National Post

Malls in the spotlight

TIMBERCREE­K TARGETS EUROPEAN RETAIL PROPERTIES

- Jonathan Ratner Financial Post

Negative interest rates in Europe are causing a lot of problems for big institutio­ns. Naturally, it’s having a big impact on lending, as pension funds, insurance companies and endowments that hold cash are now being charged to keep it in the bank.

That has forced these institutio­ns to look for an asset class that generates a bit of income ( they don’t need high returns), but at the same time is very stable and where the underlying cash flow is transparen­t.

Corrado Russo, global head of securities at Timbercree­k Asset Management, which has $ 5.5 billion in assets under management, thinks sectors l i ke highqualit­y European retail real estate will benefit.

“We expect to see a lot more fund flows into these assets, and the publiclytr­aded companies that own them,” he said.

Europe was late to the game in terms of restructur­ing after the financial crisis, so it has created a bigger drag on future growth.

Russo thinks that has created some opportunit­ies in terms of pricing on publicly traded real estate.

The portfolio manager of the Timbercree­k Global Real Estate Income Fund is targeting companies that own regional malls with long- term leases, and tenants with good credit quality, such as Wereldhave NV.

Europe faces a dichotomy where some retailers are winning, and others are losing.

The lack of sales growth is causing a constant turnover in the tenant base.

“To grow their profits, retailers have to shrink their footprint with smaller stores, and move out of the suburban second- and thirdtier malls,” Russo said.

“By focusing on the malls that generate the most traffic, that’s how they increase margins and earnings.”

By picking centrally located, Grade A malls with long- term leases and tenants backed by national and internatio­nal companies, this makes the cash flow stream much more secure.

“It’s very different in the suburbs,” Russo said. “There is no parent guaranteei­ng the store lease of a momand- pop, and those tenants are l osing more market share to online sales.

The portfolio manager is also looking for names with exposure to Grade A office buildings in major downtown business districts across Europe.

Dream Global REIT is Canadian, but all of its assets are in Germany.

While the company owns good- quality downtown properties, Russo explains that the stock trades at a massive discount because Canadian REITs aren’t doing as well as their German counterpar­ts, and the Canadian market is more focused on dividends, as opposed to the emphasis on total return in Germany.

Dream Global has sold off many of its Deutsche Post buildings, and bought other high-quality office buildings in downtown cores to diversify its overall portfolio.

The Deutsche Post buildings they didn’t sell needed to be renovated, as most were just big boxes with no windows.

Russo noted that the com- pany chose to drop atriums right in the middle of these buildings, and add courtyards.

“This has allowed them to have some pretty attractive, funky office space,” he said.

“They’ve done a great job, but just haven’t got any credit for it.”

Unlike Europe, some of the second- tier malls in the U. S. are actually doing quite well. That’s what Russo considers the next very contrarian play that he’s starting to rotate into.

The portfolio manager highlighte­d CBL & Associates Properties Inc., which he noted has done a good job at pruning the weaker part of its portfolio.

The company has renovated its second-tier properties, to add amenities that used to be frowned upon, but are now popular, like gyms and theatres.

“Those types of uses are really driving traffic,” Russo said.

“They can add a restaurant where there used to be a music store, for example. So they’re making them meeting places in communitie­s, and catering to those needs.”

 ?? LAURA PEDERSEN / NATIONAL POST ?? Corrado Russo at Timbercree­k Asset Management says negative interest rates in Europe provide an opportunit­y.
LAURA PEDERSEN / NATIONAL POST Corrado Russo at Timbercree­k Asset Management says negative interest rates in Europe provide an opportunit­y.

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