largest property owner in the province of Quebec, the lack of diversified geography presents an interesting profile.  Although Quebec is home to more stable government-related offices than other parts of Canada, this tenant usually represents a slower growth profile than resource-based western Canada. Western and Atlantic Canadian assets represent only 10% of CMLEF’s portfolio.      

When converted into US Dollars, Cominar’s dividend are at the mercy of international exchange rates.  For example, the monthly dividend has not changed in Canadian Dollars, but when deposited in our US brokerage accounts, the amount varies.  

For example, the Canadian distribution has been steady $0.1225/share a month since it was raised 2.0% last Aug. However, when converted into US dollars, the monthly distribution has varied from $0.112, or $1.34 annualized, to $0.0.95 or $1.14 annualized.  Using the previous 12 months, distribution income totaled Canadian$1.47 and US Dollar $1.23.   

Cominar yields between 9.2% based on trailing 12 month income and 8.2% based on annualizing the most recent distribution of $.095.  If investors are looking to buy shares on the US markets, the average turnover is a bit light at 2,300 shares a day vs 263,000 shares on the Toronto exchange.  Limit orders should be utilized for US market buys and sells.  

CMLEF recently offered a secondary offering of $155 mil to finance continued expansion of its portfolio.  Share prices have been negatively affected on both the Toronto and US exchanges by this dilution, along with some concerns about stagnate, aka steady, FFO/share of $0.44 in the first quarter.  The Toronto 52 week high/low is $20.11 and $17.34 vs the US share prices of $18.50 and $13.42, respectively.  Market prices are currently sitting on their 52-week lows.

As/If the USD declines against the Canadian Dollar, not only will the US share price of CMLEF improve, but the cash income from the monthly distribution will increase as well – all else being equal.  Keep in mind the opposite is true as well.   

More information can be found on their website:  http://www.cominar.com/ENGLISH/accueil_EN.php

Note and disclosure:  We are not tax advisers and always check tax facts with your accountant and broker for the specific implications to your situation.

This article first appeared in the Aug issue of Guiding Mast Investments.  Thanks for reading, George Fisher