Joshua Varghese, portfolio manager at Signature Global Asset Management, CI Investments
Focus: REITs

MARKET OUTLOOK

The REIT markets have held up relatively well in the past two months of general market volatility. Many equity markets have been down 6 to 8 per cent or more since the beginning of October; REITs have provided good diversification benefits, with the Canadian REIT index flat, the U.S. REIT index up around 1.6 per cent and the World Real Estate Index up around 1.2 per cent over the same period.

REITs and real estate companies are generally in very sound fundamental positions, as many landlords continue to see cash flow growth. However, we can no longer count on the global quantitative easing wave that propped up real estate valuations for many years. We believe higher interest rates and higher credit spreads will cause the REITs with lower leverage to have the upper hand in rent negotiations among tenants.

Broadly speaking REITs are fairly valued, but we’re seeing pockets of very good opportunity where we have been putting money to work.

TOP PICKS

ALEXANDRIA REAL ESTATE EQUITIES (ARE.N)

Alexandria is the key real estate provider in the life sciences and biotechnology sectors. They’re dominant in the major campus clusters throughout the U.S. (MIT and Stanford). They create ecosystems that are vital for collaborative work amongst its biotech and pharmaceutical tenants.  This 20-plus year relationship has built with their tenants, allowed for the integral creative space needs of its customers and continues to capture value in rent growth. There are major tailwinds in this space with good expansion ability for life sciences companies. As a result, Alexandria is rolling their leases at 25 per cent increases above expiring leases. We think this strength will continue.

INVITATION HOMES (INVH.N)

Invitation Homes was founded by Blackstone and is the largest owner of single-family rental homes in the U.S. They buy homes and rent them out to tenants, providing a very well managed service. The company’s has compelling valuation, a forward thinking management team, and a solid net asset value (NAV) growth prospects. Since this is a new institutional asset class, the companies in it are in the early stages of optimizing their revenues and expenses. We believe there is a good chance of steady margin improvement which will drive value to Invitation Homes.

TRICON CAPITAL (TCN.TO)

Tricon is a Canadian listed high-quality owner and manager of single-family rental homes in the U.S. States. It’s one of the best real estate managers in the business and it’s trading at a 25 per cent discount to its NAV. Through Tricon’s effective management, technological efforts and focus on value creation, we see this NAV increasing by annual pace of double digits over the next couple of years.

PAST PICKS

BROOKFIELD ASSET MANAGEMENT (BAMa.TO)

• Then: $57.67     
• Now: $57.98      
• Return:1%          
• Total return: 1%

PROLOGIS (PLD.N)

• Then: $65.65     
• Now: $66.86      
• Return:2%          
• Total return: 3%

ALEXANDRIA REAL ESTATE EQUITIES (ARE.N)

• Then: $128.53   
• Now: $123.61    
• Return:-4%        
• Total return: -3%

Total return average: 3%