Timbercreek seeks REITs with solid foundations

Some shopping malls will thrive but others won't survive, manager says.

Diana Cawfield 4 May, 2017 | 5:00PM

Growing demand globally in the property market bodes well for the returns of real estate investment trusts this year, according to Corrado Russo, senior managing director, investments, and global head of securities at Timbercreek Asset Management Ltd.

"It's the continuing thesis of recovering global growth around the world," says Russo. "We believe global REITs are poised to deliver 8.5% to 10.5% total returns in 2017. We expect strong performance across regions including Canada and the United States."

Overall, Timbercreek believes a rising interest-rate environment signals a brighter economic outlook, with more people working in office buildings, more household spending, and more income to be spent on travel and hotels.

Specializing in global real estate, Toronto-based Timbercreek actively manages more than $5.5 billion in assets. Its mandates include the closed-end Timbercreek Global Real Estate (TGF.UN/TSX) and an open-end mutual fund, Timbercreek Global Real Estate Income.

Employing a value-oriented discipline with an income bias, the firm mitigates risk by diversifying across more than 12 segments of the sector. These include shopping centres, offices, regional malls, industrial and residential.

Canadian REITs, which make up 13% of Timbercreek Global Real Estate Income, have "all been painted with the same brush," says Russo. "That interest rates are going up, oil prices are down, the overall economy is going to suffer, not a ton of growth." Though he rejects that bearish thesis, he believes some real-estate assets will fare much better than others.

In the retail sector, Timbercreek focuses on high-end shopping centres and areas where household incomes are above-average. "The super-regional malls, the Yorkdale Shopping Centres of the world," says Russo, "are getting stronger every day. The millennials, where you're seeing the future, are living in urban areas. They like the density and they are more focused on experience-oriented shopping."

This influential demographic group can go to the gym, shop, meet a friend for dinner and go to the movies in one convenient location. According to Russo, the management teams in these locations were smart enough to recognize the trends and spending patterns for the millennials.

In contrast, the middle-tier, suburban community malls won't survive, says Russo. He believes many retailers and department stores grew too quickly and expanded into these centres where the surrounding population and household income cannot support them.

Russo cites the likes of  Best Buy Co. Inc. (BBY), Sears Canada Inc. (SCC) and bookstores, which are facing stiff online competition. "Malls are dying and you don't want to be invested in them," he says, adding that he thinks mall retail spaces will become condominiums or golf courses in the next 10 to 20 years. Since the financial crisis, malls have been contracting "and online shopping is eating their lunch."

The third segment of the retail sector -- the grocery-anchored smaller convenience malls with perhaps a pharmacy, a dry cleaner and a hardware store -- are relatively sheltered, says Russo. "You're not doing these things online."

Another real-estate segment with a positive outlook, says Russo, is apartment buildings. Their asset values continue to be supported by immigration, limited new supply, steep prices for single-family homes and stricter mortgage rules.

Russo says the growing trend in online shopping has also created opportunities in the industrial segment. At the same time as fewer people are going to malls to view store inventories, goods to be purchased online are now being stored in industrial warehouses. One of Russo's holdings that is taking advantage of that trend is U.S.-based Stag Industrial Inc. (STAG), which owns warehouses and other industrial properties and leases them to business tenants.

The investment team continues to invest mostly in U.S. equities, which have a 44% weighting in Timbercreek Global Real Estate Income. In the global universe of publicly traded REITs, about 50% of the world's assets tend to be in the U.S.," says Russo. "Obviously, it is the biggest market, so that's where we're going to search for opportunities." As well, President Donald Trump's proposals to lower corporate and personal taxes and increase fiscal stimulus could stimulate economic growth in the U.S., Russo adds.

Helping to provide geographic diversification is the top holding, Dream Global REIT (DRG.UN), which is listed in Canada but has all of its assets in Germany. "There's good economic growth, great unemployment and relatively limited amounts of high-quality office space in the German market," says Russo, and that's exactly what Dream Global's portfolio is all about."

In terms of challenges, "there certainly are some headwinds out there," says Russo, "but I don't think they're specific to REITs. If there is some sea change in terms of tax tariffs coming from President Trump that could significantly impair global growth, that would worry me. The general view about interest rates and supply actually don't worry me that much. I think they're relatively in check. I think they're priced into the market at this point."

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Best Buy Co Inc66.40 USD1.41
Dream Global Real Estate Investment Trust14.34 CAD0.63
Stag Industrial Inc29.59 USD0.48

About Author

Diana Cawfield

Diana Cawfield  Diana Cawfield is an award-winning writer who has been a regular Morningstar contributor since 2000. Her numerous publication credits include the Toronto StarAdvisor's Edge and Chatelaine, as well as the Canadian Securities Institute's online educational services.