Navigating the third leg of REIT valuations: the view from Echelon

For the relatively new two-person team of real estate investment analysts at Echelon Wealth Partners, the third leg in the valuation of the issuers they cover has arrived, a time characterized by a larger focus on interest rates.

And, according to Frederic Blondeau and Stephane Boire — both of whom arrived at the firm late last year from the former Dundee Securities — in that third leg, an issuer’s risk management strategy is the top priority when they assess the merits of the companies they cover.

That heightened priority has arisen because of concerns about actual — and projected — interest rate increases by the central bank. In Canada’s case, there have been two rate hikes: the first in July and the second in September when they were raised by 25 basis points. Most economists expect the Bank of Canada, along with its U.S. counterpart, is not done with rate hikes for 2018.

“Rates will always be the biggest risk factor for interest sensitive sectors, including REITs,” Blondeau said on Tuesday. “Rates are now more volatile so a bigger focus is required on risk management.”

The renewed focus has occurred following two other legs: the first from 2012 to August 2016, when rate hikes were not a concern.

“We felt rates had more leeway on the downside,” said Blondeau. “As a result, we didn’t feel that REITs were at risk from a pure macro standpoint,” he said, adding that two-thirds of the issuers he covered were, at that time, rated as buys.

But in the summer of 2016, the second leg got underway, helped by the “positive” push from the creation of a new separate real estate index (previously part of the financial services index) and the feeling that rates would continue to stay low. “But I thought the REITs were fully valued, which meant there was little upside.”

That environment meant the two analysts largely abandoned a ”top-down” approach — which favored a buy and hold strategy — and opted more for a bottom-up approach that focused on stock picking.

“After that, I got lucky,” said the Montreal-based Blondeau, when referring to the effects of the election of Donald Trump, including the “Trump tantrum,” which had a positive effect on interest rates.”

But in the middle of 2017, Blondeau said his team readjusted its strategy, because the “Trump trade” was faltering. As a result, the team opted to “not to be too cautious.” Accordingly, it upped the rating on half a dozen of the 20 REITs or real estate operating companies that it covers. Now two-thirds of that universe is rated a buy.

“We are more open to be more reactive in our ratings. We will be more dynamic (given) that rates are becoming more volatile,” Blondeau said, noting that “quality” will now assume a greater importance.

As for particular sectors, those REITs whose business is in apartments or industrial properties will be favoured, while those that focus on office and retail will be avoided. “Retail in particular should continue to perform relatively poorly in this environment,” he wrote this week.

InterRent is the firm’s top pick. Others with a buy rating include: Pure Multi-Family; Northview Apartment; Northwest Healthcare, Killam Apartment and Morguard North American Residential.

But with many issuers set to report their financial results in the next six weeks, Blondeau may make some changes. “We will have precise questions in terms of operations and new supply in each of the sectors,” he said. “You will have to be more active to generate alpha (or outperformance) because of the expectation the market will produce lower returns.”

Financial Post

bcritchley@postmedia.com

Volatile Dow closes up 567 points on day of sharp swings

  • Index sees largest one-day point gain since August 2015
  • US treasury secretary Mnuchin ‘not overly concerned by volatility’

Volatile high-volume trading conditions in New York moved stocks wildly on Tuesday, with the Dow Jones closing up 567 points, or 2.3%, at 24,912.

The increase came on a day when stocks moved by more than 1,100 points. At its lowest, early in the trading day, the Dow was down 567 points.

Related: Stocks tumble as concerns grow over febrile global markets

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If we gave everyone a decent standard of living, could we sustain it?

Could we meet the needs of everyone on the planet without stripping the Earth of all its resources? A paper in this week’s Nature Sustainability says: kind of.

It should be possible to meet the basic physical needs of everyone on the planet without using up physical resources too quickly. But it wouldn’t be possible to extend a first-world standard of living to everyone without needing “a level of resource use that is two-six times the sustainable level,” researcher Daniel O’Neill and his colleagues report. Only a drastic improvement in efficiency would allow the planet to manage this higher standard of living.

O’Neill and his colleagues looked at the resources that humans use a lot of and that are critical for the planet’s health: things like fresh water, carbon dioxide, nitrogen, and phosphorus. Exceeding the “planetary boundaries” of these resources risks global environmental stability—and we’re not doing well on that front.

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House Republicans to scrutinize narrow, ‘extender’ tax breaks

WASHINGTON (Reuters) – Some short-term U.S. tax policies meant mainly to help narrow business interests could be done away with, under plans disclosed on Tuesday by House of Representatives Republicans.

Blackout hits parts of Venezuelan capital

CARACAS (Reuters) – A power outage hit parts of the Venezuelan capital, Caracas, on Tuesday, according to witnesses and subway authorities, forcing at least 10 subway stations to close while traffic signals and phone lines were also down at rush-hour.

Uber Says Hacker In Canada Was Behind Massive 2016 Breach

The building that houses the headquarters of Uber in San Francisco are shown on June 21, 2017. Uber says a hacker working from Canada was one of two people involved in stealing data connected to 57 million of the ride-hailing company's users in 2016.

TORONTO — Uber says a hacker working from Canada was one of two people involved in stealing data connected to 57 million of the ride-hailing company’s users in 2016.

The company says the hacker’s partner in Florida was the one who actually obtained the data.

The information from the hack included names, email addresses and mobile phone numbers.

The revelations are part of a statement the company’s chief security officer made to a U.S. subcommittee handling consumer protection and data security.

News of the breach was met with criticism after the company admitted it paid the hackers $100,000 to destroy the stolen information.

It triggered the firing of the company’s chief and deputy security officers and a formal investigation from the federal privacy commission.

Previously On HuffPost:

Uber: We had “no justification” for covering up data breach

Uber’s top security official testified at Capitol Hill on Tuesday, saying that Uber had “no justification” for not coming clean sooner when it had been hit by a massive data breach in 2016.

In written testimony, John Flynn, Uber’s chief information security officer, told a Senate committee that “it was wrong not to disclose the breach earlier.”

Flynn and representatives from security firms appeared as part of a hearing before the Senate Subcommittee on Consumer Protection, Product Safety, Insurance, and Data Security.

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