Money manager Dennis Mitchell isn’t rattled by the market volatility that has played out in recent weeks, even as the value of his real estate funds dipped.
Instead, the self-described “old school” investor is sticking to his strategy of holding companies that consistently grow their dividends and distributions over the long term.
“There are only three sources of return for an equity security: The internal growth it generates, which fuels the distributions that it pays and the multiple that it trades at,” says the chief executive and chief investment officer at Starlight Capital in Toronto, who oversees about $400-million in assets.
“We continually buy companies that have shown the ability to grow their cash flows over long periods of time; they usually grow their dividends over long periods of time – and the market rewards them with higher multiples. Regardless of whether inflation is 7.5 per cent or zero, whether Russia invades Ukraine or not, our approach doesn’t change.”
Mr. Mitchell’s portfolio includes 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.
The real estate fund returned 31 per cent in 2021, while the infrastructure fund was up about 8 per cent last year, according to Morningstar. Both funds have taken a hit in recent weeks amid the market volatility, but Mr. Mitchell says the funds include “high-quality businesses” in sectors poised to do well long term, such as residential and industrial real estate and companies that own data centres and cell towers.
The Globe and Mail recently spoke to Mr. Mitchell about the names he likes in the sector, some of his personal holdings outside of the real estate industry and the investment advice he gives friends and family.
What’s your investing approach?
Starlight Capital is a real asset manager. We focus on real estate and infrastructure and manage that money across listed securities and private assets, globally. For instance, we own private single-family home assets in the U.S. and publicly traded REITs in North America and Europe.
What does a ‘high-quality’ business look like in your view?
For us, a high-quality business has strong, recurring free cash flow that’s generated from a portfolio of irreplaceable assets that are capitalized with low debt and are run by management teams that behave like owners and treat us like partners. We look for this in every company we own.
What segments and stocks do you like in the real estate industry right now?
Residential and industrial real estate account for more than 50 per cent of our real estate portfolio. Both sectors have very strong, long-term structural drivers that aren’t going to end any time soon.
Residential is driven by household formation and immigration, which will grow postpandemic. Some of the names we own and like in this area include Canadian Apartment Properties Real Estate Investment Trust and InterRent REIT. In the U.S., we like Invitation Homes and Sun Communities.
With industrial, we expect retail sales to normalize into a hybrid model. That means fewer bricks-and-mortar retail outlets and a lot more e-commerce, so the demand for industrial real estate will continue to grow. On the industrial side in the U.S., we own Prologis. In Canada, we like Nexus REIT, a small-cap that’s converting from a diversified name into a pure-play industrial name.
We also like data centres and cell-tower companies where demand is driven by social media, e-commerce, digital payments and the overall need for more data and storage. There aren’t many data-centre names today, but we own Switch and Equinix in the U.S. On the cell-tower side, we own American Tower and Crown Castle International.
What segments are you steering clear of and why?
We are heavily underweight retail, which includes some of the largest names in the real estate space today. We own some essential service retail landlords, such as grocery and drugstores, including RioCan REIT in Canada and Kimco Realty Corp. in the U.S. We are also heavily underweight office real estate. We own zero traditional office REITs. We do own Alexandria Real Estate Equities, a life sciences office REIT, which includes lab, research and testing space.
What’s a stock you wish you bought or didn’t sell, and why?
In my personal portfolio, I tend to buy the stocks of the products that I regularly use, such as Nike, Disney and Apple (I wear a lot of Nike, my kids and I have seen every Marvel movie, and we’re an Apple household). I bought Amazon in April of 2020 for my personal accounts, but I am disappointed that I didn’t buy the stock sooner based on our usage of Amazon Web Services at Starlight Capital and my personal Amazon Prime membership. It was the pandemic that really got me into Amazon since I shifted a lot of my consumption from in-person to Amazon.
What is the best stock tip you have given a family member?
I told my whole family to purchase shares of Apple in April of 2020 after the pandemic sell-off. (I bought more at that time and have owned it for years). I’m not sure I got any takers but the stock is up approximately 140 per cent since I made those purchases in my personal portfolio.
What investing advice do you give family members when they ask?
Get started now and stay disciplined around your plan. The math around compounding over long periods of time is well-known and markets appreciate about 80 per cent of the time, so just get started and stick with it.