Tim Regan's Top Picks: Sep. 6, 2018

Tim Regan, managing director of Kingwest & Company
Focus: North American equities

MARKET OUTLOOK

In the U.S., the unemployment rate is the lowest it has been in years. The leading indicators south of the border have been strong throughout the summer. Add in generally tame consumer inflation, and you have a very favourable economic environment. The U.S. economy is currently growing at a robust 4.2 per cent rate.

The trend in Canada is similar. Our economy shrugged off the effects of bad weather in April to post 2.9 per cent GDP in the second quarter. The strength led to an interest rate hike on July 11. The Bank of Canada has now raised interest rates four times in the past 12 months. Rates were on hold this week, but BoC Governor Stephen Poloz said "higher rates will be warranted.”

The big question is the NAFTA talks and the how the eventual outcome will affect both economies.

TOP PICKS

NORTHWEST HEALTHCARE PROPERTIES REIT (NWH_u.TO)
Average cost: $9.47 (most recent purchase at $10.72).

NorthWest owns a high-quality portfolio of 149 medical office and hospital properties comprising 10.1 million square feet of gross leasable area located throughout major markets in Canada, Brazil, Germany, Australia and New Zealand. The portfolio is characterized by particularly long leases (with an average expiry of 12.7 years), which makes income highly predictable, and high occupancy (96.3 per cent overall and 99 per cent in international operations). Rent increases are annual, based on inflation in international operations and contractual in Canada.

Our economy is characterized by both an aging population and rapidly rising expenditures on healthcare. NorthWest is well suited to take advantage of both of these trends by participating in the highly predictable real estate segment of the market. The company is expanding its portfolio in Australia both by adding to existing properties and building new facilities already leased at very favourable terms. In Germany and Brazil, it’s acquiring new properties with favourable long-term leases to credit-worthy tenants. Furthermore, NorthWest is redeploying its capital by selling mature assets at very favourable prices and redeploying that capital in higher-yielding newer properties.

NorthWest has developed a very experienced organization led by Paul Della Lana, who started the business. The shares offer a dividend yield of 7 per cent, a growing stream of dividends, and it trades below the net asset value of its real estate, one of a very few REITs which sell below the value of their real estate. NorthWest is up quite bit since we first bought it, but the outlook is even brighter now.

BLACKSTONE GROUP LP (BX.N)
Average cost: $24. 

Blackstone is an alternative asset manager. They manage private equity, credit, hedge funds and, through their real estate division, they’re the biggest landlord in the U.S. Total assets under management reached $450 billion in June. The returns have been persistent and scale is important in this business. This year real estate head Jon Gray was promoted to president, becoming the heir apparent to Steven Schwartzman.

Over the past seven years, private equity and real estate assets under management have grown in-line with historical returns at 15 per cent. New net capital was driven by credit and hedge funds. The infrastructure asset class and new channels from insurers and retail investors provide opportunity to grow faster. The company distributes a high amount of cash to its unit holders; if it follows KKR’s lead in converting to a corporation, this could provide an even bigger boost.

NEWELL BRANDS (NWL.N)
Average cost: $26.

Newell Brands is new to our portfolio. It’s a U.S.-based manufacturer with a large portfolio of over 200 well-known consumer brands like Sharpie, Elmer’s Glue, Graco, Papermate, Sunbeam and Oster. It has $15 billion in annual sales. On its own, Newell could practically stock an entire Canadian Tire store. Newell operates in over 200 countries.

The company is reshaping its portfolio and improving operations by slashing employment and streamlining manufacturing and distribution centres in order to cut costs and widen margins. They expect to realize $10 billion after tax from divestitures. In May, Newell announced the initial two divestitures at prices above what were initially expected. The company agreed to sell the Waddington Group for $2.3 billion. A few weeks later, they announced the sale of Rawlings Sporting Goods for $395 million. Management plans to use the proceeds to boost investments in innovation and technology, reduce debt, and buy back shares. 

PAST PICKS: JULY 19, 2018

BOMBARDIER (BBDb.TO)

• Then: $5.01
• Now: $4.27
• Return: -15%
• Total return: -15%

NORTHWEST HEALTHCARE PROPERTIES REIT (NWH_u.TO)

• Then: $11.38
• Now: $11.28
• Return: -1%
• Total return: 0.3%

TD BANK (TD.TO)                                                             

• Then: $76.32
• Now: $79.64
• Return: 4%
• Total return: 4%

Total return average: -4%