Dennis Mitchell, chief executive officer and chief investment officer of Starlight Capital in Toronto.The Globe and Mail
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Real estate investor Dennis Mitchell has noticed the return of some familiar faces at the industry lunches and property tours he’s attended in recent months – generalist portfolio managers looking to add real estate assets to their portfolios.
“With interest rates poised to keep coming down and the odds of a recession looking pretty long, more and more investors will be allocating to real estate in the short term,” predicts Mr. Mitchell, chief executive officer and chief investment officer of Starlight Capital in Toronto, which oversees about $1-billion in assets.
Starlight Capital is known for investing in real estate and infrastructure assets through a handful of funds, and it expanded into diversified equities with its acquisition of Stone Investment Group Ltd. in 2022.
Mr. Mitchell says the company seeks to buy strong businesses that generate strong, recurring free cash flow from a portfolio of “irreplaceable assets run by management teams that behave like owners and treat us like partners.”
With interest rates falling and demand outpacing supply, he believes now is a good time to buy real estate assets, specifically subsectors such as residential, multi-family and industrial.
The firm’s Starlight Global Real Estate Fund, which Mr. Mitchell oversees, is up 7.6 per cent year to date and has seen an annualized return of 3 per cent since its inception in October, 2018. It also has a 6.8-per-cent annual yield paid to investors monthly. The performance is based on total returns, net of fees, for the firm’s Series F funds as of July 31.
The Globe spoke with Mr. Mitchell about three REITs he likes and one stock he recently sold:
Name three REITs you like and have been buying.
Granite Real Estate Investment Trust GRT-UN-T is an industrial REIT involved in logistics, warehouse and industrial properties in North America and Europe. Most of its assets are logistics and distribution warehouses, and its revenue is mostly from rental income from its properties. Several factors are driving the demand for industrial real estate. There’s e-commerce demand – particularly the rise of same-day or next-day delivery options that require industrial assets near major transportation hubs and major population centers, which Granite has. The REIT also benefits from the rise in the number of people entering the middle class in developing countries, leading to more demand for industrial development in these nations.
The REIT also has an attractive valuation right now. It’s trading at around $73, and our model says it’s worth $91. It also has a 4.7-per-cent distribution yield. We’ve owned the REIT for most of the six years our real estate fund has been available.
Interrent Real Estate Investment Trust IIP-UN-T provides multi-residential properties across Canada. The REIT is benefiting from a shortage of residential units. We also like its strategy of buying older assets and investing capital in them to make improvements so that it can charge more to tenants for higher-quality homes.
The REIT is currently trading at about $12, and our model says it’s worth $17. It has a 60-per-cent loan value, [the ratio of a loan to the value of an asset purchased], which sounds high. However, as a residential REIT, it can borrow money insured by the CMHC [Canada Mortgage and Housing Corporation]. That means the REIT can carry higher debt levels at lower interest rates and still have sustainable cash-flow growth. Its current distribution yield is 3.1 per cent. However, its five-year distribution growth rate has averaged 5.6 per cent a year. We’ve owned this REIT for six years and are looking to add more at its current valuation.
Riocan Real Estate Investment Trust REI-UN-T is another REIT we’ve been adding to recently. Riocan owns and operates mixed-use retail properties across Canada. What we like about Riocan is that the majority of its portfolio is focused in the largest cities across Canada, including Toronto, Montreal, Ottawa, Edmonton, Calgary and Vancouver, and more and more of its tenants are providing the necessities of daily life from grocery stores, drug stores, banks and coffee shops. RioCan has begun to develop residential assets on its existing retail properties – an asset class in strong demand and undersupplied right now.
RioCan is trading around $18, and our model says it’s worth $20.25. It also has an attractive 6.4-per-cent distribution yield.
Name one stock you recently sold.
Invitation Homes Inc. INVH-N, a developer, owner and manager of single-family homes in the U.S., is a stock we’ve sold recently. We like this name quite a bit. We like the sector because it’s undersupplied and in tremendous demand. We did well with the stock but felt it was fairly priced. We bought most of our shares in 2020 and 2021 at an average price of US$31 each. The bulk of our selling was last year and this year at an average price of US$33.70. The stock is currently trading at around US$35. We’re waiting for it to trade down a little bit more, and then we can look at starting to re-establish another position.
This interview has been edited and condensed.
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