Andrew Moffs' Top Picks: Nov. 10, 2020

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

MARKET OUTLOOK

A powerful combination of clarity resulting from the conclusion of the U.S. election and reports of Pfizer’s efficacy in phase 3 of COVID-19 vaccination trials has restored confidence to long-term sentiment and spurred a global rally in the stock market. October’s U.S. non farm payroll jobs report outperformed expectations, adding 638,000 jobs and reducing the unemployment rate to 6.9 per cent.

REITs are insulated from President-elect Biden’s proposed corporate tax rate increases, as the structure is not required to pay income tax as a flowthrough entity. This may lead to relative outperformance versus other asset classes if the policy comes to fruition.

North American publicly-traded real estate securities have surged in step with the broad market. However, shifting economic activity and secular themes has impacted the demand and supply characteristics of individual real estate asset classes differently, creating a landscape of winners and losers.

A historically low interest rate environment has created an attractive spread between real estate and bond yields, allowing cash-flow resilient property types to realize cap rate compression on the strength of cheaper borrowing costs and favourable underlying fundamentals.

Transaction volumes in the private markets have increased to healthier levels, informing valuations for their publicly-traded counterparts. Many public real estate securities continue to trade at a discount to net asset value – sectors in favour may benefit from increased M&A as this valuation gap is recognized and narrowed by larger private entities, or alternatively re-price due to increased demand.

Capital raising earmarked for real estate from leading private asset managers, large pension funds and institutions has continued unabated. According to Preqin Ltd., private equity funds across the globe currently hold a record US$328 billion in dry powder earmarked for real estate investments, which should support property valuations, specifically in sectors with favourable fundamentals.

TOP PICKS

BSR REIT (HOM-U TSX)

BSR is a unique Canadian-listed REIT that invests in U.S. multi-family apartments within the U.S. Sunbelt states of 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 management also has a significant ownership stake in the REIT, resulting in BSR having one of the most aligned and experienced management teams within the Canadian-listed apartment sector.

Tricon Residential REIT (TCN TSX)

Tricon Residential Inc. is the only Canadian-listed company that operates and manages high-quality residential real estate across North America with a focus on single-family, and multi-family rental buildings in both the U.S. Sun Belt 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.

Canadian Apartment Properties REIT (CAR-U TSX)

Canada’s largest publicly-traded rental residential enterprise, it owns 59,000 residential rental suites and manufactured housing community sites. It also owns controlling stakes in two publicly-traded European apartment REITs focused on Ireland and the Netherlands, respectively. Notwithstanding the uncertainties generated by the pandemic, CAPREIT’s units are a compelling investment for several reasons. First, it possesses a strong balance sheet with $372 million of liquidity, a debt to gross book value of only 36 per cent, access to over a $770 million unencumbered asset pool and minimal near-term maturities. Second, it owns a defensive portfolio of apartment units with in-place rental rates that are 7 per cent below market and are affordable relative to other housing options. Third, recent transactions suggest that apartment valuations have increased during COVID-19.

Past Picks: NOV. 4, 2019

BSR REIT (HOM-U TSX)

• Then: $15.60
• Now: $13.51
• Return: -13%
• Total Return: -9%

Americold Realty Trust (COLD NYSE)

• Then: $38.58
• Now: $35.17
• Return: -9%
• Total Return: -7%

Granite REIT (GRT-U TSX)

• Then: $65.33
• Now: $76.56
• Return: +17%
• Total Return: +22%

Total Return Average: +2%