According to Hazelview Investment’s 2022 Global Public Real Estate Outlook Report, publicly traded global REITs are well positioned to serve as an inflation hedging asset class.
The report suggests that while real estate investment trusts are currently trading at a discount compared with global equities on an historical basis, the potential for sustained inflation will drive earnings growth higher and ultimately real estate valuations. It estimates annual total return for this asset class at between 12 per cent and 15 per cent.
“Pricing power is the highest it has been in over a decade. Companies and REITs alike are able to pass along cost increases resulting in a boost to revenues,” Samuel Sahn, a portfolio manager at Hazelview, said in the report. “We anticipate that earnings growth will be the primary performance driver in 2022 with property types like single family rentals, cell towers, data centers, industrial and self-storage being well positioned to benefit from increases in market rents.”
According to the report, the top investment opportunities in the REIT sector are the following. Where applicable, I’ve included suggestions from the recommended lists of my newsletters, Internet Wealth Builder and Income Investor.
Best REIT choices for 2022
Industrial facilities in North America: These will benefit from supply chain disruptions and low inventory levels, Hazelview says. The e-commerce boom that has been accelerated by the pandemic has led to strong demand for industrial space. Plus, inflation has resulted in higher transportation and wage costs. This is causing tenants to move quickly to secure “last mile” space to deliver goods to their customers. Also, a replenishment of inventory as the global economy recovers from the supply chain crisis in the next two to three years will increase demand for space by upward of 550 million square feet.
Pape’s pick: Summit Industrial Income REIT owns a portfolio of light industrial properties across Canada. Third-quarter results showed a 12.6 per cent year-over-year revenue increase. Same property net operating income increased 5.4 per cent in the quarter and 4.9 per cent year-to-date. Funds from operations (FFO), a key indicator of a REIT’s performance, was down significantly from 2020, but management said this was because of the strategic early repayment of secured term mortgages. Stripping that out of the equation, FFO was $30.6-million (18 cents a unit) compared with $24.2-million (16.8 cents) last year. For the first nine months of 2021, adjusted FFO was $88.8-million (52.7 cents a unit), up from $69-million (49.2 cents) in the prior year.
We advised buying this REIT in July, 2018, when it was trading at $8.84 and reiterated our buy recommendation on Jan. 14 of this year at $13.42. The units closed on Dec. 23 at $22.93.
Residential rental properties: Pricing power for landlords has recovered faster than expected, and apartment rents have rebounded strongly from the effects of the pandemic, driven by a surge in demand for housing, the report says. Growth in renewal rates and declining resident turnover is leading to an outstanding comeback for market rents. This is paired with the ever-increasing trend of millennials preferring to rent residential space versus purchase, a trend also affected by the rising cost of home ownership. From a supply perspective, the single-family rental sector is benefiting from an underinvestment in new affordable residential construction since the 2008 financial crisis, which has created a housing shortage that cannot be easily or quickly rectified.
Pape’s pick: Minto Apartment REIT owns a portfolio of high-quality income-producing multiresidential rental properties located in Toronto, Montreal, Ottawa, Calgary and Edmonton.
Third-quarter results were more or less flat compared with a year ago. However, the trustees approved a distribution increase of 4.4 per cent, to 47.5 cents a unit, annualized. Total revenue for the quarter was $31.2-million, which was in line with the previous year. Net operating income (NOI) was $19.4-million, compared with $20.2-million in the same period of 2020. FFO was $12.5-million (21.09 cents a unit), compared with $13.2-million (22.33 cents) last year. Adjusted funds from operations (AFFO) was $10.9-million (18.42 cents) compared with $11.6 million (19.68 cents), the year before.
Insiders have been buying the stock at an unusually high rate over the past year, a sign of confidence in the trust’s outlook.
We advised buying Minto at $17.77 in July, 2020, and reiterated our buy recommendation at $24.04 in August of this year. It closed on Dec. 23 at $21.67.
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European office REITs: These are currently trading at a material discount to private market valuations. Demand for office assets in the private market remains robust, where buyers are looking for long-duration cash-flowing assets with attractive yields. However, in the public market, negative sentiment about the pandemic’s long-term impact on office spaces has created an opportunity. Hazelview says that based on its observations, this outlook is not nearly as dire as headlines suggest, and Europe is positioned to come out on top compared with other global office markets owing to factors such as short commute times and a work force driven primarily by small and medium-sized enterprises that had an easier time bringing employees back to work during the early pandemic recovery period.
Pape’s pick: We don’t have one at this time. Our entry in this area was Dream Global REIT, which owned a large portfolio of offices located mainly in Germany, the Netherlands and Austria. In December, 2019, it was taken over by Blackstone Group at a cost of $6.2-billion, or $16.79 a unit. We recommended it in November, 2012, at $10.32.
Data centres in Asia: The report says securities that focus on this segment are poised to deliver robust earnings growth in 2022. The pandemic has accelerated the timeline of cloud adoption by three to five years in Asia, as a growing work force of remote employees has pushed mid-sized and large corporations to migrate their information technology infrastructure to the cloud. Operators in Singapore and Japan are expected to outperform in this sector.
Pape’s pick: We do not have any recommendations that focus exclusively on Asian data centres. However, Austin, Tex.-based Digital Realty Trust Inc. owns a portfolio of 280 data centres in 26 countries on six continents. These include assets in Singapore, Hong Kong, South Korea and Japan.
The company reported strong third-quarter results, with FFO per share of US$1.54 compared with US$1.19 in the same period last year.
We recommended DLR in my Internet Wealth Builder newsletter in September, 2019, at US$128.89. It closed on Dec. 23 at US$169.98.
Cell towers: Globally, cell tower demand is expected to reach record levels next year, driven by the deployment of 5G cellular networks. Mobile data usage is projected to grow by more than 25 per cent by 2026. As both the number of devices and traffic for each device accelerates in 2022, the need for tower space will grow, resulting in wireless carriers adding new telecommunication equipment to either a new site or an existing site.
Pape’s pick: Crown Castle International Corp. owns, operates and leases more than 40,000 cell towers and approximately 80,000 route miles of fibre supporting small cells and fibre services across every major U.S. market. It was first recommended in the Internet Wealth Builder in October, 2015, at US$85.32 and closed on Dec. 23 at US$199.39.
The company reported strong third-quarter results and announced an 11-per-cent dividend increase. Site rental revenue increased 8 per cent on a year-over-year basis, to just less than US$1.5-billion. Income from continuing operations was up 115 per cent, to US$351-million (81 US cents a share, fully diluted), from a year ago. AFFO advanced 15 per cent, to US$767-million (US$1.77).
Potential pitfalls
Despite its optimistic view of the coming year, the Hazelview report cautions an overly aggressive assault on inflation by central banks could change the entire picture.
“We believe the biggest risk in 2022 is a monetary policy misstep to combating inflation,” the report says. “Central banks are expected to taper their pandemic-era quantitative easing programs. Should central banks become more aggressive in fighting inflation (significantly tightening monetary policy), this could create a headwind for equities (REITs included).”
Hazelview Investments, formerly Timbercreek Equities, has been an active investor, owner and manager of global real estate investments since 1999. The company has offices in Toronto, New York, Hong Kong and Hamburg, Germany. It manages $10.3-billion in real estate assets.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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Gordon Pape