Joshua Varghese’s Top Picks for October 8, 2024

Joshua Varghese, real estate, Capital Markets Advisor, Trez Capital

FOCUS: Real estate stocks

Top Picks: Storagevault, Blackstone, Equinix

MARKET OUTLOOK:

Real estate has had a tumultuous recent history, with U.S. real estate investment trusts (REITs) underperforming the S&P 500 Index in four out of the past five years. Problems compounded over the past several years, beginning with COVID-19 shutting down the world economy. While this impacted all REITs initially, the markets began to separate which REITs would structurally enable, or benefit from COVID-19-accelerated societal and technological changes (e.g. data centres) from the ones who stood to lose out (e.g. offices).

REITs in aggregate had quite a broad rebound in 2021 which was abruptly halted in 2022 when global inflation started to spike, kicking off a central bank tightening cycle that caused government bond yields to increase dramatically. This caused paralyzing finance costs for real estate buyers that resulted in slowing transaction volume in private real estate markets. Public REITs on the other hand, which offer much more liquidity and immediate price transparency, reflected these challenges vis-a-vis stock prices that declined over 20 per cent in 2022 followed by very muted growth in 2023.

Compounding these challenges were cyclical slowdowns in some real estate markets due to less favourable supply/demand dynamics (e.g. industrial, U.S. apartments). Now it seems we are coming out the other side of the interest rate headwind, with North American central banks embarking on an easing cycle that has been bringing the cost of capital down. This will offer some opportunities in certain REITs, and head-fakes in others that still may grapple with structural or cyclical challenges.

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TOP PICKS:

Storagevault (SVI TSX)

Storagevault is a real estate company characterized by a strong and well-aligned management team, a unique asset class within the Canadian real estate sector, and a track record of value creation. It is the largest publicly traded owner of storage facilities in Canada, owning over 12 million square feet of storage space. After several years of double-digit net operating income growth, it has seen slowing fundamentals due to a weaker residential property market (with a resulting decrease in demand for storage space), causing the stock price to come down 33 per cent from its high in 2022. This represents a compelling entry point for an investor to get exposure to a potential recovery in residential markets as interest rates decline and invest at a good price with a well-proven management team that knows how to create value for unitholders.

Blackstone (BX NYSE)

Bain & Co estimates that private markets as an asset class are going to continue to grow, almost tripling to $65 trillion by 2032, continuing to take asignificant share in the active asset management industry away from traditional public stock money managers. The growth in private markets is expected to be led by private equity, alternative credit, infrastructure and real estate. Blackstone is likely the best proxy to access this growth, as it is the world’s largest alternative asset manager with over $1 trillion in assets under management, with heavy exposure to all of the above relevant sub-asset classes. It has a track record of raising large amounts of capital, identifying global structural trends in alternative assets, making big bets, and being right. While the stock is certainly not cheap, investors get access to a capital-light business model, managed by some of the best in the business, with exposure to growth. With central banks now in an easing cycle, this should be a boon for private market opportunities and Blackstone should be a continued winner.

Equinix (EQIX NASD)

Equinix is one of the world’s largest digital infrastructure providers, specializing in building and operating data centers. These facilities host the IT infrastructure of a wide range of clients, from small businesses to large enterprises, offering space, power, and interconnection services. A significant portion of Equinix’s revenue is generated through colocation services, which involve leasing space for customers’ servers. Additionally, the company provides interconnection services that enable fast and secure private connections within its data centers. Thanks to its extensive network and the high switching costs for customers, Equinix enjoys a highly loyal customer base. With the structural growth in cloud computing, live streaming, and AI spending the megatrend for digitization continues and, the demand for computing power is expected to remain strong. This positions Equinix as a high-quality way to capitalize on the continued demand for data centers over the long term.