Most real estate investors look at “location, location, location” when deciding where to put their money. Not Dennis Mitchell.
“What drives real estate is jobs, jobs, jobs,” says the chief executive officer and chief investment officer at Starlight Capital in Toronto. “Where jobs are created, people move, and where people are moving, the demand for real estate increases.”
It’s not just housing but also malls, offices, schools, community centres and new infrastructure to support all of it, he says. There are also new data centres and cell towers required to keep all of these people communicating. Mr. Mitchell cites Austin, Tex., which has experienced a housing boom driven by job growth and an influx of new residents. About a dozen of the companies and real estate investment trusts that Starlight owns have exposure to the state capital – from residential and industrial properties to data centres.
Mr. Mitchell oversees about $325-million in assets, including the Starlight Global Real Estate Fund and the Starlight Global Infrastructure Fund, both created in the fall of 2018 and which include mutual fund and exchange-traded fund options. Total return for the global real estate ETF was 16.5 per cent over the past year as of July 5, according to Morningstar; the fund lost 5.6 per cent on a total return basis in 2020. Its top three publicly traded holdings are: Brookfield Asset Management Inc., which has real estate, renewable power, infrastructure, credit and private equity holdings; Granite REIT, which has industrial, warehouse and logistics properties in North America and Europe; and California-based Prologis Inc., which invests in logistics facilities.
The Globe and Mail recently spoke to Mr. Mitchell about his outlook on the real estate sector and what he’s been buying and selling.
How have your real estate holdings shifted since the pandemic started?
I’m a firm believer that, if you have a strategic investment thesis, then it really shouldn’t change all that much over time. Going into the pandemic, we decided to increase our exposure in four areas; industrial, cell towers, data centres and residential. We also added to our holdings of Alexandria Real Estate Equities Inc. It’s a different kind of office property name because it focuses on life sciences like lab, testing and research space. These sectors continue to perform well through the pandemic. The only real negative or neutral impact we had was with multiresidential, where the narrative was actually worse than the actual operating outcome. Federal governments around the world subsidized residential real estate in particular, and commercial to a lesser extent. The residential names are now catching up to the performance gap that existed between residential and sectors like industrial.
What’s your outlook on real estate as we come out of the pandemic?
I think there are competing factors that investors need to be aware of. One is retail and office as part of the reopening trade: On days when growth is robust and the reopening trade is working, these sectors will outperform. From our standpoint, within those sectors, we want to own names that actually show signs of strong fundamental performance. The point is to make sure that, even within that large macro move, you’re invested in names that are outperforming from a fundamental standpoint, so that we’re not exposed to any significant downside.
What’s your take on the office market postpandemic?
I think that the longer-term trend is for more flexible hybrid work solutions. My thoughts are that if you own the best quality real estate in the best location, you probably don’t have to worry too much about it. Take the downtown Toronto core for example: If it starts to empty out of employees and/or companies, then the companies left will take that opportunity to upgrade to the best real estate in the downtown core. Regardless of what companies and employees decide, if you own the best-located, best-quality real estate, you’re largely insulated from that structural trend. In that type of scenario, you would continue to own Brookfield, for example, because that would give you exposure to Brookfield Place and Bay Adelaide Centre, the two best office assets in downtown Toronto.
What have you been buying and selling lately?
We’ve been trimming some of the cell tower and data centre names because they’ve had a fantastic run. A lot of the future earnings growth and net asset value appreciation have already been factored into where they trade now. In terms of adding, we’ve been focused on the retail side. Examples include Simon Property Group [the largest owner of shopping malls in the U.S.], and Kimco Realty Corp. [one of North America’s largest owners of open-air shopping centres]. Where our exposure remains is primarily in industrial, cell towers, data centres and residential, and that’s unlikely to change any time soon. The reason is simple. Those are the sectors that have long-term strategic growth. Regardless of whether or not you think global growth is going to be weak or robust, that’s where you want to allocate money – sectors that are growing cash flows and compounding their net asset value.
This interview has been edited and condensed.
Special to The Globe and Mail
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