Four picks in the real estate sector

Timbercreek's Corrado Russo shares four of his best ideas.

Christian Charest 26 January, 2018 | 6:00PM
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Christian Charest: For Morningstar, I'm Christian Charest. I'm here today with Corrado Russo, Senior Managing Director and Global Head of Securities at Timbercreek, a Toronto-based firm that specializes in real estate investing.

In a previous video, we discussed his outlook for real estate securities and here we will talk about four of his top picks for the retail mutual fund that his firm manages in Canada, the Timbercreek Global Real Estate Income Fund.

Thanks for being with us today.

Corrado Russo: Thanks for having me.

Charest: So, the first stock you want to talk about is Digital Realty?

Russo: Yeah. I think that one is a function of really the tremendous amount of growth that we see in datacentre storage going forward. That's what Digital Realty does effectively is they store data for some of these larger companies like Amazon, Facebook and the other large technology companies that we see. And effectively, if you think about data usage, video usage, the amount of cell phone coverage usage, all of that data needs to move and be stored through these large warehouses called datacentres. And I think, we don't traditionally think of REITs as having that growth technology story, but here is a company that is going to benefit from that ongoing growth in data usage as we move forward, and a company that we think is trading at some pretty good valuation levels, does not fully reflect the expected growth that we see in the future. And if you look at the demand/supply, they are in relative equilibrium. So, as that growth in demand comes, the shortage of supply could potentially lead to outsized growth in cash flow.

Charest: The second stock you want to talk about is Allied REIT.

Russo: Yeah. Allied, a company here in Canada. I think if you look at the Canadian names, what we like in Canada is the ongoing ability of REITs to really grow their NAV base from where it is today. One of the major trends we are seeing in larger cities like Toronto, Vancouver, Montreal is this urbanization trend. We see it everywhere around the world as we travel, and we see the same trends coming here to Canada. People want to live, work and play in the same area, and the densification of our downtowns is continuing to grow over the long term.

If you take a company like Allied and you think of where they are positioned, where their assets are, they are right in the middle of where a lot of the densification is going to happen, and that densification is going to lead to stronger land values for the residual and excess land that they have and tremendous amount of outsized growth in net asset value as they densify and expand the buildings they have and utilize that excess land to build new developments.

Charest: The third security is Merlin Properties.

Russo: Yeah. Merlin is a Spanish company involved in office logistics and retail. I think that for us it is a play on the overall Spanish economy continuing to recover. If you look at the office rents in Spain, for instance, in some of the major markets like Barcelona, what you are seeing is, we are coming off still a very low base from the financial crisis. Spain was one of the countries that was hit extremely hard through the financial crisis and has had a much later recovery. But that recovery has happened, the historical weakness has pulled out a lot of the supply. And Merlin is a company that has the potential and the assets in the right locations to really benefit from that growth in rents that we see over the long term.

Charest: And staying in Europe, your fourth pick is a company called Wereldhave.

Russo: Yeah. Wereldhave is a retail company across Europe. They have assets in different markets like France, Italy, Netherlands. And what we like about that is, generally, if you look at European retail environment, they have suffered from a stock price perspective, very similar to what we've seen in the U.S. on the retail side. I think we know why. There's obviously been a lot of negative headline news around U.S. retail, the issues with department store closures, the issue online sales taking a greater market share relative to bricks and mortar. And what we are seeing is the underlying fundamentals are not the same in Europe.

European retail still continues to be quite strong. It's not suffering as much as you see in the U.S. And that's really a function of the inventory of retail today. European retail has one-fifth the amount of retail per capita than the U.S. So, they are much more under-retailed relative to the U.S. And that means there's a much more equilibrium, and you don't have the same potential risk that you do in the U.S. of stores closures and some of these malls that never should have built effectively being closed. So, I think, we are going to see those stocks' fundamentals and specifically, Wereldhave's hold up better than we would see from the U.S. counterparts. Yet, the stock price and the valuations are at deep discounts. So, we think we are getting it at a very good price.

Charest: Interesting. Thank you very much for sharing your insights with us today, Corrado.

Russo: Thank you.

Charest: For Morningstar, I'm Christian Charest. Thank you for watching.

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