Michael Missaghie

REITs. Generally speaking, a focus on macro events, rather than looking through to what the company fundamentals are doing, usually doesn’t result in very sound investment decisions. This is why he spends a lot of time focusing on cash flows and finding good businesses. If anybody were to build a business based on just one type of interest rate scenario or macro economic scenario, it would not be very sustainable. When he is looking at management teams, particularly in the real estate sector, he is looking to see if they can generate above average free cash flow growth in an environment of rising rates, and is the debt maturity schedule laddered. If those 2 questions can be answered, this is likely to be a sustainable business that can stand the test of time.

How are Cdn REITs affected by increasing US interest rates? Historically, REITs will sell off in the short term in the face of rising rates, but over the medium to long term, if rates are really rising because of economic growth, the sector will come back quite handsomely.

High quality seniors housing across Canada. Have been one of the laggards when looking at stock performance, versus a real estate sector, as a whole. Had some difficulty on their leverage, which is higher than many of their peers. Also, have a large proportion of their assets in “lease up” communities, so are not fully stabilized from an occupancy perspective, and have needed to increase the occupancy, which they have. The dividend yield is very sustainable and payout ratio is around 85%. There is a question on how they are going to grow with their high level of leverage. At some point there is going to be a transaction that surfaces the value for shareholders.

One of the newer IPOs in Canada, but all assets are in the US. Owns very high quality industrial real estate. Had a drop from its IPO, but has recovered because the US industrial market is performing very well. Cash flow has been very strong. They have the benefit of the US$ going higher. Have been able to bring down the payout ratio and raise equity in order to make accretive investments. From an investment standpoint, it needs to get a little bit larger for him.

This was an IPO with only Canadian assets in medical office buildings that catered to healthcare tenants. There has recently been a transaction where this company and NorthWest Health Care International are now coming together. This is probably the reason for all the volatility in shares recently. The Canadian entity has been poor over the last few years because suburban office in Canada has struggled in terms of attracting tenants. Cash flow has been relatively weak. Although the growth prospects might look greater, he also thinks the risks increase.

Retail assets and their largest tenant is Wal-Mart. Historically they have been 99% occupied which has driven stability in their cash flow as well as their distributions. They have started to dispose of some of their non-core assets. A stable yield and you will get 3%-5% cash flow growth.

A recent IPO. Most of their multifamily assets are located in Texas. They don’t have huge holdings in Houston, so there is not the energy risk. The quality of their assets is sound. Occupancy and rents are trending higher. Trading slightly under its US$ NAV, likely because it is small and it is going to be difficult for them to grow. Its distribution yield is secure. He prefers Avalonbay Communities (AVB-N).

(A Top Pick March 19/14. Up 23.18%.) Recently sold some of their US assets. This has been an M&A candidate for some time. Large US healthcare REITs have been looking to grow their portfolios and their cost of capital is very attractive, so the sale of assets was not a surprise. It simplifies the business, because it will now be a fully Canadian seniors housing REIT. This will help them reduce their leverage and will probably end up focusing on developments and redevelopments in Canada.

(A Top Pick March 19/14. Up 16.29%.) An owner of high quality retail in Canada. Also, have a very large development pipeline and will likely invest over $1 billion in the next 5 years. Trading slightly above NAV, but this is because of the quality of its properties, the quality of its balance sheet and the above average free cash flow growth.

(A Top Pick March 19/14. Up 10.53%.) Largest global owner of industrial real estate. It is the best run industrial REIT in the world. Trading below its NAV of around $44 per share. He thinks one of the biggest beneficiaries of the US economic recovery is going to be industrial real estate. One of the biggest beneficiaries of the large e-commerce push is going to be industrial real estate as well. Their global footprint is very important. This still screens as very attractive.

They own apartments both in Canada and the US. This is a classic case of good real estate trading at a wide discount to its NAV in apartments. Current NAV is $14-$15. Trading at a large discount because it has a very large controlling shareholder (Morguard Corp) as well as having higher leverage than many of its peers. Also, as a small-cap REIT, most investors are going to wonder how they are going to grow.

This is a retail REIT. The majority of their assets are tenanted by Sobies and Safeway. Over the last 3 years, this REIT has diversified from predominantly Atlantic Canada focused, to one that is now across Canada. Thinks the NAV is close to $14 and this screens as attractive. This will give you stable yield, and anywhere from 2%-3% free cash flow growth.

One of the largest apartment REITs in Canada. Have done a very, very good job of putting capital into their assets, which has driven cost savings and improved their margins. Have seen very strong same property net operating income growth and very strong cash flow growth. Payout ratio has come down. Haven’t had a problem because of energy, because the majority of their assets are in eastern Canada. Trading at a slight discount to NAV of around $20.50-$29.

One of the largest REITs in Canada. Have now diversified into retail, office and industrial. Their portfolio is about $14 billion, and $10 billion of that is in long leased assets. Very, very safe. Yield is very safe.

What you have to believe, if you are buying this, is that you want Brookfield to be your real estate investor globally. They’ll provide a handsome yield to do that, but he feels he is able to make those investments himself. He prefers the parent company Brookfield Asset Management (BAM-N).