Andrew Moffs, senior vice president and portfolio manager, Vision Capital

FOCUS: Real estate stocks 


With the multi-decade high inflation levels of the previous year tapering off throughout the first quarter, investors became sanguine about the market conditions. However, a sudden banking crisis and the renewed uncertainty of the path that central banks will be taking regarding interest rates, has extinguished that optimism and increased the likelihood of a recession in 2023.

With the uncertainty in the markets continuing to rise, understanding the importance of quality assets has become more of a fundamental necessity, in order to be rewarded in this environment. In the context of publicly-traded real estate, the quality of the properties and management are vital. Real estate investment trusts (REITs) that have sound management practices and strong balance sheets, position themselves particularly well to navigate uncertainty and market distress.

The prevailing conditions affect real estate asset classes differently. Sectors such as single-family rentals, manufactured housing communities, grocery anchored retail and industrial, tend to be more defensive in nature and have exhibited resiliency thus far in the current climate. This is compared to sectors such as office, hotels, and U.S. health care, which could display further signs of distress as the year progresses.

The robust mergers and acquisition activity in 2021 and the first half of 2022 saw a significant slowdown as the year came to a close. However, the volume of transactions might improve as the year progresses as there is more movement in private market pricing and stabilization in financing costs. REITs that have been the most resilient throughout 2023 within sectors containing positive supply and demand fundamentals will increasingly be targets for strategic takeovers should they continue to trade at wide discounts to net asset value.

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Andrew Moffs' Top Picks

Andrew Moffs, senior vice president and portfolio manager at Vision Capital, discusses his top picks: First Capital REIT, First Industrial Realty Trust, and Dream Industrial REIT.

First Capital REIT (FCR.UN TSX)

First Capital REIT owns interests in over 22 million square feet of retail real estate located in Canada’s major urban centers. More than 85 per cent of the portfolio is leased to tenants providing essential goods and services and the portfolio has over 24 million square feet of future development potential. Vision believes this is the highest quality and best-located grocery and pharmacy-store-anchored portfolio globally.

The supply and demand backdrop for grocery-anchored shopping centers is increasingly favourable in the current economic environment with minimal new supply and a high degree of economic resilience. In a recessionary environment, First Capital’s necessity-based retailers will experience minimal disruption in sales which will outperform peers more exposed to discretionary retailers.

Over the last six months, due to significant unitholder activism, First Capital has made substantial improvements to portfolio strategy, balance sheet, and corporate governance. On Sept. 22, 2022, the REIT announced an enhanced capital allocation and portfolio optimization plan that will rebalance the portfolio to monetize excess density improving both earnings growth and corporate debt metrics. This plan is the culmination of years of re-zoning work to unlock embedded value within the portfolio.

In addition, the REIT has continued to substantially refresh the board of trustees, changing the chair of the board and adding two new trustees, including Ira Gluskin and Richard Nesbitt. This is in addition to the retirement of Andrea Stephen for whom Dayna Gibbs will now stand for election at the REIT’s upcoming AGM. Seven of the current 10 trustees at First Capital, including the new chair, have joined since 2018 as part of First Capital’s ongoing board refreshment.

First Capital is well positioned for strong unit price outperformance with the REIT trading approximately 35 per cent below the private market value of the assets (the most discounted valuation in the Canadian shopping center REIT space).

First Industrial Realty Trust (FR NYSE)

First Industrial Realty Trust is a fully integrated owner, operator, and developer of U.S. industrial real estate. The REIT’s 63.1 million square feet portfolio is highly concentrated in 15 of the tightest markets in the United States. First Industrial’s portfolio is located in the top 15 industrial hubs in the U.S. with a concentration in Southern California (25 per cent of revenue). Its concentration in these markets has caused the REIT to produce one the strongest NOI and FFO growth profiles amongst its peers and once again is projected to be one of the leaders in earnings growth in 2023.

With availability rates below national averages in the REIT’s core markets, market-rent growth has been robust over the last several years which has created a mark to market on the REIT’s portfolio between +40-to-50 per cent. Looking ahead, this mark-to-market should remain elevated as supply in its markets is projected to remain muted. As a result, the REIT should have sustained top quartile NOI and FFO growth for next several years. In addition to its strong internal growth, the REIT’s development pipeline offers exciting external growth prospects as upon completion it would expand its portfolio by 28 per cent. Notably, the REIT strategically acquired its land bank before the pandemic, securing a very attractive cost basis and therefore allowing for strong development profits. Moreover, it is concentrated in some of the most attractive, supply constrained industrial markets in the U.S., lowering the leasing risk of its pipeline.

Complementing its robust internal and external earnings growth profile, First Industrial operates a well managed balance sheet with no maturities until 2027 and at a low 4.9x net debt to EBITDA. Notwithstanding this, shares of the REIT trade a 22 per cent discount to its NAV, the widest amongst the peers, which if sustained, makes the REIT a potential takeover candidate.

Dream Industrial REIT: (DIR.UN TSX)

Dream Industrial REIT is a pure-play industrial REIT focused on owning primarily distribution and logistics assets across Canada (62 per cent of investment property value, excluding assets held for sale) and Europe (38 per cent). It also owns a 25 per cent interest in a private open-ended U.S. industrial fund, in which the REIT earns fees for property and construction management as well as leasing services. The REIT recently formed a joint-venture with Singapore Sovereign Wealth Fund “GIC” to acquire Summit Industrial Income REIT for $5.9 billion. In addition to participating as a 10 per cent equity owner, the REIT will earn management fees from this new platform allowing the deal to be immediately accretive to earnings.

The REIT’s portfolio is concentrated in low vacancy, high-barrier to entry industrial hubs across North America and Europe, which over the last several years has resulted in sizeable market rent growth. Specifically, the REIT has 33 per cent of its portfolio in the Toronto and Montreal areas, which experienced market rent growth of 40 per cent and 50 per cent in 2022. With new supply in these markets de minimis, market rent growth should continue to remain above inflationary levels for the next few years, which in turn should further improve the REIT’s already robust earnings growth profile. As a result of realizing its strong mark-to-market potential and several development projects coming online in 2023, the REIT is expected to achieve nine per cent same-property NOI growth and 10 per cent FFO growth. These metrics place Dream Industrial amongst the fastest growth industrial REITs in North America. Moreover, when overlaid with its conservative balance sheet of 32 per cent debt to assets, the REIT screens highly attractive from a risk-adjusted growth basis.

Despite this, units of the REIT continue to trade at a compelling 21 per cent discount to its underlying NAV.




PAST PICKS: April 28, 2022

Andrew Moffs' Past Picks

Andrew Moffs, senior vice president and portfolio manager at Vision Capital, discusses his past picks: Boardwalk REIT, Sun Communities, and Summit Industrial Income REIT.

Boardwalk REIT (BEI.UN TSX)

  • Then: $57.83
  • Now: $54.86
  • Return: -5%
  • Total Return: -3%

Sun Communities (SUI NYSE)

  • Then: $183.33
  • Now: $138.03
  • Return: -25%
  • Total Return: -23%

Summit Industrial Income REIT (SMU.UN TSX)

  • Then: $21.53
  • Sold: $23.48 (Delisted from the TSX on Feb. 21, 2023 after it was acquired by GIC and Dream Industrial REIT)
  • Return: 9%
  • Total Return: 11%

Total Return Average: -5%