O Canada! REIT opportunities in the Great White North

Mark Mazzarella

APN Real Estate Securities (part of Dexus)

It’s been two years since we launched the APN Global REIT Income Fund (the Fund) and Canada remains what we like to call our secret weapon.

When we were constructing the initial portfolio, Canada’s $80 billion REIT market appealed, not least given the relative valuations of this uniquely diverse REIT market. Fortunately, opportunities here still do.

The Fund’s objectives are to deliver a relatively high income at lower than market volatility and a relatively attractive real capital return over the investment period. Canadian REITs, which have contributed 27% of the Fund’s relative outperformance against its benchmark over the year to the end of June 2022, have made a substantial contribution.

From the beginning, the Fund has been overweight Canadian REITs and underweight U.S. REITs, relative to the performance benchmark. More importantly, we have maintained this portfolio stance so far in 2022. Let me explain the four reasons why this is the case.

1. Canada – an ideal investment destination for Australian capital

Understandably, Australian investors tend to frame their worldview through a domestic lens. The local familiarity and perceived safety make sense, but it can leave investors over-exposed to Australia (home country bias) at the expense of geographies with potentially better opportunities.

For professional real estate investors like us, laser-focused on maximising income while minimising risk, Canada fits the bill.

There are parallels with Australia in its western democratic societal structure, rule of law and transparency in asset ownership. A resources-rich domestic economy is another similarity, as are heavily urbanised populations with cities where land use is at a premium – both factors that support property values.

Despite these similarities, and for obvious reasons, Canada is more often compared with its southern neighbour. In an economic sense, such comparisons leave Canada looking more attractive than it otherwise might.

Whilst we analyse the REIT sectors in which we invest with a bottom-up focus – concentrating on the values and attributes of individual REITs – macroeconomics form part of the top-down overlay within our process. This is an essential consideration in all market conditions but more so now than ever.

In this area, Canada again scores well. According to Bloomberg data, the country is anticipated to enjoy higher GDP growth, lower levels of inflation and a lower budget deficit than the U.S. Similar to Australia, Canada are also running a healthy trade surplus and there is also a lower probability of a looming recession.

Source: Bloomberg, DXAM. See disclaimer, including in relation to forward looking statements. Forecasts are not guaranteed to occur. Past performance is not an indication of future performance

2. Monthly distributions

As managers focused on generating defensive income, we’re particularly attracted to a unique structural attribute of Canadian REITs – their payment of monthly distributions. South of the border, most US REITs pay distributions quarterly. This highlights the income-focused nature of Canadian REITs.

In addition, US REITs are required to pay out 90% of taxable income as shareholder distributions. In Canada, REITs are obliged to pay out 100%. These seemingly small differences can make a big difference to income investors. They also indicate a mindset consistent with our ‘property for income’ focus.

3. Better relative value

While Canadian REITs have been affected by the recent sector sell-off, they have performed relatively well compared to their U.S. counterparts, outperforming over this calendar year to the end of June by 1.7 percentage points. Canadian REITs also offer a compelling relative proposition on key value indicators:

Source: GPR, DXAM; *DXAM coverage universe, as at 30 June 2022

4. Uniquely attractive opportunities

Compared to the U.S REITs and those in other developed regions, Canadian REITs have successfully invested in offshore markets over a sustained period. This track record means Australian investors can get access to currently desirable international markets and property sectors, often at compelling valuations, through Canadian REITs.

NorthWest Healthcare Properties REIT, for example, is a specialised owner, developer and manager of care-focused healthcare properties, including medical office buildings and hospital facilities in Canada, United States, Brazil, Germany, Netherlands, UK, Australia and New Zealand. This is a truly global REIT with industry-leading expertise in a highly attractive asset class.

Whilst listed in Canada, just 25% of the REITs asset base is in its home market. The compelling valuation, high-quality global healthcare portfolio and multiple catalysts make it a uniquely attractive investment proposition, in our view.

Dream Industrial REIT is similar, owning a portfolio of logistics and industrial assets. Listed in Canada and run by a highly credentialed leadership team, the group owns, manages, and operates a portfolio of urban logistics properties across Canada, the US and Continental Europe.

Flagship Communities REIT specialises in the ownership, development and management of manufactured housing communities delivering affordable rental accommodation in locations benefiting from favourable demographics. Whilst listed in Canada, its portfolio is entirely located within the US Midwest. Currently, it trades at a considerable discount to its larger US-listed peers.

Through such opportunities, Australian investors can achieve international diversification at very attractive valuations. Their high distribution frequency and relative value make them ideal for Australian income-focused investors.

Canadian REITs have been a secret weapon in the success of the APN GREIT Income Fund. Given our current portfolio allocation to the country, we expect they will continue to play a major role.

Broaden your income horizons

APN Real Estate Securities (RES) is a specialist investment manager that actively manages portfolios of listed property securities. Since inception in 1998, our deep understanding of real estate and “property for income” philosophy, together with a highly disciplined investment approach has been the backbone of our performance. Click here to find out more. 

Managed Fund
APN Global REIT Income
Global Property
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1 fund mentioned

Mark  Mazzarella
Portfolio Manager, Real Estate Securities
APN Real Estate Securities (part of Dexus)

Mark is part of the Investment Team tasked with analysing and investing in global real estate-sector equities. He is an Associate of the Australian Property Institute, a Certified Practicing Valuer and a CFA charterholder.

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