Paul Curbo believes that real-estate equities are fairly priced and trading at a modest discount to intrinsic value.
"Right now, stocks trade at a 5% discount. That represents reasonable value and, in some cases, favourable value," says Curbo, a portfolio manager who is on the team that manages the $162-million Invesco Global Real Estate. He's a member of the portfolio-management team at Dallas-based Invesco Real Estate, a unit of Invesco Ltd.
In contrast, Curbo notes, the discount was as much as 30% in the 2008 financial crisis. "Since then we've been in a recovery on a fundamental level, where demand has outpaced supply and occupancy rates have improved," he says. "On the capital-markets side, things have improved even faster. Money is available for real-estate companies and very low debt costs have been a source of growth. What we're seeing now is the fundamentals are catching up with capital markets."
The Invesco team believes that the U.S. offers some of the best value. It accounts for about 46% of the fund, a weighting that is close to the fund's benchmark, a blend of the FTSE European Public Real Estate Association and NAREIT Developed Real Estate Index.
U.S. companies are expected to have 9% cash-flow growth, which exceeds the 6% global average, says Curbo. One representative holding in the 100-name portfolio is Avalon Bay Communities Inc. AVB, which owns apartment buildings on both the east and west coasts.
"Apartment fundamentals are still improving and rents are still increasing," says Curbo. "People are looking to move into these high-quality urban locations in many of the best markets. The other factor is that Avalon Bay has a very large development pipeline that's around US$4 billion or about 20% of their NAV."
Curbo notes that the firm is slated to produce 9% earnings growth over the next year. "We think they should deliver that or better. And it has a 3.5% dividend yield." He adds that the stock is trading at a 15% discount to its NAV. "So this is a combination of valuation and growth."
A native of Dallas, Curbo joined the industry after he graduated with a bachelor of business administration from the University of Texas at Austin in 1993. And he's been involved in real estate ever since he started working within the commercial real-estate lending group at JPMorgan Chase.
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"Real estate touches everyone's lives. I find it fascinating how real estate changes over time and how it's different in different countries, and yet it shares a lot of commonality," says Curbo, adding that he learned a great deal from the real-estate downturn in the early 1990s. "It's a fascinating place to work in."
In 1995, Curbo joined Security Capital Group, where as a senior research associate he created econometric forecasts for demand and supply in commercial real estate. In 1998, he was hired by Invesco and focused on forecasting local markets in the U.S. In 2005, he moved to the fund-management side and began working as an analyst covering office and industrial sectors.
Two years later, Curbo became a fund manager and joined the 19-person team (which includes six portfolio managers) that oversees the US$1.5-billion Invesco Global Real Estate, which has the same holdings as the Canadian fund. Single holdings are limited to about 6% of fund assets.
Launched in 2007, the Canadian-domiciled Invesco Global Real Estate returned 3.9% for the 12 months ended April 30, versus 4.4% for the median fund in the Real Estate Equity category. Over the three- and five-year periods, it had an annualized 9.8% and 12.7% return, respectively, compared with 9.7% and 14.8% for the median fund.
The fund lagged on a five-year basis because the managers avoided poor-quality companies that gained the most following the market meltdown. "But that five-year period does not pick up our outperformance prior to the financial crisis," Curbo says. "Over the long term, our process works extremely well and higher-quality companies have had better long-term performance."
Valuation and growth are the main themes in the Invesco fund, Curbo says. He favours companies with better balance sheets and lower leverage. One such holding is Allied Properties REIT AP.UN, which specializes in converting older properties into office space in major Canadian urban centres.
"They offer a compelling value opportunity for potential tenants in that they offer lower rents than a Class A property. In Toronto, for instance, the rent is 25% lower. And they have a large redevelopment pipeline," says Curbo, adding that Allied Properties is planning to add 1.8 million square feet in new projects. "This makes them different from many Canadian REITs in that they will have 16% earnings growth, versus about 6% for all of Canada. It also has a fair valuation. We're not paying up for that growth."
