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

MARKET OUTLOOK

Across the broader markets, the mix of economic and political events continues to cause confusion and uncertainty. Against this challenging backdrop, it is noteworthy that stocks have mostly been able to move higher thus far in 2019. Within the real estate sector, the strength of the unit/share prices of North American REITs and REOCs in the first half of 2019 has narrowed the gap between unit/share prices and the underlying net asset value of these companies. Nonetheless, 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 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. In addition, the financial burdens, constraints and high costs 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 subsectors, secular trend for retail space, especially in larger shopping centres, has become increasingly difficult. The continuing shift to e-commerce is causing problems for many traditional retailers, from the department stores to iconic specialty brands. Nonetheless, many retailers with foresight and acumen are responding positively to the current challenge. The adverse impact at the margin has negatively impacted investors’ attitudes towards shopping centre REITs, even when agile management and long-term leases have allowed properties to maintain their occupancies and revenue streams.

TOP PICKS

CANADIAN APARTMENT REIT (CAR_u.TO)

This company is Canada’s largest publicly-traded rental residential enterprise. Earlier this year, the REIT appointed long-time chief operating officer Mark Kenney as CEO, and he has embarked on a strategy of surfacing “hidden” value across the portfolio. This includes the intensification of existing properties in Toronto and Vancouver with the goal of adding 10,000 units over the next 10 years. If fully built out, this could potentially add about $4 per unit of value on a net present value basis (8 per cent higher than current unit price). Vision believes CAPREIT might be able to zone and develop these units sooner than anticipated, with proposed legislation by Ontario favouring new residential development.

The REIT recently spun out its $634-million Netherlands multi-family portfolio into European Residential REIT (ERE_u.V) to better align existing unitholder interest and surface the true value of these assets. While still holding an 80-pe-cent interest in the venture, CAPREIT can still benefit from the European growth story without relying on its own balance sheet.

CAPREIT’s units currently trade at an implied cap rate of 4.2 per cent, compared to recent transactions in the REIT’s markets of sub-4 per cent.

AMERICOLD REALTY TRUST (COLD.N)

Americold is the world’s largest publicly traded REIT focused on temperature-controlled warehouses. The REIT’s high-quality facilities are “mission-critical” for its tenants as they’re an integral component of their food infrastructure 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 as well as 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 these facilities and e-commerce penetration increases. The stock is very attractive as it is currently trading at a similar 2020 funds from operations multiple to the U.S. industrial REIT sector, but has nearly double the growth.

THE HOWARD HUGHES CORPORATION (HHC.N)

Howard Hughes is a real estate development and operating company that owns large, tracts of prime urban land holdings in major U.S. cities. Howard Hughes’ operating strategy achieves significant and non-dilutive growth for its shareholders as it harvests and deploys the profits from land development sales to fund the equity portion of the development of commercial, residential and mixed-use income properties.

As Howard Hughes is structured as a corporation rather than a REIT, with no dividend and self-funding its equity requirements, it has escaped many real estate analysts’ attentions, which has caused a mispricing of its shares. Vision believes this misunderstanding is also reflected by the fact that its recurring annual income is projected to grow from US$200 million as of annualized Q1/19 to US$295 million over the next four years. On June, Howard Hughes formally announced a review of strategic alternatives to maximize shareholder value. The company retained Centerview Partners to help explore a broad range of options from joint ventures to the full sale of the company. Vision believes the current share price still reflects good value and upside to US$170 per share, given the underlying net asset value of the company’s real estate.