RioCan is a partner in The Well retail-and-condo project in downtown Toronto, photographed in March 2021 and now completed. The company will see positive cash flow from the retail space, which is 93-per-cent leased.Fred Lum/the Globe and Mail
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Real estate investment trusts (REITs) struggled for most of 2023 amid higher interest rates that raised debt costs and competition from lower-risk, cash alternatives for their dividend yields.
But the outlook is improving as REITs began rallying in late October. That coincided with the 10-year U.S. Treasury bond yield falling to 3.9 per cent from almost 5 per cent, and the U.S. Federal Reserve Board’s dot plot – an indicator of policymakers’ outlook for interest rates – signalling three possible interest rate cuts this year.
Bank of Canada Governor Tiff Macklem said he too expects to start cutting interest rates this year, although he needs to see several months of sustained downward momentum in core inflation first.
We asked three portfolio managers for their top picks among undervalued REITs that are poised for a rebound.
Dean Orrico, president, chief executive officer and portfolio manager, Middlefield Capital Corp. in Toronto
The fund: Middlefield Real Estate Dividend Class and Middlefield Real Estate Dividend ETF MREL-T
The pick: Granite Real Estate Investment Trust GRT-UN-T
Granite is an industrial REIT that’s benefiting from the e-commerce trend and growing onshoring activity as rents rise amid a tighter supply of properties, Mr. Orrico says.
The Toronto-based REIT has 50 per cent of its assets in the U.S. and the rest in Canada and Europe. Granite was spun off in 2003 from auto parts giant Magna International Inc., which now only represents 25 per cent of rental revenue.
The REIT came under pressure starting in late 2021 as the market anticipated rising interest rates amid growing inflation, he says. There was also concern about a growing supply of industrial buildings in the U.S. market, but that’s being absorbed, and Granite’s unit price has risen more than $10 since last fall, he adds.
The REIT trades at a discount to its net asset value, estimated at close to $90 per unit, he notes. Although he doesn’t anticipate a hard-landing recession, it’s still a risk, as well as any rise in interest rates.
The pick: Minto Apartment Real Estate Investment Trust MI-UN-T
Minto Apartment REIT, which focuses on major Canadian cities, has tailwinds from a growing demand for rental accommodation amid a housing shortage, Mr. Orrico says.
The Ottawa-based REIT has been hurt by rising interest rates but has been selling non-core assets to pay down debt, he says.
Mr. Orrico is also bullish on this REIT because it has an advantageous relationship with the Minto Group – a private builder owned by Ottawa’s Greenberg family and which owns about 40 per cent of the REIT’s units.
Minto Group is developing new properties, which the REIT has the option to buy but has no obligation to do so, he adds. However, it means that “the REIT doesn’t take on the development risk.”
Minto Apartment REIT trades well below its net asset value estimated at $22 to $23 per unit, he says. It could reach the $18- or $19-per-unit range in the next seven months from just below $16 a unit today, he suggests. A hard-landing recession and higher interest rates are risks to this REIT.
Lee Goldman, senior vice-president and portfolio manager, CI Global Asset Management in Toronto
The funds: CI Canadian REIT Fund, CI Canadian REIT ETF RIT-T, CI Global REIT Fund, and CI Global REIT Private Pool ETF CGRE-T
The pick: First Capital Real Estate Investment Trust FCR-UN-T
This retail REIT, which owns grocery store-anchored shopping malls in major Canadian cities, should benefit from rising lease rates given limited retail development for more than a decade, Mr. Goldman says.
Toronto-based First Capital’s shopping centres focus on high-density neighbourhoods with more affluent consumers. Although rising interest rates have hurt this REIT, it has been selling assets to reduce its debt load, he says.
The REIT is about 50 per cent through its goal to sell $1-billion in assets to improve its balance sheet and is optimistic it can achieve that target by year-end, he says.
Its units have rebounded from below $13 per unit to $15 per unit, but “we think there is definitely more upside,” he says. It trades below its net asset value, estimated to be $19 to $20 per unit, he notes.
High interest rates and an economic slowdown are risks, but a hard-landing scenario seems unlikely, he adds.
The pick: Ventas Inc. VTR-N
This U.S. health care REIT has been hurt by high interest rates and operational issues but will benefit from growing demand from aging baby boomers for seniors’ lodging, Mr. Goldman says.
Chicago-based Ventas gets 68 per cent of its net operating income from seniors’ housing and the rest from medical-office and out-patient facilities.
It uses third-party operators for its housing portfolio. Some are structured as triple net leases – in which the tenant pays all expenses – or Ventas pays a management fee to the operator and participates on the upside. Occupancy rates in the seniors’ housing fell during the COVID-19 pandemic but are rebounding, he says.
Using a price to funds from operations multiple, Ventas trades at a deep discount to main rival Welltower Inc. WELL-N, but that should narrow as Ventas improves its balance sheet and housing portfolio, he adds. High interest rates and missteps by housing operators are risks.
Dennis Mitchell, chief executive officer and chief investment officer, Starlight Capital Inc in Toronto
The fund: Starlight Global Real Estate Fund
The pick: RioCan Real Estate Investment Trust REI-UN-T
RioCan, a developer of retail-focused and increasingly mixed-use properties, will see its profit ramp up as projects near completion, Mr. Mitchell says.
The Toronto-based REIT, which is a partner in The Well retail-and-condo project in downtown Toronto, will see positive cash flow from the retail space that is 93-per-cent leased, he says.
The REIT has been hurt by rising interest rates, while the growth of e-commerce has reduced demand for physical retail space, he notes.
However, RioCan has diversified into building condos as well, and “we think it will continue to generate positive growth this year of 2 to 3 per cent,” he adds.
The REIT, which yields close to 6 per cent, trades a huge discount to its net asset value estimated at $25.50 per unit, he notes. Continued high interest rates would be a risk to RioCan.
This large-cap REIT should attract generalist investors, such as dividend fund managers, who want exposure to this space, he says.
The pick: Dream Industrial REIT DIR-UN-T
This industrial REIT, which has been hurt by rising interest rates and other headwinds, is poised to recover nicely amid a growing e-commerce trend, Mr. Mitchell says.
Toronto-based Dream Industrial REIT has most of its assets in Canada, but also has properties in Europe and the U.S.
“We think [Dream] will continue to benefit from net operating income growth of 8 to 10 per cent annually, compared with a long-term sector average of about 3 per cent,” he says.
The REIT has struggled partly due to a “perceived risk” from exposure to the weaker European economy, and a joint-venture acquisition made at a material premium to the stock price, he adds.
Dream, which trades below its net asset value, estimated at $17 per unit, and has about a 5-per- cent yield, should attract dividend-fund investors wanting exposure to the sector, he says.
The main risks to this REIT, Mr. Mitchell says, are high interest rates and any weakness in the European or U.S. economies.
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