Andrew Moff, senior vice president and portfolio manager, Vision Capital

FOCUS: Real Estate Stocks


As the third quarter draws to a close, elevated interest rates continue to be a cause for concern, with central bank policies indicating a likely “higher for longer” environment. 

This dynamic, grouped with deteriorating domestic and international economic conditions, continues to weigh on investors’ sentiment as the likelihood of a recession in the near future increases.

With the uncertainty in the markets continuing to rise, understanding the fundamental return drivers of high-quality investments becomes increasingly important to ensure portfolios are defensively positioned. In the context of publicly-traded real estate, the quality of the properties, supply-demand fundamentals, operating platforms and management team acumen are vital. REITs that realize cost efficiencies, operational synergies, proprietary technology implementation, value-add development project execution and strategically acquiring and/or divesting to optimize their portfolios and maintain strong balance sheets position themselves well to navigate uncertainty and market distress.

Notwithstanding, the prevailing conditions influencing economic activity are impacting real estate sub-sectors differently, creating a bifurcation across property-level fundamentals and stock price performance. Sectors such as single-family rentals, manufactured housing communities, industrial, data centres and necessity-based shopping centres have exhibited resiliency thus far in the current climate. This is compared to sectors such as office, malls, and U.S. healthcare, that could display further signs of distress in the coming quarters.

At this time, more investors spanning institutions, pension plans, endowments, sovereign wealth funds and private equity have amassed dry powder totalling US$344 billion earmarked for direct property investments. REITs that have been the most resilient throughout 2023 within sectors containing positive supply and demand fundamentals will increasingly be targets for strategic takeovers should they continue to trade at wide discounts to net asset value.

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Dream Industrial REIT (DIR.UN TSX)

Dream Industrial REIT is a pure-play industrial REIT focused on owning primarily distribution and logistics assets across Canada (66 per cent of investment property value, excluding assets held for sale) and Europe (34 per cent). It also owns a 25 per cent interest in a private open-ended U.S. industrial fund, in which the REIT earns fees for property and construction management as well as leasing services. The REIT recently formed a joint-venture with Singapore Sovereign Wealth Fund “GIC” to acquire Summit Industrial Income REIT for $5.9 billion. In addition to participating as a 10 per cent equity owner, the REIT will earn management fees from this new platform allowing the deal to be immediately accretive to earnings.

The REIT’s portfolio is concentrated in low vacancy, high-barrier to entry industrial hubs across North America and Europe, which over the last several years has resulted in sizeable market rent growth. Specifically, the REIT has 33 per cent of its portfolio in Greater Toronto and Montreal areas, which experienced market rent growth of 40 per cent and 50 per cent in 2022, and year to date rent growth of 6 per cent and 10 per cent. With new supply in these markets de minimis, market rent growth should continue to remain above inflationary levels for the next few years, which in turn should further improve the REIT’s already strong earnings growth profile. As a result of realizing its strong mark-to-market potential and several development projects delivering in 2023, the REIT is expected to achieve 10.5 per cent same-property NOI growth and 12 per cent FFO growth. These metrics place Dream Industrial amongst the fastest growing industrial REITs in North America. Furthermore, the REIT is achieving this growth with a conservative balance sheet at 36 per cent debt to assets.

Despite this, units of the REIT continue to trade at a compelling 27% discount to its underlying net asset value (“NAV”).

Sun Communities (SUI NYSE)

Sun Communities owns and operates approximately 118,000 manufactured housing sites, 59,000 recreational vehicle sites and 48,000 marina wet slips and dry storage spaces, all of which are in the U.S., Puerto Rico, Ontario and the U.K. The REIT focuses on high-quality properties that tend to be clustered in popular coastal and vacation destinations. Its largest markets are Florida, Michigan, the U.K., California, and Texas.

The manufactured housing communities (“MHC”) sector has several uniquely positive characteristics, namely that its resilient demand and high barriers to entry have resulted in the publicly-listed U.S. sector, on average, never having a negative year of same-property net operating income (“NOI”) growth. The sector also benefits from lower capital expenditures relative to other asset classes as it is largely a land lease business.

Sun’s shares are, in Vision’s view, an attractive investment opportunity. Not only are they trading at a wide discount to Vision’s NAV of 20 per cent, but this level is significantly below the historic seven per cent premium to NAV that the shares have traded at, on average, since the beginning of 2000.Vision believes this discount currently exists due in part to concerns over the REIT’s exposure to the U.K given the weakening economic backdrop and its impact on home sales in this market. Nonetheless, if one were to assign no value to this region’s assets, Vision estimates Sun’s shares would still be trading at a significant discount to NAV of 17 per cent in a sector with positive supply-demand fundamentals and defensive and growing NOI, with the REIT expecting total same property NOI growth in 2023 of 5.3 per cent to 6.1 per cent. 

Boardwalk REIT (BEI.UN TSX)

Boardwalk Real Estate Investment Trust, the second-largest publicly-traded apartment REIT in Canada, owns over 33,900 suites with its largest markets of Edmonton, Calgary and Montreal.

With a large concentration of its exposure in Alberta, Boardwalk has been a beneficiary of strong population growth in this province driven by a significant increase in both international and interprovincial migration. In the first quarter of 2023, Alberta’s population grew by more than 56,000 people, the second largest quarterly increase since the data were tracked beginning in 1951. Interprovincial net migration contributed to approximately 16,000 of that increase, the greatest level of any province or territory in Canada over that timeframe. In addition, rents remain affordable in Alberta, with Boardwalk’s rent-to-income ratios in its largest markets of Edmonton and Calgary at 23 per cent and 27 per cent, respectively, which is significantly below its other regions, that are mostly in the mid- to high-30 per cent range. This has been a contributing factor towards record levels of migration to Alberta.

In addition to these positive factors that have contributed to increasing occupancy rates and market rents, the REIT benefits from having significant exposure to provinces that have not placed a statutory ceiling on rent increases, with Alberta and Saskatchewan comprising 73 per cent of its same property NOI, which allows the REIT to, on renewals, increase in-place rents closer to market rents, as compared to other regions. Combined, this has translated into strong operational performance for the REIT, with Boardwalk expecting to produce same-property NOI growth of 11.5 per cent to 14 per cent this year.

Despite the strong fundamentals and operational results, units of the REIT continue to trade at a compelling 16 per cent discount to its underlying and quickly growing NAV.




PAST PICKS: September 28, 2022

Tricon Residential (TCN TSX)

Then: $12.16
Now: $10.31
Return: -15%
Total Return: -13%

First Capital REIT (FCR.UN TSX)

Then: $14.95
Now: $13.36
Return: -11%
Total Return: -6%

Summit Industrial Income REIT (SMU.UN TSX)

Then: $16.30
When acquired: $23.50 (Acquired by GIC and Dream Industrial REIT on Feb. 17th 2023)
Return: 44%
Total Return: 45%

Total Return Average: 9%



PAST PICKS: December 15, 2022

Microsoft (MSFT NASD)

Then: US$249.01
Now: US$309.94
Return: 24%
Total Return: 25%

Royal Bank of Canada (RY TSX)

Then: $128.22
Now: $118.08
Return: -8%
Total Return: -5%


Then: US$97.60
Now: US$70.53
Return: -28%
Total Return: -26%

Total Return Average: -2%