Portfolio managers on why Canadian investors have to embrace scale and earning potential of huge real estate firms
There is a new world order when it comes to REITs – and investors should be venturing outside Canada to capitalize fully.
That’s the message from Harvest Portfolios Group, which has shone a light on the breadth and depth of the sub-sectors that make up the global REIT arena. While home bias is certainly not restricted to Canada, its real estate makes up just 3% of the world market.
For the Oakville, Ontario-based fund provider, it believes there is more opportunity overseas for uncorrelated, diversified, unique assets with huge scale that investors simply don’t have in Canada. These include hotel REITs, storage REITS, healthcare REITs, healthcare office properties and triple net lease retail as well as specialty REITs in the technology and data centre growth areas.
The latter is a growth area the firm aims to capture with its Harvest Global REIT Leaders Income ETF (HGR), which currently has just under 5.5% distribution. Paul MacDonald , CIO and portfolio manager, told WP: “I really think having an income source like that in today's low-yielding environment is attractive.
“Perhaps we can also capture a little bit of capital gain and have exposure to some of those growth areas but this is really about generating income, and you will go up and down with markets, but this is diversified away from what a lot of Canadians already own, but with very large, diverse companies with hard assets.”
One of the biggest growth areas the ETF aims to capture is data storage, with companies like Digital Realty housing an enormous amount of servers and data in massive warehouses. It boasts more than 210 data centres across 124 countries.
Portfolio manager Mike Dragosits said it’s a prime example of why investors should look beyond Canadian REITs.
He said: “Everybody likes to talk about Google and Facebook and all these tech companies without realizing that the amount of data is just growing exponentially by the year. Think about the data stored in the cloud and all the technology that's coming into our homes through the Internet of Things - that's all collecting data that needs to be stored in these massive warehouses.
“You also have AI and autonomous vehicles - there's a lot of information that's going to be stored and a lot of growth that is expected in that area. Digital Realty is a big data centre storage name. Nobody really thinks about the data storage that’s going to be necessary – and that’s where you can capture the growth on the REIT side of that technology.”
Scale is central to the Harvest global REIT philosophy. It holds up the comparison on the industrial side between Dream Industrial in Canada, which has about 23 million square feet in four provinces, and global firm Proligis, which has 700 million square feet in 19 countries globally.
Another area that the fund focuses on is the REIT subsector of campus-style healthcare and technology office space. These facilities cluster top-name firms from these two industries, which in turn attracts other tenants through the prospect of innovation and integration.
Dragosits added: “The name that I'm thinking of in particular is Alexandria. It's a $17 billion market cap company and you can see the names on their list; it’s all the big healthcare companies and tech companies.
“It gives the companies a platform to innovate together and [Alexandria] actually funds R&D for some of these companies, which really attracts the tenants to these campus-style REITs and office spaces. That’s an opportunity we just don’t have available to us in Canada.”
Other global firms, for example Pfizer, Biogen and Bristol Myers, are situated together, often near hospitals, and they operate next to household tech names like Uber and Facebook. This quest for global scale – and therefore better distributions – also translates into other healthcare companies, in particular Orpea, which is the fund’s largest holding at 4.3%.
MacDonald explained: “In Canada, you would recognize a Chartwell because you feel and touch it on a daily basis, or you have family members there. They’ve got 211 facilities with 31,000 beds in one country, while Orpea, in France, operates almost 1,000 different facilities in 14 countries all through Europe with nearly 100,000 beds. You’re getting a kind of Chartwell of Europe, but it’s got multiples of its scale.”
REITs have become more attractive as global growth continues to slow and investors search for steadier cash flows.
Dragosits said: “We are just coming out of a rate-hiking cycle and the initial knee jerk reaction was to shy away from REITs in that environment. But we found that actually hasn’t been the case historically. It’s actually been pretty rare that REITs have underperformed in a rate-hiking cycle.
“In this environment, where global central bankers and global yields are heading lower, and central bankers are turning even more dovish, it just [pushes] that search for yield into an asset class like REITs, which generally it has higher income, steadier cash flows and steadier distributions.
“That makes them more attractive in this environment, especially as global growth and growth expectations continue to slow down.”