Andrew Moffs, Senior Vice President & portfolio manager, Vision Capital

FOCUS: Real estate stocks


In the wake of a strong and broad rally across the North American publicly-traded real estate securities universe in the fourth quarter of 2023, pricing has been pared back year-to-date. Prices most recently responded to a hawkish tone from the minutes released of the May 1 meeting of the U.S. Federal Open Market Committee, which clouded the timing and quantum of interest rate cuts from their current restrictive levels.

Amidst this consolidation, REITs appear to be approaching a point of inflection, where market factors that have previously registered as headwinds weighing on sector prospects are now shifting to tailwinds.

First, the prospect of peak interest rates eases upward pressure on property capitalization rates, placing a floor under property valuations. With REIT implied cap rates continuing to trade at a material spread to both appraisal and transaction values in the private market, the backdrop for convergence in pricing between the public and private markets should benefit REIT unit prices.

Second, BofA reports fund managers' REIT holdings are near the extreme lows of the Great Financial Crisis in 2009, at a 28 per cent net underweight. A recovery of investor sentiment should benefit REIT fund flows as managers rebalance toward historical exposures, enhancing demand and pricing for REIT securities.

Finally, as a capital-intensive sector, a recovery in credit markets will continue to drive greater transaction volume, and improve the prospect of M&A for REITs trading at discounts to their forward-looking net asset value.

Blackstone, the poster child for taking advantage of public-private arbitrage, has already announced the privatization of two listed real estate entities year-to-date: Tricon Residential Inc. (TSX/NYSE: TCN), at a 30 per cent premium to its prior closing share price, and Apartment Income REIT Corp. (NYSE: AIRC), at a 25 per cent premium to its prior closing share price, both on the NYSE.

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Andrew Moffs' Top Picks

Andrew Moffs, senior vice president and portfolio manager at Vision Capital, discusses his top picks: Boardwalk REIT, Digital Realty Trust, Inc., and Chartwell Retirement Residences.

Boardwalk REIT (BEI.UN TSX)

Boardwalk Real Estate Investment Trust, the second-largest publicly-traded apartment REIT in Canada by market capitalization, owned – as of the end of the first quarter of 2024 – over 34,000 suites across Canada, with nearly two-thirds of these units in the province of Alberta. Vision is constructive on units of the REIT primarily due to two reasons.

First, residential market conditions in its core Alberta market, which generates 63 per cent of its stabilized NOI, remain strong. This is due to the greater level of affordability in the Alberta rental market, relative to other regions in Canada, and has been a contributing factor of demand, stemming from high levels of both international and interprovincial migration to the province.

In fact, Alberta’s population increased 4.4 per cent year-over-year in 2023; the highest annual growth rate of any province or territory, and the highest rate for Alberta since 1981.

Second, Boardwalk benefits from having significant exposure to Alberta and Saskatchewan, both of which do not have rent controls. In fact, 74 per cent of Boardwalk’s stabilized NOI is generated from these two provinces. This advantageous position allows the REIT to increase rents more dynamically, bringing them closer to market rents upon lease expiration.

In contrast, other Canadian provinces with rent controls often face limitations, constraining increases in rents to levels that may be at or below inflationary increases in expenses. Despite this, units of the REIT continue to trade at a compelling 17 per cent discount to its underlying net asset value (NAV).

Digital Realty Trust, Inc. (DLR NYSE)

Digital Realty Trust, Inc. is a leading global provider of data centre, colocation, and interconnection solutions for customers across a variety of industry verticals. Digital Realty owns and operates 309 data centres, comprised of 38.1 million square feet, of which 62 per cent are in the United States, 21 per cent in Europe, and the balance is in Asia-Pacific and Africa. The REIT focuses on wholesale/hyper-scale data centres, or large-scale enterprise customers, as opposed to small-medium-business customers.

The bullish thesis for investing in the data centre sector is predicated on the continued growth of data consumption, which is driven by consumers and businesses not only requiring more information every year, but also at faster speeds. Over the last decade, companies like Amazon, Microsoft, Apple, and Google recognized this need and began developing their own data centres and, at the same time, leased newly-developed data centres to enable hyper-growth.

Most recently, the mass adoption of artificial intelligence (AI) has further fueled demand and has caused U.S. data centre new-leasing activity to increase nearly 400 per cent year-over-year to new all-time highs. This has caused strains on regional power grids, which were not designed to handle this rapid change in demand.

As a result, local municipalities across the world have begun to enforce building moratoriums and restrict power allocation toward data centres resulting in new supply being curtailed. While supply is being restricted, demand remains elevated, which has resulted in lower vacancy rates in core markets and rental rates increasing as much as 40 per cent in key markets like Northern Virginia.

As supply and demand fundamentals have positively shifted to allow for strong organic rent growth, DLR is well-positioned as a premier operator and is a preferred partner for institutional capital seeking to establish platforms and/or partnerships in the sector. To that end, DLR and Blackstone announced a US$7 billion hyper-scale data centre development joint venture in December 2023, to develop four hyper-scale data centre campuses across Frankfurt, Paris and Northern Virginia, with DLR maintaining a 20 per cent interest in the properties and managing the development and day-to-day operations of the joint venture, for which it will earn fees.

Due to accelerating fundamentals and rental rates, the REIT has one of the strongest multi-year earnings growth outlooks amongst REITs, which justifies its shares trading at a modest premium to its NAV.

Chartwell Retirement Residences (CSH.UN TSX)

Chartwell Retirement Residences is the largest owner of seniors housing in Canada, with more than 26,000 suites located across Ontario, Quebec, Alberta, and British Columbia. Chartwell’s occupancy has been increasing over the last 12 months as the aftereffects of the pandemic continue to fade and seniors once again move into retirement homes to receive the care and support they need.

Supply under construction has diminished to only 1.2 per cent of inventory as higher interest rates and construction costs make development projects unprofitable at the same time as the population growth rate of seniors has increased to over four per cent. These factors are combining to create a supportive operating environment for Chartwell and this has led occupancy to rise by over seven per cent to 86 per cent during the last 12 months to the end of March, 2024.

Further occupancy growth is predicted over the course of this year. With the Trust currently trading at an implied cap rate of nearly 7.1 per cent, or an approximate 10 per cent discount to NAV, this turning point in supply and demand fundamentals creates a compelling investment opportunity as Chartwell’s occupancy and earnings continue to grow.




Andrew Moffs' Past Picks

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

First Capital REIT (FCR.UN TSX)

  • Then: $15.55
  • Now: $14.61
  • Return: -6%
  • Total Return: 0.1%

First Industrial Realty Trust (FR NYSE)

  • Then: US$52.06
  • Now: US$46.70
  • Return: -10%
  • Total Return: -8%

Dream Industrial REIT (DIR.UN TSX)

  • Then: $14.38
  • Now: $12.29
  • Return: -14%
  • Total Return: -9%

Total Return Average: -6%