Andrew Moffs, senior vice-president and portfolio manager at Vision Capital
Focus: Real estate stocks
The global markets continue to be fraught with uncertainty as a second wave of the pandemic threatens economic activity, the CERB is being replaced by a combination of EI and the newly proposed (yet to be approved) Canada Recovery Benefit and the U.S. election approaches. North American real estate valuations continue to diverge as the pandemic has affected the demand and supply characteristics of the individual real estate asset classes differently.
The U.S. Federal Reserve recently indicated it will hold interest rates near zero until at least 2023. As part of the Central Bank’s new long-term policy framework it will allow inflation to overshoot its 2 per cent target after periods of underperformance. The spread between real estate and bond yields continues to be attractive, 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 and should put a floor under values.
Vision continues to see opportunity within this historic dispersion, maintaining a constructive outlook on single-family residential, U.S. Sunbelt and European multi-family apartments, U.S. manufactured housing communities, U.S. homebuilders and industrial real estate globally.
Tricon Residential (TCN TSX)
Tricon is a residential real estate firm focused on rental housing. The company offers 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. The single-family rental sector is one of the few real estate asset classes to experience net demand growth throughout COVID-19 as the pandemic pushes households to begin leaving city centers, shifting demand towards suburbs. In addition, work-from-home is expected to further drive deurbanization and create demand for larger living spaces.
Recognizing the strong fundamentals and best in class management team, Blackstone Real Estate Income Trust recently led a syndicate of institutional investors, which included Vision Capital, in a US$300 million preferred equity investment. With robust operating fundamentals, a sizeable investment by a world-renowned private equity firm, and an improving balance sheet, Tricon is a compelling investment that is currently trading at a 4 per cent discount to its consensus net asset value.
BSR REIT (HOM-U TSX)
BSR owns 9,359 suites across 40 properties, concentrated within the suburbs of Houston, Dallas, Austin and Oklahoma City. BSR is a unique Canadian-listed REIT that invests in U.S. multi-family apartments within the Sunbelt states. 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 experienced management teams in the Canadian apartment sector. BSR is very well positioned to significantly grow its net asset value both organically and through upgrading rental units and opportunistic capital recycling.
Irish Residential Properties REIT (IRES ISE)
This REIT owns 3,800 suites across 42 properties, concentrated within Dublin and other major Irish city centres. It’s the only publicly listed company that is solely focused on consolidating the Irish multi-family sector. With a strategy of focusing on mid-market tenants, the REIT’s portfolio is highly defensive. Since its IPO in 2014, the REIT has grown its portfolio by over 10 times to amass the largest multi-family portfolio in Ireland. The REIT is a compelling investment opportunity due the strong operating fundamentals in Dublin and its highly attractive valuation.
PAST PICKS: JUNE 25TH, 2020
Tricon Residential (TCN TSX)
- Then: $8.85
- Now: $10.89
- Return: 23%
- Total Return: 25%
European Residential REIT (ERE-U TSX)
- Then: $4.21
- Now: $4.26
- Return: 1%
- Total Return: 3%
Granite Real Estate Investment Trust (GRT-U TSX)
- Then: $67.83
- Now: $77.07
- Return: 14%
- Total Return: 15%
Total Return Average: 14%