Jeffrey Olin, president and CEO at Vision Capital
Focus: Real estate stocks

MARKET OUTLOOK

The outlook for Canadian and U.S. REITs and REOCs is largely framed by the following factors:

• Late 2019 weakness in the share/unit prices of North American REITs and REOCs should prove to be a passing phase, with the outlook remaining positive through 2020.
• 2019 was a record year for equity offerings that has served to temporarily satiate demand for REITs/REOCs.
• Positive cyclical and secular factors should reassert themselves in 2020.
• A wall of capital, both equity and debt, continues to look for a home in hard assets, particularly in real estate.
• Concerns about a recession in North America have become much more muted while many North American real estate markets remain strong, positively influencing trends in occupancy and property valuations.

Given these factors, the Vision team remains focused on striking the appropriate risk/reward stance while selecting those securities that should be bought because they’re undervalued and those that should be sold short because they’re significantly overvalued.

TOP PICKS

AMERICOLD REALTY TRUST (COLD NYSE)

Americold is the world’s largest publicly traded REIT focused on the ownership, operation and development of temperature-controlled warehouses. The REIT’s high-quality facilities are “mission-critical” for its tenants as they are 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 growth over the coming years via organic growth and accretive acquisitions and developments. Demand for its warehouse space is expected to trend higher as the population grows, consumer preferences shift towards fresh foods requiring temperature-control facilities and e-commerce penetration increases. The stock is very attractive as it is currently trading at a slightly lower 2020 adjusted funds from operations (FFO) multiple than the U.S. industrial REIT sector, but has approximately three times the growth.

TRICON CAPITAL GROUP (TCN TSX)

Tricon 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 the U.S. Sunbelt 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 than other segments of the rental market.

Strong supply and demand fundamentals in the U.S. Sunbelt have allowed Tricon to achieve consistent rent growth well above inflation. Management’s excellent operational capabilities have controlled expenses below inflation. For the last twelve-months, this combination has helped Tricon achieve same-property net operating income growth close to 10 per cent, nearly two-times higher than U.S. peers. Despite the robust outperformance, shares of Tricon trade at a 20-per-cent discount to their net asset value, which offers a compelling entry point for investors as U.S. peers are currently trading at a 7-per-cent premium.

BSR REIT (HOM-U TSX)

BSR is an unique Canadian-listed REIT that invests multi-family apartments within 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 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 incredibly well positioned to significantly grow its net asset value organically as well as through its value-add initiatives of upgrading rental units and opportunistic capital recycling. Additionally, BSR’s focus on affordable housing with very low average monthly rents provides a very 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 net asset value while U.S. peers trade at a 2-per-cent premium.

PAST PICKS: JULY 31, 2019

AMERICOLD REALTY TRUST (COLD NYSE)

• Then: $33.53
• Now: $35.37
• Return: 5%
• Total return: 6%

CANADIAN APARTMENT REIT (CAR-U TSX)

• Then: $48.71
• Now: $54.77
• Return: 12%
• Total return: 13%

THE HOWARD HUGHES CORPORATION (HHC NYSE)

• Then: $135.00
• Now: $124.14
• Return: -8%
• Total return: -8%

Total return average: 4%

FUND PROFILE

Vision Opportunity Fund
Performance as of: Dec. 31, 2019

• 1 month: -2.0% fund, -0.3% index
• 1 year: 17.4% fund, 16.2% index
• 3 years: 8.6% fund, 6.9% index

INDEX: Equally weighted average of TSX Capped REIT Total Return Index, Scotiabank Canadian Hedge Fund Index, HFRI Index, and MSCI U.S. REIT Index.
Returns are based on reinvested dividends, net of fees and annualized.

WEBSITE: visioncap.ca