Andrew Moffs, senior vice-president and portfolio manager at Vision Capital
Focus: Real estate stocks

MARKET OUTLOOK

The coronavirus pandemic was the catalyst for broad, indiscriminate selling across all asset classes, resulting in sharp declines not witnessed since the Great Recession. In fact, March 2020 was the most volatile month on record, with the S&P 500 benchmark index averaging a daily move, in either direction, of more than 4.8 per cent.

The massive selloff has created an environment Vision was built to succeed, executing on its mantra: buy property in the stock market cheaper than one can in the property market. There are many constructive factors that should aid in the recovery of select real estate securities, though bifurcation is expected in periods of volatility.

Discounts to net asset value: At quarter end, the average discount to net asset value (NAV) among REITs in the U.S. was 41 per cent and in Canada, 39 per cent. Even with potential weaker economic data eroding NAVs in the interim, it is evident that property prices have not declined 40 per cent.

Cap rates: The average spread between implied property cap rates and BBB-rated corporate bond yields is currently at 3.2 per cent, near historic highs.

Wall of capital: There continues to be an appetite from leading private asset managers, large pension funds and institutions looking to allocate capital to direct property investments. Both Blackstone and Brookfield have raised property funds exceeding $30 billion and investment funds are rebalancing their asset mixes to increase exposures to hard assets. Blackstone said on their Q1 earnings release conference call that they have $152 billion of dry powder.

Interest rates lower for longer: Bond yields are no longer attractive to investors, inciting a hunt for yield. Property historically has benefited from predictable cash flows and may be candidate for substitution

TOP PICKS

BSR REIT (HOM/U TSX)

BSR is a unique Canadian-listed REIT that owns and manages 9400 multi-family rental apartments suites focused in major U.S urban sectors, with its largest concentration being in the Dallas-Fort Worth market. The REIT’s principal strategy is to own and operate affordably-priced apartments within these strong population and job growth markets and selectively deploy value-add renovations that achieve high returns. Not only has management of BSR perfected this strategy over the last 20 years, but they also have a significant ownership stake in the company, resulting in the REIT having one of the most aligned and experienced management teams within the apartment sector. BSR’s focus on affordable housing provides a compelling defensive characteristic during uncertain economic conditions.

AMERICAN HOMES 4 RENT (AMH NYSE)

American Homes 4 Rent owns 52,000 single-family rental homes across 35 markets, with 60 per cent of its net operating income concentrated in the high growth Sunbelt region, targeting middle-market renters. The REIT offers shareholders an exceptional balance sheet, a diversified portfolio and a build-to-rent single family residential development platform, all attributes that should help its shares outperform throughout the economic cycles. The REIT is a compelling investment opportunity, as it is currently trading at a 13 per cent discount to its net asset value.

WPT INDUSTRIAL REIT (WIR/U TSX)

WPT Industrial REIT is the only Canadian-listed industrial REIT whose portfolio is solely comprised of assets located in the U.S., totaling approximately 32 million square feet. The REIT also manages a private capital business that invests in value-add acquisitions and development projects of U.S. industrial real estate, providing a valuable source of fee income. The REIT’s portfolio of institutional-quality industrial real estate is more defensively positioned through this cycle than some of its peers, as close to half of its revenue is generated from investment grade-rated tenants. Furthermore, following the current downturn, demand for industrial space is expected to significantly increase from a likely acceleration in e-commerce adoption and tenants’ needs for higher inventory levels to ensure a sufficient supply of goods.

PAST PICKS: MARCH 5, 2020

STORAGEVAULT CANADA (SVI TSXV)

• Then: $3.78
• Now: $3.04
• Return: -20%
• Total return: -20%

TRICON CAPITAL GROUP (TCN TSX)

• Then: $11.30
• Now: $8.08
• Return: -29%
• Total return: -28%

BSR REIT (HOM/U TSX)

• Then: $12.79
• Now: $9.41
• Return: -26%
• Total return: -26%

Total return average: -25%