Full episode: Market Call for Monday, November 4, 2019
Andrew Moffs, senior vice-president and portfolio manager at Vision Capital
Focus: Real estate stocks
Across the broader markets, the mix of economic and political events throughout most of this year has caused confusion and uncertainty. Against this challenging backdrop, it is noteworthy that stock markets thus far in 2019 have been able to move higher. Within the real estate sector, share price strength for North American REITs and REOCs has narrowed the gap between valuations and the underlying net asset value of many of these companies, with some even trading at a premium. While valuations have collectively risen, they’re not stretched due to favorable sector trends as well as increasing property values, which have been supported by a growing amount of private capital being raised. As a result, Vision anticipates there is further potential upside in select real estate equities over the next 12 months.
For industrial real estate, the secular trends remain very bullish. The continuing shift to e-commerce has added significant demand for space while in many markets, particularly coastal areas in the U.S., Toronto and Vancouver, the supply of industrially-zoned land is severely constrained.
Secular trends in the multi-family sector remain similarly positive. Young adults delaying marriage and having children as well as the preference to live in or near urban centres continue to support the sector. The financial burdens of homeownership also bode well for rental apartment demand.
Another long-term positive structural force derives from the aging North American population. This inexorable trend should positively impact those public entities operating in the seniors housing sector, even if there is short-term oversupply in certain markets.
In contrast to the above sectors the secular trend for retail space, especially in larger shopping centres and malls, has become increasingly difficult. E-commerce is causing problems for many traditional retailers. Nonetheless, many with foresight and acumen are responding positively to the challenge. The adverse impact at the margin has negatively impacted investors’ attitudes towards retail REITs, particularly the mall sector, even when agile management and long-term leases have allowed properties to maintain their occupancies and revenue streams.
BSR REIT (HOM-U:CT)
BSR is a unique Canadian-listed REIT that invests in U.S. multi-family apartments within the Sunbelt states of Arkansas, Texas and Oklahoma. 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 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 well positioned to significantly grow its NAV organically and through its value-add initiatives of upgrading rental units and opportunistic capital recycling. Additionally, BSR’s focus on affordable housing provides a compelling defensive characteristic should economic conditions deteriorate. Significant upside exists in the price of the REIT’s units, as they’re currently trading at a meaningful discount to its NAV, whereas its U.S. peers are trading at a 19-per-cent premium.
AMERICOLD REALTY TRUST (COLD:UN)
Americold is the world’s largest publicly traded REIT focused on the ownership, operation and development of temperature-controlled warehouses. Its high-quality facilities are “mission-critical” for tenants, as they’re an integral component of their supply chain. Americold, with its experienced management team, has modernized the business model and developed best-in-class technology and operating platforms, providing for a significant competitive advantage.
The REIT is extremely well positioned to generate high levels of cash flow (funds from operations) growth over the coming years organically and through accretive acquisitions and developments. Demand for its warehouse space is expected to trend higher as population grows, consumer preferences shift towards fresh foods that require temperature-control facilities and e-commerce penetration increases. The stock is very attractive as it is currently trading at a similar 2020 FFO multiple to the U.S. industrial REIT sector, but has more than double the growth.
GRANITE REIT (GRT-U:CT)
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. CEO Kevan Gorrie is an accomplished executive who as former CEO of Pure Industrial Real Estate Trust built a very large and successful enterprise that was sold at a premium price.
Positive fundamental performance across Granite’s markets continues to accelerate and its unique exposure in Europe provides the REIT access to cheaper sources of financing than other Canadian-listed industrial REITs. In addition to benefitting from a fortress balance sheet, Granite has been incredibly successful in significantly reducing exposure to its largest tenant over the past two years, which not only improves the REIT’s credit profile, but also has contributed to further unit price appreciation. The REIT’s units are trading at very attractive levels, with an implied capitalization rate of 6.1 per cent, which is significantly greater than recent large industrial portfolio sales that have been transacting at a mid-4-per-cent yield.