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Interest Rates. His view is that while you saw a sharp rise in interest rates in 2013, going forward the share prices are going to be somewhat more difficult to see. There are some headwinds to US economic growth as well as global economic growth. Right now we are seeing many emerging markets decelerating with respect to growth. Also, the fed is very acutely aware of the US housing market. They realize that any material rise in interest rates is going to affect applications for mortgages or the secondary home price increases that we have seen in the last 12 months or so. In the last 6 months of 2013, we did see home price growth slow including mortgage applications.
Predominantly office REIT. Got hit over the last 6 months or so because they have done a fair bit of acquisition, raised equity to do so and in combination with that there are some fears about supply in the office markets, most notably in Calgary and Toronto. This drove the units down in comparison with some of their peers. Have actually improved their asset quality over the last 2-3 years, have lowered leverage and their payout ratio is very sustainable. Trading at about a 10%-12% discount to NAV. 7.8% yield.
An apartment REIT with majority of assets in south-western Ontario and Ottawa. Has a firm belief that management is going to drive value over time, both through acquisitions and redevelopment and repositioning of assets they have in their portfolio. Recent quarter was somewhat of a disappointment relative to the consensus numbers because of the repositioning of one of their key assets they purchased in Ottawa. With low leverage and a low payout ratio and a management team that is well aligned in the incremental growth you are going to get from redevelopment from some of the assets, he sees this as a core holding. Dividend yield of 3.6% and there is room for distribution increases from free cash flow growth.
Owner of very high-end retirement homes across Canada. Trading around the 10%-12% discount to what the assets are worth. Fall of this stock price has befuddled many in the investment community. The only thing he can think of is that they have come out with some increased disclosure looking through to some of the assets where they own partial equity ownership and the leverage looked a little bit higher than most people anticipated. Also, they have a large proportion of their assets in lease-up, whereby they are not fully stabilized so some investors might be a little bit concerned as to whether those assets are going to be stabilized sooner rather than later. He has confidence in this company.
Owner of diversified assets such as office, industrial and retail. Probably trading close to a 10% discount to its NAV. A unique story now because they have internalized asset management which was previously an issue. Also, announced a large buyback of shares because they believe their units are undervalued. He would look at how they are able to create value going forward. This is going to provide you with a stable yield and 2%-3% of free cash flow growth. To drive any outperformance versus the REIT sector, it is going to need to undertake either further acquisitions or joint ventures. Doesn’t think their capital price right now is going to allow them to raise equity. Have been talking about joint ventures to raise equity.
One of the smaller retail REITs in Canada. Have done a very good job over the last 2-3 years of using their cost of capital to improve the quality of their assets as well as trying to improve their balance sheet and payout ratios. Payout ratio is still above 100% and will remain above 100% this year on adjusted funds from operations. Doesn’t believe there will be a cut in distributions, but he would like to see more sustainability in their payout ratio before getting involved.
Orange Capital purchased over 10% and attempted to implement some changes with regards to internalizing asset management down the road, as well as finding a new CEO and changing the terms of the property management agreement. These are all positive things. With ownership of hotels, this has historically been more volatile when it comes to cash flow compared to other REITs. Had to cut the distribution a couple of times. Believes the current distribution is sustainable as long as the fundamentals in the lodging sector hold up. Before purchasing, he would like to see execution in many of the things that have come out with respect to the strategic plan. Thinks the yield is sustainable.
(A Top Pick April 4/13. Up 0.65%.) Owns, operates and develops apartment communities in the US. Apartment assets have done well from a free cash flow perspective, but unfortunately, they face the headwinds of increased supply as well as the fear from many investors that people that are renting are going to start moving into single-family homes. From his perspective, this is one of the highest quality apartment owners in the US. Have a large development pipeline which is going to differentiate themselves from their peers and will allow them to deliver above average free cash flow growth going forward.
(A Top Pick April 4/13. Up 5.04%.) Continues to like. Doesn’t feel they have gotten enough credit with respect to what they have done to the balance sheet and payout ratio. Management unfortunately has been faced with a “we’ll wait and see” from most investors. They are now starting to come into the name. It will re-rate to a higher multiple from his perspective. About 20% invested in the US.
(A Top Pick April 4/13. Down 1.9%.) An apartment REIT with most of their assets in Alberta. With the small percent it was down over the last year, it has probably outperformed both the index and many of its apartment peers. Still likes. Solid management that have been very disciplined with capital.
Owner, operator and developer of apartment assets, with the majority being in the eastern provinces. Recently hit with higher natural gas prices, which depressed the cash flow. Also, got hit with some occupancy losses last year, which they have remedied. Net operating income will probably come in at 1%-2%, but there is the risk of operating expenses and then being able to manage it from a hedging perspective and how high natural gas prices actually go. Doesn’t expect much move in occupancy levels. His company is the largest shareholder. Believes the short-term hiccups are not reflective of the longer-term value. Trading close to a 12%-13% discount to NAV of about $11. Not adding to his position as he is finding better opportunities elsewhere.
Spun out from Loblaw’s (L-T) real estate. The majority of Loblaw’s real estate is now in this REIT and they are an 80% holder. If looking for a long-term sustainable yield with moderate growth, this is probably appropriate from an investment standpoint. He is not a big fan of single tenant REITs. Not sure how the portfolio will look 10 years from now. Prefers to see higher free cash flow growth.
Focused on medical office buildings and regular office buildings that cater to healthcare type tenants. Have fallen over the last 6 months along with the sector, but they face some unique issues. Haven’t been able to get to their stabilized level of occupancy. Management have indicated that they believe they can get to 93%, but have only reached 91%. Also, the Canadian office market is seeing some increased supply. He is concerned about competition. Trading at a substantial discount (15%) to their NAV. 8.3% yield will continue to be sustainable. Any investor that is looking for value and has patience could consider this as an investment.
The industrial sector in Canada from a REIT perspective has grown dramatically over the last 3-4 years. From his perspective, this is the name you would want to own to get industrial exposure. This has an internalized management team that has proven that over time they have been able to allocate capital effectively so as to grow free cash flow over time. Has a sustainable distribution payout ratio and high quality assets. A big proportion of their assets are exposed to markets like BC where it is difficult to purchase industrial. Also, have exposure to Ontario. Feels the low Cdn$ is going to help manufacturing, which will flow into industrial assets.
REITs. 2013 was a difficult period for REITs. Coming out of a financial crisis investors were looking towards stability, income, visible cash flow growth and their REITs benefited from that. In 2013 risk appetites increased and people looked towards businesses that were more economically sensitive so the allocation of capital moved away from sectors like real estate. Coming out of the talk of fed tapering and the reaction of interest rates, it made investors reassess their real estate holdings. What they wanted to get from their holdings was some sort of buffer with respect to a rise in interest rates. Wanted to make sure the internal growth from the real estate businesses they were buying was high enough, such as occupancy, rent increases and redevelopment, were going to drive the average free cash flow growth. Those REITs that are poised to deliver above-average free cash flow growth have performed better than those doing below free cash flow growth. Feels 2014 is going to be a little bit different.