Derek Warren is portfolio manager at Morguard Financial Corp. His focus is REITs.
Core: Chartwell Retirement Residences (CSH.UN TSX)
Chartwell manages a portfolio of high quality retirement homes across Canada, with holdings in the US as well. The demographic of an aging population provide support to this sector, and Chartwell is the best operator in Canada. With US companies expanding into Canada, Chartwell is looking inexpensive relative to recent transactions. We added to our holdings last week.
Value: Granite REIT (GRT.UN TSX)
Granite has an international portfolio of industrial buildings, some of which are used by Magna for automobile production. The company has very low debt, and recent asset sales in Mexico leave it with significant cash holdings meaning the company can grow significantly without raising equity. Last purchase was in January.
Income: Pure Industrial REIT (AAR.UN TSX)
Pure Industrial has a quality portfolio of logistics and shipping type properties across Canada, and they recently announced an expansion into the US. We like Industrial as it is the first to benefit in a strengthening US economy, plus the logistics business is a great way to play the e-commerce trend. Last purchase was their recent equity deal at the end of June. Yield is 6.8%.
Past Picks: July 31, 2013
Terreno Realty (TRNO NYSE)
Then: $18.34; Now: $18.84; Total return: +5.75%
Camden Property Trust (CPT NYSE)
Then: $70.54; Now: $72.51; Total return: +7.01%
Cominar REIT (CUF.UN TSX)
Then: $20.17; Now $18.69; Total return: -0.51%
Total Return Average: +4.08%
The tremendous recovery in REIT stocks this year has been focused on the largest, most liquid names as investors were drawn to the space by the REIT sector's discount valuations and attractive yields. There remain some very attractive opportunities in value-focused small and mid cap investments, though not all are equal. We remain optimistic on real estate for 2014. Yields remain attractive. REIT share prices, despite the rally, are still below the value of their underlying properties. Demand for premier properties from institutional and foreign buyers continues to support fundamental prices. The economy, especially in the U.S., continues to strengthen. Rising interest rates will eventually be a concern for the sector, though this will likely be accompanies by stronger economics and thus higher rents. We expect the Industrial sector on both sides of the border will benefit the most from the continued economic improvement in the US, while the office market in Canada remains a concern.