Real estate stocks have proven a good investment during the stock market recovery, especially those that have offered yield-hungry investors a decent payout. But recently, many stocks in the sector, as well as real estate investment trusts, have been trading near their highs, pushing yields down and creating an environment where investors must be more selective.
So what real estate companies and trusts should investors now target - and is it really a sector still worth buying into?
Jeffrey Olin, president and CEO of Vision Capital Corp., took your questions in a live one-hour discussion Thursday. Mr. Olin has 15 years of senior-level investment banking experience and 10 years of direct corporate real estate experience.
Vision Capital is an investment counselling and portfolio management company which manages the Vision Opportunity Funds, which are primarily real estate focused. The Vision Limited Partnership was the top performing fund in the Scotia Hedge Fund Index in 2010.
The following is a full transcript:
9:32 Darcy Keith - Good morning everyone and welcome to this live discussion.
9:32 Darcy Keith - I'm Darcy Keith, a web editor with Globe Investor
9:32 [Comment From Jeffrey Olin]
Good morning everybody
9:33 Darcy Keith - Thanks for joining us Jeffrey, we're looking forward to this!
9:34 [Comment From Guest ]
Good morning. What is your opinion of mortgage investment corporations, especially Firm Capital (FC-TSX)?
9:35 [Comment From Jeffrey Olin]
Mortgage Investment Corporations, including specifically FIrm Capital Corporation, are typically useful vehicles to generate relatively low-risk income, however, have limited upside versus REIT and REOC investments...
9:36 [Comment From Jeffrey Olin]
However, they are also less tax-advantaged than REIT distributions or REOC dividends as the dividend/distribution from Mortgage Invesment Corporations is typically taxed as income, at the highest marginal tax rate
9:37 [Comment From Wiliam ]
Good morning. What is your opinion of commercial-property focused REITS versus apartment-focused REITS? Especially in light of so much attention on the "imminent" housing bubble burst. Thank you for your answer.
9:38 [Comment From Jeffrey Olin]
We believe in a combination of top-down and bottom-up analysis, meaning we first look at macro economic factors, regional economic drivers, and regional supply and demand fundamentals...
9:39 [Comment From Jeffrey Olin]
Then, we look at specific attributes of a particular commercial or residential real estate invesment: management team, the strategy, the allignment, the growth, and the valuation...
9:40 [Comment From Jeffrey Olin]
Our portfolio today consists of a mix of both commercial and residential investments that have considered the above factors...
9:41 [Comment From Jeffrey Olin]
In markets where there is tight credit conditions, we would have a favourable bias to multifamily residential because of the access to abundant mortgage financing due to the government guarantee from CMHC financing. Today there is no issue as both commercial and residential entitites have ample access to mortgage financing...
9:42 [Comment From Jeffrey Olin]
We also don't believe there is a housing bubble of substance imminent in Canada.
9:43 Darcy Keith - Thanks Jeffrey. That last point is certainly one of a lot of interest for our readers. Can you elaborate on your outlook for housing in Canada? If no bubble, does that mean overall we're looking at modest growth still to come?
9:45 [Comment From Jeffrey Olin]
The single-family residential market in Canada reflects owners and buyers that are purchasing homes to live in, not as a speculative invesment. The legal framework in Canada limits the amount of mortgage debt to 80% loan to value (unless there is CMHC insurance in place).
9:47 [Comment From Jeffrey Olin]
These factors suggest stability to the market. We do have some concern regarding the condo market where the opposite is the case and typically 40% to 70% of new condos are being purchased by investors for rental income or speculative capital gains purposes. We believe modest growth over a long-term basis should be expected.
9:47 Darcy Keith - Sounds reassuring overall, thanks Jeffrey. Here's a follow-up question on your evaluation of companies for your portfolio:
9:48 [Comment From Mike ]
How do you evaluate the bricks and sticks of a building - do you have access to Building Engineering reports...
9:49 [Comment From Jeffrey Olin]
Typically, on a day to day basis we do not have access to building engineering reports. However, we often seek such reports and other critical due diligence in assessing significant investments of a longer term strategic nature...
9:51 [Comment From Jeffrey Olin]
When we refer to evaluating the 'bricks and sticks' we are referring to the valuation of the real estate, which is primarily an economic consideration for which we use a broad range of market data publicly available, as well as our own internal database...
9:51 [Comment From Jeffrey Olin]
We also do not make real estate decisions from an office on Bay street; we typically like to tour the real estate and make our own physical assessment and understand the local market dynamics.
9:52 [Comment From Steve Ladurantaye ]
Hi Jeffrey: Some analysts are suggesting investors best get used to unit prices where they are, because they aren't likely to climb much higher this year. Do you agree?
9:54 [Comment From Jeffrey Olin]
Overall, the sector is trading at a fair value, with REIT distributions and REOC dividends reliable with some growth. However, we continue to focus on investment opportunities where we see substantial upside emmanating from either significant undervaluation of the real estate on a Net Asset Value basis i.e. the value of the properties relative to the price of the shares/units...
9:55 [Comment From Jeffrey Olin]
And/or companies with above average growth prospects. Examples include Morguard Corporation trading @ $74 with a value of $140...
9:56 [Comment From Jeffrey Olin]
Mainstreet Equity Corp trading at $17 with a value in the range of $24 to $30...
9:57 [Comment From Jeffrey Olin]
Edleun Group, Inc. trading at $1.15, with analyst targets ranging between $1.75 and $3.00, which we believe will prove to be conservative over a 12 to 36 month period.
9:58 Darcy Keith - Thanks Jeffrey....a lot of people have been wondering about your views on Edleum....sounds like you're quite bullish...Our next question is from Mr. Woodbridge:
9:58 [Comment From SLWoodbridge ]
What is your opinion of REIT ETFs? Which ones are the best?
10:01 [Comment From Jeffrey Olin]
We have no strong opinion on any REIT ETF. We believe there are distortions because of the over-weighting of the larger cap REITs, and prefer to be stock pickers.
10:01 [Comment From Gary Paul ]
If I may, what would be your recommendation for a REIT within my TFSA that has a generous DRIP program (i.e. discount on reinvested distributions)? This will be a long term (5-10 year) hold. Thanks greatly.
10:03 [Comment From Jeffrey Olin]
Allied REIT (AP.un), Retrocom Mid-Market REIT (RMM.un), Pure Industrial REIT (AAR.un), are a few interesting names.
10:04 [Comment From Abraham ]
What is the best way for a young investor to get real estate exposure: REITs or brick and mortar real estate?
10:05 [Comment From Jeffrey Olin]
REITs or REOCs give you exposure with experienced management, diversification, liquidity and without the personal time, expense and illiquidity of direct real estate ownership.
10:06 [Comment From Bill ]
Do you recommend purchasing REITs targeted in a specific type of real estate investment, or a basket of REITs in many types?
10:08 [Comment From Jeffrey Olin]
We always recommend targeted investments with a specific investment theme (see discussion on top-down bottom-up above). We believe a portfolio approach is appropriate however, with limited names. You are better off focussing on your 3 or 4 best ideas based on the above themes, than a wide basket of REITs/REOCs.
10:08 [Comment From Stephen ]
You have spoken at length about public REITs and real estate. How does your modest long-term forecast affect private REIT investments? If given an opportunity to invest, would you recommend private or public REITs?
10:10 [Comment From Jeffrey Olin]
There are limited private REIT investments available in Canada. A few of them may offer reasonable income. Public REITs are generally preferred as they offer both growth and income, typically better governance and transparency, and a lower cost of capital because of broader access to different sources of capital.
10:11 [Comment From wendy_waters ]
How do you deal with diversification? Or, what's important in balancing risk/opportunity in a REIT-dominated real estate portfolio?
10:12 [Comment From Jeffrey Olin]
We believe a balance of income and growth is appropriate. Some regional diversification may be appropriate, but only if one assesses the particular regions to be stable with compelling growth, particularly employment growth prospects.
10:13 [Comment From SLWoodbridge ]
What do you see as the next big commercial real estate trend? Not more big-boxes obviously...what will it be? Where will it be?
10:16 [Comment From Jeffrey Olin]
Firstly, we would reiterate our views on Edleun (EDU-v) which is a new asset class for Canada, a consolidation and new development of childcare centres across the country. This consolidation and professionalism of the childcare industry has occurred in most Anglo-Saxon countries in the world, except Canada. There is a dramatic shortage of childcare centres in the country. Ask any parent you know about this situation...
10:17 [Comment From Jeffrey Olin]
In addition, we see early stages of outlet shopping centres developing, but believe this will have limited impact...
10:17 [Comment From Jeffrey Olin]
A bigger longer-term trend is urban intensification of real estate development in contrast to the suburban sprawl in the 1960s and 1970s.
10:18 [Comment From Steve Ladurantaye ]
What do REITs look like when rates start increasing?
10:19 [Comment From Jeffrey Olin]
Interest rates are but one factor that must be considered. One must look as to what is driving interest rate increases. Is it inflation pressure?...
10:20 [Comment From Jeffrey Olin]
If so, inflation is a positive for real estate, as real estate is a hard asset for which the replacement cost will increase. Are interest rates increasing because of tighter credit conditions?...
10:21 [Comment From Jeffrey Olin]
If so, this is negative for real estate. While interest rates are a factor, today North American REITs and REOCs have generally conservative levels of debt, with maturities spread over a 4 to 10 year period...
10:22 [Comment From Jeffrey Olin]
The bigger factors are macro economic, regional growth, and supply/demand considerations, just like any other business or investment.
10:23 [Comment From Mark ]
Hello Jeffrey, I am new to investing in REIT's, have no real accounting knowledge and have trouble decycphering which REITs seem to have unreasonably high yields and which are sustainable. Is there a better way to figure this out rather than just examining EPS?
10:25 [Comment From Jeffrey Olin]
Yes, don't use EPS to evaluate REITs or REOCs. Look at payout ratios relative to a REIT's AFFO (adjusted funds from operations). You want a REIT with a yield that is not substantially higher than its cashflow, unless there are compelling reasons for this.
10:26 [Comment From Richard ]
When I look at something like RioCan with a current yield of 5.3%, still looks OK but the forward PE is over 15 and the PEG is over 3. Is there really still value here?
10:28 [Comment From Jeffrey Olin]
RioCan trades consistently at a premium to its Net Asset Value, and will continue to do so. It is amongst the largest REITs in North America, has a diversified portfolio, and outstanding management. However, at the present time, on a short-term basis, it is disproportionately benefitted from the news of Target coming to Canada, but again, on a short-term basis is relatively overvalued as compaired to its peers.
10:29 Darcy Keith - We're running out of time quite quickly here I'm afraid. But here's one final question:
10:29 [Comment From Guest ]
What would be your pick for a TFSA account with a long term horizon of at least 10 years
10:31 [Comment From Jeffrey Olin]
I would reiterate our three prior top picks, which are all ideal on a longer term basis, particularly on a portfolio approach: Morguard (MRC), Mainstreet Equity Corp. (MEQ), and Edleun Group, Inc (EDU-X). As our time is running short, if you have any questions regarding the Vision Opportunity Funds post the online session, please do not hesitate to contact us at Vision Capital Corporation @ 416-362-6546.
10:31 [Comment From Jeffrey Olin]
Or via the web @ www.visioncap.ca
10:32 Darcy Keith - OK, thanks Jeffrey. A lot of good, actionable advice today and it was great having you join us. Any final thoughts you'd like to leave with our audience?
10:33 [Comment From Jeffrey Olin]
Yes, avoid the temptation to assess the valuation of REITs or REOCs (or any investment) based on yield. It is not the percentage of income that one chooses to pay out that is determinant to valuation, but rather what matters is what the income will be on a go-forward basis. Thanks very much, Jeff.
10:33 Darcy Keith - Thanks Jeffrey. My apologies to those who submitted questions but we didn't have time for.
10:34 Darcy Keith - To read more on REITs, including a special online screen for finding real estate equities and REITs, see this month's Investor All-Stars on the topic. Click here to see it.
10:34 Darcy Keith - Join us again soon for another live discussion at Globe Investor. Have a great Canada Day everybody.