Full episode: Market Call for Thursday, June 25, 2020
Andrew Moffs, senior vice-president and portfolio manager at Vision Capital
Focus: Real estate stocks
The indiscriminate sell-off of public real estate securities in March created a massive dislocation when compared to the valuations of their private market counterparts. Although stock prices have begun to recover in the subsequent period, all property types and geographic regions do not stand to benefit equally.
As bond yields are no longer attractive to investors, this has incited a global hunt for yield. Property historically has benefited from predictable cash flows and may be a candidate for substantial inflows. Real estate is also buttressed by the appetite from leading private asset managers, large pension funds and institutions looking to allocate capital to direct property investments.
A confluence of secular themes accelerated by the global pandemic, accommodative central bank policies and shifting supply/demand fundamentals has guided Vision’s positioning as we seek to purchase property cheaper in the stock market than one can in the property market. Vision is constructive on U.S. single-family rental housing, Canadian multi-family apartments and industrial real estate.
TRICON CAPITAL (TCN TSX)
Tricon is a residential real estate firm largely focused on rental housing, primarily in the U.S. Sunbelt and Toronto and segmented into three verticals: Single-family rental (SFR) homes, multi-family rentals and for-sale housing. The company’s principal strategy is to offer affordable upscale rentals in high-population growth markets to middle-market consumers who have historically offered landlords longer-tenure and therefore more stable cash flows than other segments of the rental market. The SFR sector is one of the few real estate asset classes to experience net demand growth amid COVID. The pandemic has caused households to begin leaving city centers, shifting demand towards suburban single-family homes. In addition, work-from-home is expected to further drive deurbanization and create demand for larger living spaces. As a result, Tricon has been able to increase occupancy to record highs approaching 98 per cent and achieve blended rental rate growth of 5.1 per cent in May. Despite record demand and accelerating fundamentals, shares of Tricon trade at a 21 per cent discount to consensus net asset value, which offers a compelling entry point for investors as U.S. peers are currently trading at an 8 per cent discount to their net asset values.
EUROPEAN RESIDENTIAL REIT (ERE/U TSXV)
European Residential REIT is the world’s only REIT focusing on multi-family apartments in the Netherlands, the third-most densely populated country in the world. The REIT currently owns and operates 5,632 residential suites across 131 properties in the country. It
emerged in its current form when Canadian Apartment REIT sold a portfolio of 41 multi-residential properties located in the Netherlands and ERE took over its management and control. ERE offers unitholders first-mover advantage in consolidating the apartment sector in the Netherlands, where fundamentals are robust and no other institutional operator of size exists. CAPREIT identified this opportunity and decided it would be rewarding to sponsor ERE as a standalone vehicle with its own cost of capital and independently-focused investor base. Despite COVID-19, fundamentals in the REIT’s core markets remain largely unchanged, with ERES able to collect 100 per cent of rent, increase occupancy by 120 basis points as of April 30 and successfully send out renewal increases of 2.4 per cent. This compares to North American peers who have predominantly lost occupancy, collected below-historical average rents and have achieved flat net effective rent growth. Notwithstanding robust fundamentals, units of ERES remain a compelling investment, trading at a 14 per cent discount to their IFRS net asset value.
GRANITE REIT (GRT/U TSX)
Granite, the largest industrial REIT listed in Canada by market capitalization, owns a diverse portfolio of industrial properties across Canada, the U.S. and Europe. The REIT’s CEO, Kevan Gorrie, is an accomplished industrial real estate executive. Positive fundamental performance across Granite’s markets is expected to reaccelerate due to a rise in ecommerce, tenants increasing their inventory levels to meet demand, and slowing development starts, which limits the amount of new supply. In addition to benefitting from a fortress balance sheet, the REIT has been incredibly successful in significantly reducing exposure to its largest tenant over the past two and a half years. This improved Granite’s credit profile and contributed to further unit price appreciation. The REIT’s units are attractively valued, trading at a slight discount to NAV whereas its U.S. peers trade at a 9 per cent premium on average.
PAST PICKS: APRIL 30, 2020
BSR REIT (HOM/U TSX)
- Then: $9.75
- Now: $10.78
- Return: 11%
- Total return: 11%
AMERICAN HOMES 4 RENT (AMH NYSE)
- Then: $24.14
- Now: $26.93
- Return: 12%
- Total return: 12%
WPT INDUSTRIAL REIT (WIR/U TSX)
- Then: $11.47
- Now: $12.87
- Return: 12%
- Total return: 13%
Total return average: 12%