Oct 9, 2019
Joshua Varghese's Top Picks: Oct. 9, 2019
Joshua Varghese, portfolio manager at Signature Global Asset Management, CI Investments
Global real estate is up over 20 per cent for the year, outperforming global equities by approximately 440 basis points. With continued global macro uncertainties including, but not limited to trade wars, rising global populism and political turmoil, the visible free cash flow growth profile of REITs continues to look attractive. REITs are proving to be a very effective diversifier to equity and balanced portfolios and this helps provide protection in down equity markets. In the past year and a half, there have been three notable periods of global equity market corrections: two in 2019 where they saw themselves down approximately 6 per cent and one in late 2018 in which they were down approximately 18 per cent. Global REITs significantly outperformed during all of these periods, down 1.1 per cent, up 0.19 per cent and down 7.5 per cent respectively and proving out their ability to add value to an equity portfolio. We believe that should economic uncertainty persist and/or escalate, REITs will continue to look attractive as an alternative option for risk-adjusted returns. Recent research is showing that while REITs screen as a crowded trade relative to historical positioning, they remain the most underweighted sector position for generalist investors. This in our mind leaves room for further allocations should broader equity markets see volatility.
MGM GROWTH PROPERTIES (MGP:UN)
This is a triple net REIT leased to MGM. It is MGM’s real estate arm, which spun out in 2016. The triple-net structure ensures that the REIT receives cash rental payments from MGM, with MGM responsible for the operating and capital expenditures. This, combined with long-term lease structures and annual escalations in rent, makes the cash flow stream extremely visible. Since gaming REITs are a relatively new sector within the REIT world, we believe a case can be made that the sector is misunderstood, with many investors cautious on how the business performs in an economic downcycle. However, we note that the cash coverage of the tenant (MGM in this case) allows it to very easily pay its rent even in a downcycle, and that the cash flow to the REIT looks to be very secure regardless of the revenue profile of the casino business. We believe that in a recession scenario, the cash flow of MGM Growth Properties will actually look attractive relative to other asset types. The REIT has a good pipeline of acquisition opportunity to further grow its free cash flow per share.
SUN COMMUNITIES (SUI:UN)
Sun Communities owns and operates manufactured homes and recreational vehicle communities. This stock always looks expensive because the free cash flow profile is always stronger than the markets give it credit for. We believe this trend will continue. Their business is in leasing land parcels to owners of manufactured homes. This model ensures that capex requirements for Sun are low and the visibility and resiliency of cash flow extremely high. It is for this reason that this sector tends to perpetually outperform other REIT sectors. Even at current prices, the internal rate of return (IRR) profile of their business looks very compelling relative to other REITs.
AMERICOLD REALTY TRUST (COLD:UN)
We still really like Americold. It is the largest global REIT focused on the ownership and operation of temperature-controlled warehouses. As food producers and retailers work to revamp their product offerings and supply chains, Americold becomes more and more integral to the system. They will store and distribute food for major producers like McCain and KraftHeinz, as well as retailers like Safeway and Krogers. As the temperature-controlled warehouse business is in its infancy in terms of a truly institutionalized business, we believe valuations for the asset class will continue to increase.
PAST PICKS: AUG. 16, 2018
BROOKFIELD ASSET MANAGEMENT (BAM/A:CT)
- Then: $57.67
- Now: $68.45
- Return: 19%
- Total return: 21%
ALEXANDRIA REAL ESTATE EQUITIES (ARE:UN)
- Then: $128.62
- Now: $153.45
- Return: 19%
- Total return: 24%
PROLOGIS (PLD :UN)
- Then: $65.65
- Now: $85.23
- Return: 30%
- Total return: 35%
Total return average: 27%
Sentry Global REIT Fund
- 1 month: 2.3% fund, 2.8% index
- 1 year: 19.8% fund, 21.7% index
- 3 years: 32.4% fund, 28.2% index
Index: FTSE EPRA NAREIT Developed Total Return Index.
Returns based on reinvested distributions.
TOP 5 HOLDINGS AND WEIGHTINGS
- Continuum REIT: 6.6%
- Equinix: 3.9%
- Alexandria Real Estate Equities: 3.7%
- Avalon Bay Communities: 3.6%
- Interrent REIT: 3.6%