O Canada! REIT opportunities in the Great White North
Article10 mins31 October 2022
It’s been two years since we launched the Dexus Global REIT Income Fund (the Fund) in 2020, and Canada remains our secret weapon.
When we were constructing the initial portfolio, the relative valuations of Canada’s uniquely diverse $80 billion REIT market appealed. Fortunately, opportunities in the north still do.
The Fund’s objectives are to deliver a relatively high income at lower-than-market volatility and a relatively attractive real capital return over the investment period. Canadian REITs, which have contributed 27% of the Fund’s relative outperformance against its benchmark over the year to the end of June 2022, have made a substantial contribution.
From the beginning, the Fund comprised overweight Canadian REITs and underweight US REITs, relative to the performance benchmark. More importantly, we have maintained this portfolio stance in 2022. for the following four reasons.
1) Canada - an ideal investment destination for Australian capital
Understandably, Australian investors tend to frame their worldview through a domestic lens. The local familiarity and perceived safety make sense, but it can leave investors overexposed to Australia (home country bias) at the expense of geographies with potentially better opportunities.
Canada fits the bill for professional real estate investors who are laser focused on maximising income while minimising risk.
There are parallels with Australia in its western democratic societal structure, rule of law and transparency in asset ownership. A resources-rich domestic economy is another similarity, as is heavily urbanised populations within cities where land use is at a premium - both factors that support property values.
Despite these similarities, Canada is more often compared with its southern neighbour. In an economic sense, such comparisons leave Canada looking very attractive.
While we analyse the REIT sectors in which we invest with a bottom-up focus - concentrating on the values and attributes of individual REITs – macroeconomics form part of the top-down overlay within our process. This is an essential consideration in all market conditions, but more so now than ever before.
In this area, Canada again scores well. According to Bloomberg data, the country is anticipated to enjoy higher GDP growth, lower levels of inflation and a lower budget deficit than the US. Similar to Australia, Canada is also running a healthy trade surplus with a lower probability of a looming recession.
Source: Bloomberg, DXAM
See disclaimer, including in relation to forward-looking statements. Forecasts are not guaranteed to occur. Past performance is not an indication of future performance
2) Monthly distributions
OUr focus on generating defensive income ensures we're particularly attracted to a unique structural attribute of Canadian REITs: their payment of monthly distributions. South of the border, most US REITs pay distributions quarterly. This highlights the income-focused nature of Canadian REITs.
In addition, US REITs are required to pay out 90% of taxable income as shareholder distributions. In Canada, REITs are obliged to pay out 100%. These seemingly small differences can make a big difference to income investors. They also indicate a mindset consistent with our ‘property for income’ focus.
3) Better relative value
While Canadian REITs have been affected by the recent sector sell-off, they have performed relatively well compared to their US counterparts, outperforming over this calendar year to the end of June by 1.7 percentage points. Canadian REITs also offer a compelling relative proposition on key value indicators:
Source: GPR, DXAM; *DXAM coverage universe, as at 30 June 2022
4) Uniquely attractive opportunities
Compared to US REITs and those in other developed regions, Canadian REITs have successfully invested in offshore markets over a sustained period. This track record means Australian investors can get access to currently desirable international markets and property sectors, often at compelling valuations, through Canadian REITs.
NorthWest Healthcare Properties REIT, for example, is a specialised owner, developer and manager of care-focused healthcare properties, including medical office buildings and hospital facilities in Canada, United States, Brazil, Germany, Netherlands, UK, Australia and New Zealand. This is a truly global REIT with industry-leading expertise in a highly attractive asset class.
Whilst listed in Canada, just 25% of this REITs asset base is in its home market. We believe the compelling valuation, high-quality global healthcare portfolio and multiple catalysts make it a uniquely attractive investment proposition.
Dream Industrial REIT is similar; owning a portfolio of logistics and industrial assets. Listed in Canada and run by a highly credentialed leadership team, the group owns, manages and operates a portfolio of urban logistics properties across Canada, the US and Continental Europe.
Flagship Communities REIT specialises in the ownership, development and management of manufactured housing communities, delivering affordable rental accommodation in locations benefiting from favourable demographics. While listed in Canada, its portfolio is entirely located within the US Midwest. Currently, it trades at a considerable discount in comparison to its larger US-listed peers.
Through such opportunities, Australian investors can achieve international diversification at very attractive valuations. Their high-distribution frequency and relative value make them ideal for Australian income-focused investors.
Canadian REITs have been a secret weapon in the success of the Dexus Global REIT Fund. Given our current portfolio allocation to the country, we expect they will continue to play a major role.
This material (“Material”) has been prepared by Dexus Asset Management Limited (ACN 080 674 479, AFSL No. 237500) (“DXAM”), the responsible entity and issuer of the financial products mentioned in this Material. DXAM is a wholly owned subsidiary of Dexus (ASX: DXS). Read Less
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