Andrew Moffs-BNN - Top Pick
Andrew Moffs' Top Picks: January 31, 2022
MARKET OUTLOOK:
In spite of surging inflationary readings across both Canadian and U.S. consumer price indices, policymakers have delayed raising interest rates in response to headwinds challenging the global recovery, namely the Omicron variant continuing to hinder economic activity and cloud prospects for global growth.
The market is further challenged by the U.S. Federal Open Market Committee announcing at its January 26th meeting that it would accelerate shrinking the Fed’s balance sheet, placing upward pressure on bond yields and causing a broad sell-off of North American equities.
Notwithstanding macroeconomic forces and the risk of war on the European continent, fundamentals that dictate the prospect of publicly-traded real estate securities remain strong, suggesting the recent indiscriminate pullback in share prices have left select REITs/REOCs trading significantly below the net asset value at which they would be appraised in the private market.
The REIT sector has generally served as an effective hedge against inflation, benefiting twofold from growing cash flows as operators mark rents to market and underlying property values appreciating to reflect the higher replacement cost of new developments.
Applying this assessment to the broad asset class may prove inappropriate, as pricing power attributable to tight supply-demand dynamics must be present to realize rent growth. Property types such as multi-family apartments and self-storage also benefit from short lease durations, allowing for a faster conversion of existing tenants to market rents.
REIT balance sheets remain healthy in the face of an imminent liftoff of interest rates, refreshing the false narrative that rising borrowing costs disadvantage the sector. A record-low interest expense ratio and opportunistic refinancing to extend REIT terms to maturity have stabilized key expenses, as upward earnings revisions for REITs benefiting from favourable fundamentals continue unabated.
A $364 billion wall of capital earmarked for real estate continues to underpin property valuations as M&A transaction volumes remain at elevated levels.
TOP PICKS:
Andrew Moffs Top Picks
Andrew Moffs, senior vice president and portfolio manager at Vision Capital, discusses Boardwalk REIT, Dream Industrial REIT, and StorageVault Canada.
Boardwalk REIT (BEI-U TSX)
With the price of oil rebounding and several new technology firms announcing expansions into the REIT’s core markets of Calgary and Edmonton, the outlook for a complete removal of tenant concessions where the majority of NOI is generated is increasingly likely.
Additionally, management has indicated that the occupancy trajectory of the REIT is on track to improve to 97 per cent in 2022, positioning its portfolio to realize outsized FFO growth in 2022, as rents are marked-to-market.
Finally, recent private market transactions indicate a significant mispricing of the REIT’s units, which may lead to cap rate compression in future appraisals. Combining all four catalysts have the potential to increase the near-term NAV per unit of BEI to $74.