Full episode: Market Call for Thursday, November 26, 2020
Michelle Wearing, associate portfolio manager at Starlight Capital
Focus: Real estate stocks
The Dow and S&P 500 hit all-time highs on Tuesday amid positive vaccine news, hope for a strong economic recovery in 2021 and easing of political uncertainty. While the positive news has led value stocks to outperform, we believe rising COVID cases and deaths as well as potential logistics challenges of the vaccines could derail some of the recent momentum.
Over the past two weeks, we met with over 30 global real estate companies and would characterize management teams as moderately more bearish compared to during Q3 earnings just a few weeks ago. While the recent vaccine news has provided a light at the end of the tunnel for the hardest hit REIT sectors (retail, seniors housing, hotels, office) the rising COVID cases and deaths is likely to cause significant near-term economic pain, especially if businesses are forced to shut down again. We caution that these sectors were struggling with oversupply and/or secular changes well before COVID and fundamentals have only deteriorated since. The lasting impact of COVID is not a 180 degree change in human behavior, but more of an acceleration of trends that were already taking place. We continue to prefer subsectors with long-term secular demand drivers and those that have been insulated from, or even benefited from the pandemic such as industrial REITs, data centres and towers. We see the multi-residential sector as the most compelling opportunity today, trading on average between 10 to 20 per cent discounts to their net asset values.
The combination of low interest rates, low inflation and low growth, coupled with a growing demand for tax-efficient income, makes real estate one of the most compelling investment opportunities today. While many companies have suspended or reduced distributions, the Starlight Global Real Estate Fund has had 22 distribution increases at an average of 6.4 per cent thus far in 2020.
Americold (COLD NYSE)
Americold is the world’s largest publicly traded REIT focused on the ownership, operation, acquisition and development of temperature-controlled warehouses. It owns and operates 185 temperature-controlled warehouses, with over 1 billion refrigerated cubic feet of storage. Americold’s facilities are an integral component of the supply chain connecting food producers, processors, distributors and retailers to consumers. We believe COVID has accelerated the shift to how investors view various REIT sectors and believe the REITs with defensive cash flows and structural tail winds (such as cold storage), will continue to outperform over the long term. We like Americold’s niche business model in a high-demand sector, scale and market share benefits, favorable industry and demographic trends, e-commerce expansion potential, seasoned management team, consolidation opportunities and cost of capital/balance sheet positioned for growth. We view the current share price as very attractive, having sold off on the recent value trade and concerns over a cyberattack. Americold is currently trading at a significant discount to its peers, despite having superior growth.
American Homes 4 Rent (AMH NYSE)
American Homes 4 Rent is the second largest publicly traded single-family rental REIT in the U.S. with over 53,000 single-family properties across 22 states. It’s benefiting from longer-term positive demographic trends as well as near-term COVID related demand as renters seek shelter in less dense suburban markets. This is evidenced by record high occupancy in September and October, accelerating new lease rate growth and solid cash rent collections. In addition, American Homes 4 Rent development pipeline is creating value and the REIT now expects to deliver more homes in 2020 than previously expected as well as having a larger forward pipeline. We believe COVID has accelerated the demand for single-family houses and recommend buying this REIT on its recent weakness, which was driven by the value trade.
Community Healthcare Trust (CHCT NYSE)
Community Healthcare Trust is a small-cap REIT that owns real estate properties associated with the delivery of outpatient healthcare services throughout the U.S. The REIT’s portfolio consists of non-urban healthcare facilities such as medical office buildings, behavioral facilities, dialysis clinics, physician clinics, that provide stable revenue growth and predictable long-term cash flows. The REIT generally focuses on individual acquisition opportunities of US$10 million or less in off-market or lightly marketed transactions. We like Community Healthcare because they consistently generate double-digit funds from operations growth acquiring assets at a significant spread to their overall cost of capital. In addition, Community Healthcare has raised its dividend every quarter and will continue to do so (as FFO keeps growing, so will the dividend). Lastly, we like that management is aligned, as they take their compensation in stock. At a time when many traditional health care REITs are struggling with COVID, Community Healthcare’s cash flows have proven resilient collecting over 99 per cent of rent throughout the pandemic. We view the current share price as an attractive entry point, providing almost a 4 per cent yield.
PAST PICKS: OCT. 31, 2019
Prologis (PLD NYSE)
- Then: $87.76
- Now: $99.01
- Return: 13%
- Total Return: 15%
Killam Apartment REIT (KMP-U TSX)
- Then: $19.51
- Now: $17.75
- Return: -9%
- Total Return: -6%
European Residential REIT (ERE-U TSX)
- Then: $4.78
- Now: $4.18
- Return: -13%
- Total Return: -9%
Total Return Average: 0%