Andrew Moffs’ Top Picks for March 31, 2025

Andrew Moffs, senior vice president and portfolio manager at Vision Capital

FOCUS: real estate stocks

Top picks: First Capital REIT, Boardwalk REIT, Sun Communities

MARKET OUTLOOK:

To date, the commencement of U.S. President Donald Trump’s second term in office has challenged investor confidence, punctuated by a flurry of executive orders that may reshape geopolitical relationships and the pillars of interdependent global trade. While policymakers in the White House have reiterated objectives of devaluing the U.S. dollar in a bid to erase trade deficits and lowering the U.S. 10-year Treasury bond yield to stimulate the private sector, the techniques applied by the administration risk eroding economic growth while contending with above-trend inflation.

Amidst uncertainty, markets have responded by rebalancing portfolios away from risk assets to insulate against a slowdown, illustrated by the March 2025 BofA Fund Manager Survey reporting the largest monthly drop in U.S. equity exposure ever, and the largest corresponding rotation to cash since March 2020. The evolving landscape appears to be supportive of publicly traded real estate securities when viewed in totality. The bond market’s new adage, “don’t fight the Treasury” points to yields continuing to trend lower, just as property fundamentals are stabilizing and transaction volumes begin to recover, enabling price discovery and investor confidence to deploy capital.

Real estate investment trusts (REITs) have traditionally been viewed as a defensive asset class, benefiting from greater earnings visibility due to contractual operating leases, resulting in predictable cash flows that are distributed to unitholders as a source of income. Through 2024, 76 U.S.-listed REITs (48 per cent of the investable universe) and 14 Canadian-listed REITs (30 per cent of the investable universe) increased their dividends, evidence of resilient operating models.

Any sustained weakness in corporate earnings may attract capital flows to the REIT sector, seeking to benefit from:

1. Stronger operating margins (greater than 40 per cent funds from operations (FFO) margin versus 14 per cent S&P 500 Index earnings per share margin)

2. Higher relative dividend yields to the S&P 500

3. Trading at an attractive valuation (FFO/per share multiple trading at a 20 per cent discount to the S&P 500 earnings/per share multiple, versus a historic premium)

• Market-moving news, fast: Get the BNN Bloomberg App now
• Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe

TOP PICKS:

First Capital REIT (FCR.UN TSX)

First Capital REIT owns or manages over 22 million square feet of grocery anchored, necessity-based retail real estate in Canada’s urban centres, with approximately half of its portfolio located in Toronto. The REIT also has 23 million square feet of potential future development, incremental to the existing retail base. Vision believes this is the highest quality and best-located grocery store-anchored portfolio globally. Fourth-quarter 2024 results demonstrated the resilience of its operating portfolio, with same-property net operating income (NOI) increasing by 3.4 per cent and occupancy rising to 97 per cent. Lease renewal spreads remained strong at 12.7 per cent, paving the way for sustained NOI growth in the years ahead. The REIT made significant progress on its three-year strategic plan, completing over $700 million in property sales out of its $1 billion target (at average cap rates below three per cent), while continuing to identify additional disposition opportunities. The plan also targets over three per cent average annual growth in both same property NOI and FFO per unit, while reducing leverage. Having already achieved significant progress in its density monetization goal, First Capital is enhancing its balance sheet capacity by deleveraging on an accretive basis, while further unlocking earnings potential through rezoning and development initiatives. Despite this progress, First Capital’s units trade at a 25 per cent discount to its most recent international financial reporting standards (IFRS) valuation. With robust fundamentals, strong growth prospects, and a prime urban property portfolio, Vision anticipates continued outperformance.

Boardwalk REIT (BEI.UN TSX)

Boardwalk Real Estate Investment Trust, the second largest publicly traded apartment REIT in Canada by market capitalization, owned, as of the end of the fourth quarter of 2024, over 34,000 suites across Canada, with nearly two-thirds these units in the province of Alberta. Vision is constructive on units of the REIT primarily due to two reasons. First, demand for housing in its core Alberta market, which generates 64 per cent of its stabilized NOI, remain strong relative to other provinces and territories. This is due to the greater level of affordability in the Alberta rental market, relative to other regions in Canada, and has been a contributing factor of demand, stemming from high levels of both international and interprovincial migration to this province. In fact, Alberta’s population increased 3.5 per cent year-over-year in 2024, the highest annual growth rate of any province or territory and nearly double the national growth rate of 1.8 per cent. Second, Boardwalk benefits from having significant exposure to Alberta and Saskatchewan, both of which do not have rent controls. In fact, 75 per cent of Boardwalk’s stabilized NOI is generated from these two provinces. This advantageous position allows the REIT to increase rents more dynamically, bringing them closer to market rents upon lease expiration. In contrast, other Canadian provinces with rent controls often face limitations, constraining increases in rents to levels that may be at or below inflationary increases in expenses. Despite these factors, units of the REIT trade at a compelling 20 per cent discount to its underlying net asset value (“NAV”).

Sun Communities (SUI NYSE)

Sun Communities Inc. (“Sun” or the “REIT”) owns and operates approximately 97,000 North American manufactured housing sites, 57,000 North American recreational vehicle sites, 49,000 marina wet slips and dry storage spaces, and 53 U.K. holiday parks containing approximately 22,000 sites, as of the end of 2024. The REIT focuses on high-quality properties that tend to be clustered in popular coastal and vacation destinations. Its largest markets are Florida, Michigan, the U.K., California, and Texas. The manufactured housing communities sector has several uniquely positive characteristics, namely that its resilient demand and high barriers to entry have resulted in the publicly listed U.S. sector, on average, never having a negative year of same-property net operating income growth. The sector also benefits from lower capital expenditures relative to other asset classes as it is largely a land lease business. Sun’s shares are, in Vision’s view, an attractive investment opportunity. Not only are they trading at a discount to Vision’s NAV of eight per cent, but this level is significantly below the historical average premium of 24 per cent to NAV that the shares have traded at from the beginning of 2011 until the end of 2021. Vision believes this recent discount has persisted due to the complexity of its operations as the REIT expanded its business segments into marinas and U.K. holiday parks over the past few years. Recently, however, management has taken steps to simplify its structure, most notably with the announcement, in February 2025, that Sun will be selling its marina business to affiliates of Blackstone Infrastructure for an all-cash purchase price of US$5.65 billion and, importantly, represents an estimated book gain of approximately US$1.3 billion from the REIT’s approximately four-year ownership of this segment. Upon closing of this transaction, approximately 90 per cent of Sun’s net operating income will be derived from its North American MH and RV portfolio, with the remaining 10 per cent attributable to its U.K. holiday park segment. Despite the REIT’s shares narrowing their discount to NAV upon news of this transaction, Vision believes Sun’s shares are still attractively valued. To this point, Vision believes the REIT’s share price reflects nearly no value for its U.K. assets, while the remainder of its portfolio is expected to produce strong year-over year same property NOI growth in 2025 of 4.3 per cent to 5.6 per cent.

PAST PICKS: March 27, 2024

Dream Industrial REIT (DIR.UN TSX)

• Then: $13.12
• Now: $11.34
• Return: -14%
• Total Return: -8%

Chartwell Retirement Residences (CSH.UN TSX)

• Then: $12.35
• Now: $16.70
• Return: 35%
• Total Return: 40%

First Industrial Realty Trust (FR NYSE)

• Then: US$52.07
• Now: US$53.76
• Return: 3%
• Total Return: 6%

Total Return Average: 13%