Andrew Moffs' Top Picks
Andrew Moffs, senior vice president, portfolio manager at Vision Capital
Focus: Real estate stocks
The Federal Open Market Committee concluded its two-day meeting on Wednesday, citing “progress” as a rationale to begin formulating a strategy and timeline to taper its US$120 billion asset purchases, though admittedly the initiative will be dependent on improving employment figures.
Recently, rhetoric has subtly shifted in appreciation of market forces that are threatening more persistent price appreciation over an extended timeline, as this was further reflected in the Fed’s forecasted increases in core PCE at year-end 2021 and 2022 of a median of 3 per cent and 2.1 per cent, respectively. Investors have long-espoused the REIT asset class as an effective inflation hedge, benefiting from growing cash flows as operators mark rents to market, and valuations of its underlying properties re-price as replacement costs rise. This is borne out in data compiled by Yardi Matrix, reporting year-over-year multi-family rents are up by double digits in nine of the top 30 markets, while national year-over-year rent growth is up 6.3 per cent.
Spurred on by cheap, easy access to capital and an improving economic landscape, REIT mergers & acquisition activity is accelerating in the second half 2021. These transactions are supportive of price discovery and lend confidence to NAV calculations as volumes improve. REITs have recorded US$12 billion net in property acquisitions year-to-date, competing with vast sums of private capital to secure assets that continue to realize meaningful cap rate compression. Deal volumes are elevated relative to historical averages in property types displaying solid fundamentals, specifically manufactured housing, single-family rental, multi-family, and industrial.
Publicly-traded REITs are well positioned to benefit from this environment, either through the price appreciation of publicly-traded shares to reflect the increase of underlying property values, or acquisitions of undervalued entities at premiums to where they are trading, closing the gap to the underlying net asset value.
In the first quarter 2021, BSR completed its capital recycling initiative which saw the REIT sell US$613 million of non-core assets in low growth markets at a 6 per cent premium to their IFRS values over a three-year period. Proceeds were then reinvested into properties located in BSR’s core growth markets of Austin, Dallas, and Houston Texas, that have recently or are currently in the lease up phase to immediately improve operations and significantly enhance cash flows. In addition, the REIT has US$287 million of acquisition capacity to further enhance its earnings growth and expects to deploy this capital by year end. As a result of these actions, BSR forecasts it can realize AFFO per unit of US$0.65, implying 30 per cent year-over-year growth which is four times greater than its U.S. listed Sun Belt peers.
Recent sales of comparable portfolios in the Sun Belt have transacted at in-place and forward cap rates between 3.90 per cent to 4.25 per cent, implying BSR is trading at an in-place cap rate of 5.00 per cent, and thus suggests significant near-term upside.
Finally, insiders of BSR acquired an additional 51,500 units of the REIT to augment their substantial equity stake alongside shareholders.
WPT has increasingly focused on private sector partnerships to enhance its access to capital and development pipeline, while generate fee income from its operating acumen. Currently, the REIT counts the Canada Pension Plan Investment Board, Alberta Investment Management Corporation and Investment Management Corporation of Ontario as strategic partners across four separate joint ventures, a testament to institutional confidence in their management team.
Additionally, WPT is well positioned in the industrial real estate sector due to strong tenant demand for larger facilities, where as of May 2021, rent growth was outpacing the national average on a year-over-year basis.
With industrial real estate in WPT’s markets rapidly increasing in price, Vision believes the units are significantly undervalued as they trade at a 17 per cent discount to its NAV, notwithstanding the wide valuation gap to its U.S.-listed peers that trade at an average 18 per cent premium. The discount to NAV is notably evident in the unit’s implied cap rate of 5.0 per cent, whereas CBRE and JLL estimate the cap rates in a large majority of the REIT’s markets to range from a low-4 per cent to high-4 per cent level.
At the onset of the pandemic, Boardwalk’s unit price declined 62 per cent between February and March 2020 in tandem with a 35 per cent decline in the price of oil and a weak Alberta economy. Since then, operations have remained remarkably steady and occupied rents flat, mainly attributable to the affordable nature of its portfolio. Despite this, units of Boardwalk still remain 20 per cent below their peak price in February 2020.
With the price of oil rebounding and several new technology firms announcing expansions into the REIT’s core markets of Calgary and Edmonton, the outlook for a complete removal of tenant concessions is positive. If the REIT were to eliminate all concessions in its portfolio, it would imply a 14.8 per cent increase to its in-place NOI and FFO per unit would be 31 per cent higher than its current first quarter 2021 annualized run rate.
Boardwalk’s units currently trade at a forward FFO multiple of 13.8x, which is 8.0x lower than its Canadian peers, and an implied cap rate of 5.4 per cent, or 125 bps higher than its peers.
PAST PICKS: July 25, 2020
Tricon Residential Inc. (TCN TSX)
- Then: $8.85
- Now: $14.88
- Price Return: 68.14%
- Total Return: 73.38%
European Residential REIT (ERE.UN TSX)
- Then: $4.21
- Now: $4.42
- Price Return: 4.99%
- Total Return: 9.44%
Granite REIT (GRT.UN TSX)
- Then: $67.83
- Now: $86.15
- Price Return: 27.01%
- Total Return: 32.42%
Total Return Average: 38.41%