National Post (National Edition)
Residential rental investments paying off
Investors around the world are looking for yield, and real estate continues to be one place to find it. The asset class is recognized as a secure and predictable source of cash flow, but investors have to be choosy. Variations in property company fundamentals and volatility in the capital markets are creating opportunities to take both long and short positions.
Jeff Olin, Frank Mayer and Andrew Moffs, portfolio managers at Toronto-based Vision Capital Corp., focus on gaining real estate exposure through the stock market, which is cheaper than buying property.
One area they like is the North American apartment market, which is probably the strongest sub-sector in real estate on the continent, and the Vision Opportunity Fund has related positions on both sides of the border.
Many investors expected new supply in the U.S. would overwhelm demand, but that hasn’t happened. Rents, for example, have been rising at a clip of more than five per cent for many months, while the occupancy rate is at a healthy 95.3 per cent.
Mayer noted that several demographic trends are driving demand, while home ownership in general is in decline. Baby boomer children, who fall in the 20-to34-year-old range, prefer renting, which is evident in the decline of 1.2 million in owner-occupied households during the past decade, and they tend to stay at their parents’ home longer and form families later.
“Virtually all the growth has been in the rental sector,” Mayer said.
The fund has a long position in Camden Property Trust, a multi-family apartment company with more than US$10-billion worth of assets, primarily located in major Sun Belt markets.
It’s trading at one of the largest discounts (14 to 15 per cent) to net asset value in the entire residential space, while seeing very strong underlying growth.
One sub-sector the portfolio managers are very bearish on is office space. They point out that virtually every market in Canada is overbuilt, and more supply continues to come on.
“In Calgary, more people left office space than occupied it in 2013,” Olin said. “While it was marginally positive in 2014, 2015 has been a bloodbath. Edmonton is even worse.”
Toronto is a much more bifurcated market, Olin said, with the downtown area holding up pretty well while the suburbs are terrible, with continuing negative absorption and plummeting rents, leaving landlords in weak corridors such as the 427 highway to beg for potential renters.
As a result, investors in this space must monitor net effective rents, which take into account incentives (for example, cash for renovations) that landlords use to secure tenancies. Another factor to consider is that declining rents mean Class B tenants can move up to Class A space more readily.
The fund continues to have a short position in Dream Of
fice REIT, which gets 45 per cent of its net operating income from Toronto — the vast majority of that being Class B space — and another 27 per cent from Calgary and Edmonton (all Class B).
“They are not properly disclosing the amount of free rent and cash they are putting into the deals,” he said. “Because of these pressures and net effective rents, they are over-distributing their dividend. They haven’t cut the distribution, but if this path continues, it is likely that the company will be required to do so.”
Another trend playing out in the real estate space is M&A — a cycle that Moffs believes has only begun.
He said that since REITs are trading at their widest discounts to NAV since the financial crisis (13 per cent in the U.S. and 11 per cent in Canada), private-equity funds are eager to get in on the action.
“They need to put their capital to work and it takes a long time to do so buying one-off buildings,” Moffs said. “So why not go out and buy a big portfolio of assets all in one scoop, whether it’s a U.S. REIT or even a Canadian REIT?”
In Canada, two takeovers in the seniors housing space have occurred recently, with both Regal Lifestyles and Amica Mature Lifestyles being taken out at very large premiums.
“We’re seeing an institutional bid for these assets, and, given the large discounts, we think it should continue,” Moffs said, highlighting the fund’s position in Chartwell Retirement Residences, the largest owner and operator of senior residences in Canada with roughly 25,000 suites.
Virtually all the growth has been in the rental sector