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

FOCUS: Real estate stocks


Investor sentiment has continued to deteriorate as several trends such as high inflation and rising interest rates continue to weigh on the world’s economies. As central banks employ hawkish strategies to tackle inflation, an ever-increasing likelihood of a recession in 2023 looms.

As these trends have pressured global markets significantly, real estate investment trusts (REITs) have been underperforming compared to the broader stock market. However, with interest rates increasing rapidly from historic lows, it is important to reiterate that REITs are generally well positioned with lower net debt to asset values, a larger proportion of fixed debt and a longer term-to-maturity as compared to historical averages.

The sharp selloff in the stock market has created short-term dislocation between listed and unlisted real estate valuation, increasing the correlation between equities and REITs. This is in contrast to the medium-to-longer term, where REIT securities become more positively correlated to private market real estate, as evidenced by publicly-traded REITs having generated very similar total returns to the private property market over a 20-year period.

REITs with solid supply and demand fundamentals are positioned to continue to perform well and are posting strong earnings growth as higher rents offset inflationary pressures on the cost side.

As well, there continues to be substantial dry powder available for private real estate investment that is increasingly being directed towards the opportunities available in the public real estate market to buy large platforms and high-quality portfolios of assets at wide discounts to asset value. The necessity of investing these funds will continue to have a positive impact on REITs.

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Andrew Moffs' Top Picks

Andrew Moffs, senior vice president & portfolio manager at Vision Capital, discusses his top picks: Tricon Residential, First Capital REIT, and Summit Industrial Income REIT.

Tricon Residential (TCN TSX)

Tricon Residential Inc. is a rapidly growing single-family rental (SFR) operator owning over 33,000 homes located primarily in the U.S. sunbelt. Tricon also operates two other smaller and peripheral business lines comprised of multi-family rentals and residential development.

The SFR industry continues to benefit from favourable supply-demand dynamics. Population growth of the 35-44-year-old age group, the primary cohort requiring housing, is projected to grow at twice the rate of broader population growth over the next five years, resulting in strong demand for homes. At the same time, the production of new single-family homes remains well short of historical levels, resulting in a significant supply deficit. In addition to these tailwinds for the sector, the escalating cost of homeownership has pushed an increasing number of families and individuals toward renting. These favourable dynamics have resulted in strong cash flow growth for Tricon, with the company expecting to achieve same home net operating income growth of over nine per cent this year.

In addition to being a more affordable product, there are several defensive factors that may mitigate against a decline in the SFR business’s cash flows, relative to other real estate sectors. First, it is estimated that the average monthly institutional-quality SFR rents for about US$1 per square foot, approximately 36 per cent lower than the average three-bedroom apartment rent. Second, Tricon’s business benefits from the strong demographics of its tenants, serving largely middle-market families usually with one or more children that not only require the space and convenience of a home but also tend to be longer-term renters than other household income segments, resulting in lower turnover and more stable cash flows. Lastly, with Tricon’s estimated 20 per cent gap between in-place and market rents, market rents would need to decline by a significant amount for there to be a negative impact on rent growth on new leasing and renewals.

Despite the defensive and currently strong growth that Tricon’s SFR business generates, the company’s shares are attractively valued as they trade at a mid-30 per cent discount to private market values and an implied cap rate that is approximately 150 basis points greater than its peers.

First Capital REIT (FCR.UN TSX)

First Capital REIT is a pure-play grocery-anchored shopping center REIT focused on Canada’s strongest demographic markets. By fair value, the portfolio is 48 per cent Greater Toronto Area (GTA), 12 per cent Greater Montreal area (GMA), and 11 per cent in each of the Calgary and Vancouver markets.

On Sept. 22, the REIT announced an enhanced capital allocation plan to monetize $1B of low-yielding assets where value-enhancing goals have been achieved to drive increased earnings growth and improved debt metrics. The plan is expected to take two years and will improve First Capital’s annual earnings growth rate to four per cent.

In addition, the supply and demand backdrop for grocery-anchored shopping centers is increasingly favourable with minimal new supply and a high degree of recession resistance. Over 85 per cent of First Capital’s tenants are necessity-based retailers which offer essential goods and services. In a recessionary environment these tenants, and as a result, First Capital’s properties will outperform peers more exposed to discretionary retailers.

The REIT’s second quarter results demonstrated this portfolio resilience with same-property net operating income growth of 3.8 per cent on a year-over-year basis driven by higher rents, and a strong portfolio occupancy rate of 95.6 per cent. Furthermore, rent spreads on renewal leasing increased to 11 per cent, above First Capital’s longer-term and year-to-date pace of nine per cent.

With a new capital allocation plan designed to surface value and units of the REIT trading approximately 40 per cent below comparable private market values (the most discounted valuation in the Canadian shopping center REIT space), First Capital is well positioned for strong unit price outperformance.

Summit Industrial Income REIT (SMU.UN TSX)

Summit Industrial Income REIT is a pure-play Canadian industrial REIT concentrated, in terms of gross leasable area, in the GTA 44 per cent, the greater Montreal area GMA 23 per cent and Alberta 26 per cent.

The supply and demand imbalance within the GTA and GMA regions are amongst the widest in North America. As per CBRE, market rent growth as of second-quarter 2022 in the GTA and GMA increased 35 per cent and 60 per cent year-over-year. This has led to increased property values which are now 60 per cent higher than pre-pandemic levels. With almost 70 per cent of its gross leasable area in the GTA/GMA markets, the REIT is well-positioned for future FFO and NAV per unit growth as leases roll over and mark-to-market.

To this point, Summit reported strong second-quarter results, achieving year-to-date releasing spreads in excess of 100 per cent in its GTA portfolio and occupancy at 99 per cent, and releasing spreads between 25-30 per cent and occupancy remaining at 100 per cent in the GMA.

Finally, the REIT is relatively insulated from rising rates due to its lowly levered balance sheet (26.7 per cent to gross book value) and short-term lease profile which allows the REIT to offset higher interest rates with meaningful rent growth upon turnover.

Despite strengthening fundamentals and private market transactions pushing asset values higher, units of the REIT continue to trade at an attractive 33 per cent discount to its underlying net asset value.




PAST PICKS: September 27, 2021

Andrew Moffs' Past Picks

Andrew Moffs, senior vice president & portfolio manager at Vision Capital, discusses his past picks: BSR REIT, Boardwalk REIT, and Corp. Inmobiliaria Vesta.


  • Then: $15.42
  • Now: $15.01
  • Return: -3%
  • Total Return: 1%

Boardwalk REIT (BEI.UN TSX)

  • Then: $48.57
  • Now: $45.39
  • Return: -7%
  • Total Return: -4%

Corp. Inmobiliaria Vesta (VESTA BMV)

  • Then: 35.97 MXN
  • Now: 37.70 MXN
  • Return: 5%
  • Total Return: 10%

Total Return Average: 2%