Investment Vision: Olin lays out Canada's top performers
Jeff Olin, co-founder and CEO of Vision Capital. (Courtesy Vision Capital)
Vision Capital Corporation co-founder and CEO Jeff Olin embraces periods of volatility in public markets, and that's exactly what investors have been dealing with during the past year or so. Olin said he believes an active investment approach can differentiate investors from competitors during such times.
"It's years like 2020 where we really stand out," said Olin. "Our returns were positive three per cent for the year, but we beat the REIT Index by over 1,500 basis points."
Vision was formed in 2008 to manage funds focused on investing in publicly traded securities in the real estate sector. Its Vision Opportunity Fund Class A has delivered a compound annual growth rate of 12.5 per cent since its inception and has never experienced a negative year, said Olin, who also holds the titles of portfolio manager and company president.
Olin and fellow portfolio managers Frank Mayer and Andrew Moffs have a combined 100 years of real estate experience spread across both the private and public markets.
Olin spoke with RENX about the four commercial real estate asset classes Vision is currently focused on, as well as the Canadian REITs in which Vision Opportunity Fund Class A has recently invested.
Olin said Toronto, Montreal and Vancouver are among the best-performing industrial markets in the world, with vacancy rates below two per cent and rents surpassing $10 per square foot.
"It's an asset class that benefits from inflation. If you look at land costs, construction costs and development charges, the rents you need to justify new development are $13 to $15 right now. So this is a space we like a lot and the stocks are relatively cheap compared to the United States."
Olin said e-commerce now accounts for 25 per cent of retail sales in Canada, leading to increased demand for logistics, warehousing, distribution and last-mile delivery facilities.
A return of on-shore and near-shore manufacturing to North America is expected. Olin said he's been told by economists 20 per cent of current American imports from China could eventually be manufactured in North America.
"We think it's significant and, frankly, we don't think it's going to be unproductive to do so, like it's been for 50 years. We'll increasingly benefit from automation, robotics and artificial intelligence."
Olin believes just-in-time manufacturing and supply chains are coming to an end.
"Just-in-time is done. Now it's just-in-case. Nike will still make shoes in Vietnam, Cambodia or China, but Nike will have additional inventories and have redundant supply chains in Western economies," he said.
"Today, inventories as a percentage of sales are about 10 per cent below historical levels. We think that's going to rise to 10 per cent above."
Multifamily apartments
Vision was heavily weighted in multifamily apartments since its inception, but pared that significantly last spring because of the gap between market and in-place rents caused by a drop in immigration. Olin is more optimistic about the asset class now and expects higher demand for Canadian apartments because:
– Canada has set an immigration target of 1.2 million people over the next three years.
– Many of the estimated 1.5 million young people who moved back home with their parents during the pandemic are expected to return to their own apartments.
– Some 700,000 foreign post-secondary students are expected to return to campuses this fall along with Canadian students.
– The opening of the economy and increasing employment will restore demand for rental units.
Olin believes Canadian leaders in the self-storage space will generate superior earnings growth compared to their American peers.
"Self-storage generally performs well during periods of economic contraction. It's an asset class that's highly fragmented and ripe for consolidation. The top five operators in Canada only own about 15 per cent of the market.
"We like Canada over the United States. There's been a spike in new supply over the past five years in the United States. In Canada you have three square feet of self-storage space per capita. In the United States that number is eight."
Olin doesn't expect the Canadian per capita rate to become as high as it is in the U.S., but he thinks the gap will narrow.
Experiential retail had been gaining favour before the pandemic, as in-person activities involving dining, fitness and entertainment were thought to be more immune to e-commerce. However, COVID-19 has adversely impacted those sectors.
While experiential retail could regain strength as the pandemic subsides, retail centres focused on essentials have been re-established as more stable, profitable and preferred property types.
Grocery store and pharmacy-anchored community retail properties, medical uses and banks have proven much more resilient than malls and power centres. These businesses are also less susceptible to e-commerce penetration.
"We think there should be a re-rating in the pricing of grocery-anchored real estate to higher levels in both the private market and the public market," said Olin.
Vision's investments
Vision entered 2021 invested in eight REITs and companies that trade on the Toronto Stock Exchange: BSR REIT; Canadian Apartment Properties REIT; European Residential REIT; Tricon Residential; Granite REIT; WPT Industrial REIT; StorageVault Canada; and Chartwell Retirement Residences.
Vision has added six REITs to that list this year. Olin explained why he likes them in the portfolio.
Boardwalk REIT
Boardwalk REIT is the second-largest publicly traded Canadian apartment REIT and owns more than 33,000 units across more than 200 properties, totalling more than 28 million net rentable square feet.
"This is probably the cheapest of the Canadian apartment REITs even though it's one of the oldest and most experienced REITs," said Olin. "The reason it was cheap is that it's focused on Alberta primarily, as well as Saskatchewan."
Boardwalk is trading at an implied capitalization rate of 5.6 per cent, according to Olin, who said the REIT has been punished by its exposure to Alberta. Olin believes Alberta will make a gradual recovery with increasing commodity prices and immigration, which should benefit Boardwalk.
Choice Properties REIT
Choice Properties REIT has a portfolio of more than 700 properties totalling approximately 66 million square feet. Retail comprised 79 per cent of its Q4 2020 net operating income, with industrial accounting for 13 per cent, office for seven per cent and residential for one per cent.
Loblaw is Choice's largest tenant, generating approximately 56 per cent of its gross rental revenue.
Vision believes Choice is well-positioned given its concentration in necessity-based retail tenants. Demand for space hasn't wavered and leasing has remained active through the pandemic as tenants from lower-performing malls and centres have looked to locations operated by Choice.
Vision took a position in Choice during Q1 when its units were trading at a six per cent discount to NAV. The discount was one per cent by the end of the quarter and Vision believes there's room for more upside.
Dream Industrial REIT
Dream Industrial REIT primarily owns distribution and logistics assets, with 67 per cent of its property value in Canada, 18 per cent in the U.S. and 15 per cent in Europe.
Thirty per cent of its property value is in the Greater Toronto Area (GTA) and 14 per cent is in the Greater Montreal Area (GMA), two markets with limited supply, robust demand and vacancy rates around two per cent.
First-quarter rents increased over 2020 rates by 19 per cent and 17 per cent respectively, and double-digit growth is forecast for both markets this year.
Dream has a goal of increasing its European property value to 20 to 30 per cent, as it can access very cheap debt there.
"They have a great strategy where they can eliminate currency risk by financing 100 per cent of the asset value in Europe, benefitting from the low rates and keeping some of the Canadian assets unencumbered from debt," said Olin.
Dream has grown its development pipeline and expects to start construction on one million square feet of projects this year. It has identified 1.5 million square feet of potential development over the medium term on 67 acres of excess land and approximately one million square feet of redevelopment opportunities.
With these factors, Vision believes Dream's units are attractive, trading at about an eight per cent discount to NAV and a 5.4 per cent implied cap rate. Its U.S.-listed peers trade at an average nine per cent premium to NAV and a 4.1 per cent implied cap rate.
First Capital REIT
First Capital REIT owns 150 properties totalling 20 million square feet at the REIT's share. The GTA comprises 48 per cent of the portfolio, followed by Montreal, Calgary and Vancouver at 12 per cent, 12 per cent and 11 per cent respectively.
"First Capital has really done a great job over the last 15 years of concentrating its portfolio in major urban markets," said Olin.
Demand has remained strong and First Capital has been leasing to a variety of tenants.
"First Capital has an enormous value-add development pipeline because of their focus on urban centres and because they're embedded in communities," said Olin.
"To add value by adding apartments or fitness centres or other uses to their properties, such as medical or self-storage, they're uniquely positioned to do that and they have the skill to do it."
Vision believes First Capital's units are undervalued relative to American peers, trading at a 14 per cent discount to NAV in Q1. It acquired a position in the REIT because it's confident that gap will narrow.
InterRent REIT
InterRent REIT is focused on multifamily properties in high-growth urban markets across Canada.
While there's a big disconnect between in-place rents and market rents at some InterRent properties, it can be eradicated through making improvements. The REIT often repositions B-quality assets to a higher standard and Olin said it should benefit from increases in new and returning renters.
"These guys are leaders in value-add activity in this country. They buy apartments that are under-managed operationally or physically in terms of being starved for capital. They put in capital, they fix them up, and through that process they're able to generate better apartments and attract higher rents."
InterRent's stock price dropped due to COVID-19 and its vacancy rate increased to 7.6 per cent. Despite this, it took a long-term view and maintained asking rents since it operates in rent-controlled markets with low turnover rates.
Olin said the virus particularly impacted the REIT in Montreal, where occupancy dropped because it owns many units around McGill University. The market is expected to bounce back with the return of students this fall.
InterRent has committed to an intensification program, which also makes it more attractive. Olin said the REIT has four projects underway that represent 13 per cent of its currently owned suites. Vision also believes there are hidden intensification possibilities in InterRent's suburban Ottawa portfolio.
Vision exited its position in InterRent in Q1 2020, but got back into it this year since it believes the valuation of its units relative to private market apartment values is compelling.
Summit Industrial Income REIT
Summit Industrial Income REIT's gross leasable area is concentrated in the GTA (44 per cent), Alberta (27 per cent) and the GMA (20 per cent). Vision believes the concentrated exposure in Canada's two largest markets, which is expected to grow, will contribute to strong net operating income growth over the coming years.
As of the end of 2020, in-place rents in Summit's GTA leases averaged $7.16 per square foot, about 30 per cent below average market rents of $10.25. Rising replacement costs, in conjunction with buoyant demand, suggest rents in the GTA and GMA will move significantly higher.
Summit also has 652,000 square feet of active developments in the GTA and will start more in the GMA in the fourth quarter.
"We've also been really surprised, notwithstanding some of the weakness in the Alberta economy, that the industrial sector in Calgary is doing quite well," said Olin.
"It speaks to some diversification in the economy and also the fact that Calgary is well-located as a regional distribution hub."
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