Fund managers like U.S. REITs, including one that holds prime assets on the Las Vegas strip, with an interest rate cut expected this month.chrisp0/iStockPhoto / Getty Images
U.S. real estate investment trusts (REITs) are getting a new lease on life after being punished by rising interest rates.
REITs are recovering on expectations that the U.S. Federal Reserve Board will start cutting its benchmark rate on Sept. 18 and more investors will look to REITs for yield.
The U.S. real estate sector is more diversified than Canada’s, with opportunities ranging from cell towers to cold storage and leisure-oriented experiential REITs.
The Globe asked three fund managers for their top picks.
Lee Goldman, senior vice-president and portfolio manager, CI Global Asset Management in Toronto
The funds: CI Global REIT Fund, CI Global REIT Private Pool, CI Global REIT Private Pool ETF CGRE-T
The pick: VICI Properties Inc. VICI-N
VICI Properties, which owns North American casino properties, bowling alleys and golf courses, is a “safe business model” that’s also poised for growth internationally, Mr. Goldman says.
The New York-based experiential REIT formed in 2017 after emerging from the bankruptcy of Caesars Entertainment Corp. and acquiring more properties through sale-leaseback deals.
“It owns 10 trophy assets on the Las Vegas strip,” Mr. Goldman says, as well as regional casinos that, all combined, make up 95 per cent of rents.
VICI Properties signs triple net leases with its operators, which pay all expenses. Half of casino leases are linked to inflation, but that should grow to 95 per cent in 10 years, he adds. VICI Properties also provides mezzanine loans to firms such as Great Wolf Resorts Inc.
VICI Properties traded recently at 15 times 2024 adjusted funds from operations (AFFO) but that’s reasonable, he says. His one-year target is US$36 a share.
The pick: American Tower Corp. AMT-N
The global operator of wireless and broadcast infrastructure is poised for strong growth because of rising mobile phone use and proliferation of Internet of Things devices, Mr. Goldman says.
Boston-based American Tower leases space to wireless carriers on its cell towers in the U.S. and in countries such as Brazil, Germany and Spain. The fees have built-in escalators or are linked to inflation.
American Tower also owns a data-centre business, which represents about 8 per cent of revenue and will benefit from growing artificial intelligence (AI) applications, he adds.
His one-year target for this REIT is US$240–$250 a share. It trades around 21 times price to AFFO, which is reasonable given its historical and projected growth, he says.
A risk is a default or merger by carriers, which reduces the number of cell towers needed, he says.
Dean Orrico, president, chief executive officer and portfolio manager, Middlefield Capital Corp. in Toronto
The funds: Middlefield Real Estate Dividend Class, Middlefield Real Estate Dividend ETF MREL-T
The pick: SBA Communications Corp. SBAC-Q
The wireless infrastructure provider is an attractive investment given the growth in data from 5G cellular technology and advances in AI, Mr. Orrico says.
Boca Raton, Fla.-based SBA is the smallest of the U.S. cell tower REITs, but its shares are “better value” versus its larger peers, he says. “SBA trades at about 16.5 times AFFO for 2024.”
The company, which also owns data centres, gets 70 per cent of its revenue from the U.S. and the rest in other regions such as Central America and South America.
Falling interest rates benefit SBA Communications from a capital-cost perspective, while its strategic focus on debt reduction should persuade investors to pay a higher price for its shares, Mr. Orrico says.
A recession is a risk that could dampen data usage, he adds.
The pick: Welltower Inc. WELL-N
Welltower will benefit from the growing demand for seniors’ housing from an aging population amid a lack of new supply, Mr. Orrico says.
Fewer new seniors’ residences are coming on the market due to high interest rates, rising construction costs and wage inflation, he says.
Toledo, Ohio-based Welltower is well positioned because it has a relatively low debt level and has joint ventures with institutional investors to acquire or build new housing, he adds.
Welltower’s occupancy rate fell to about 75 per cent in 2021 amid the COVID-19 pandemic but has rebounded to around 83 per cent.
The REIT, which trades at a consensus estimate of about 25 times funds from operations for 2025, is not cheap, he says, but the valuation is justified because it is a well-run business.
One risk, he says, is a significant economic slowdown that could cause seniors to seek other living arrangements.
Andrew Moffs, senior vice-president and portfolio manager, Vision Capital Corp. in Toronto
The funds: Vision Opportunity Fund LP, Vision Alternative Income Fund
The pick: Sun Communities Inc. SUI-N
This REIT, which focuses on manufactured housing, recreational vehicle communities and marinas, is a compelling investment because of high demand and lack of supply, Mr. Moffs says.
Southfield, Mich.-based Sun Communities is one of the largest owners and operators of U.S. manufactured communities, which is a “great sector” because it’s seen as affordable housing, he says.
Using a trailer-park model, the owner of a prefabricated home pays rent to the REIT. Occupancy is almost at record levels due to the lack of land available for this purpose, he says.
However, this REIT is trading at a discount to Vision’s estimated net asset value (NAV) of about US$150 a share versus its peers that trade at a premium, Mr. Moffs adds.
Its stock has been hurt by slow sales from an ill-timed investment in Park Holidays UK in 2022, “but that in our view has plateaued,” he says.
Rising interest rates increased the REIT’s expenses, but it has been selling assets to reduce debt, he adds.
A risk is management not being able to execute on its business plan in the U.K., he says.
The pick: Americold Realty Trust COLD-N
This REIT is compelling because it operates in the cold storage sector, which is critical for the global food supply chain, and is also an industry consolidator, Mr. Moffs says.
Atlanta-based Americold is the second-largest U.S. publicly listed refrigerated warehouse operator after Lineage Inc. LINE-Q, which went public this past summer.
Americold’s occupancy levels fell during the past year and a half due to economic headwinds, but they’re improving, he says.
There is a line of sight for its physical occupancy rate to rise to 80 per cent from just under 70 per cent now, he says. The economic occupancy rate – in which clients pay for space they’re not always using – is about 10 per cent higher.
The REIT has suffered because it lost a lot of workers during the COVID-19 pandemic, but it now uses a software system to make its labour force more efficient, Mr. Moffs says.
Although falling interest rates will help Americold, it also has access to capital from partnerships with railroads and ports to build new refrigerated warehouses, he adds.
Americold, he says, trades at a discount to Vision’s estimated NAV at about US$33 per share and at a wide discount to its peers.
A risk lies in management’s ability to execute on its strategy. The Street is “watching those margins carefully,” Mr. Moffs adds.
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