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

MARKET OUTLOOK

Despite a shock to global GDP that is expected to be temporary, the supply and demand fundamentals that underpin the valuations of North American real estate securities remain favourable. Vision’s constructive view on publicly traded real estate stocks is predicated by the following:

Public/private arbitrage

Real estate is a unique asset class where the private market dwarfs the public market. Since the advent of the coronavirus, there has been no increase in cap rates for real estate, no decrease in valuations and pricing of real estate properties and no abatement of real estate transactions. Yet, during the market correction, REIT prices plummeted 15 per cent, providing a great opportunity for strategies like Vision’s.

A “wall” of equity and debt capital

A wall of capital, both equity and debt, continues to look for a home in hard assets in general and real estate in particular.

Unprecedented low interest rate environment

The precipitous decline in interest rates could result in compressed cap rates in certain real estate sectors, causing property values to increase, further accentuating the disconnect and opportunity. Search for yield has driven investors into both private and public real estate.

TOP PICKS

BSR REIT (HOM-U TSX)

BSR is a unique Canadian-listed REIT that invests in U.S. multi-family apartments Texas, Oklahoma, and Arkansas. 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 Canadian apartment sector.

BSR is incredibly well positioned to significantly grow its net asset value both organically as well as through its value-add initiatives of upgrading rental units and opportunistic capital recycling. Additionally, BSR’s focus on affordable housing with very low average monthly rents provides a very compelling defensive characteristic should economic conditions deteriorate.

TRICON CAPITAL GROUP (TCN TSX)

Tricon is a residential real estate firm largely focused on rental housing, primarily in the U.S. Sunbelt and Toronto. 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.

Strong supply and demand fundamentals in the U.S. Sunbelt have allowed Tricon to achieve consistent rent growth well above inflation and management’s excellent operational capabilities have controlled expenses below inflation. Despite a robust operational outperformance, shares of Tricon trade at a 16 per cent discount to their net asset value (NAV), while U.S. peers are currently trading 3 per cent above their NAVs.

STORAGEVAULT CANADA (SVI TSXV)

StorageVault is the only Canadian-listed corporation that operates, manages and develops self-storage facilities across the country. The Canadian self-storage industry is highly fragmented, with the top 10 owners only controlling an estimated 15 per cent market share. StorageVault has been the leading consolidator. It has over 200 facilities under management, which is nearly three times more than the second largest operator. Through its economies of scale and superior operating capabilities, StorageVault is able to acquire under-managed facilities and improve their net operating income (NOI) by nearly two times in a relatively short period of time. Despite growing its NOI four times faster than U.S. peers, StorageVault currently trades at a 2 per cent discount to its NAV and an implied cap rate of 5.1 per cent compared to U.S. peers trading at a 14 per cent premium to their NAV and an implied cap rate of 4.8 per cent.

PAST PICKS: NOV. 4, 2019

AMERICOLD REALTY TRUST (COLD NYSE)

• Then: $38.58
• Now: $32.22
• Return: -16%
• Total return: -16%

GRANITE REIT (GRT-U TSX)

• Then: $65.33
• Now: $70.96
• Return: 9%
• Total return: 10%

BSR REAL ESTATE INVESTMENT TRUST (HOM/U TSX)

• Then: $15.60
• Now: $17.11
• Return: 10%
• Total return: 11%

Total return average: 2%

FUND PROFILE

Vision Opportunity Fund Limited Partnership
Performance as of: Feb. 28, 2020

• 1 month: -2.9% fund, -2.8% index
• 1 year: 10.0% fund, 6.8% index
• 3 years: 6.9% fund, 6.0% index

INDEX: Equally weighted average of TSX Capped REIT Total Return Index, Scotiabank Canadian Hedge Fund Index, HFRI Index, and MSCI U.S. REIT Index.
Returns are based on net of fees and annualized.

WEBSITE: visioncap.ca