How to evaluate real assets

A focus on asset, balance sheet and management team quality is a must when it comes to assessing real estate and infrastructure companies, says Larry Antonatos, managing director and portfolio manager with Brookfield Asset Management’s Public Securities Group in Chicago.

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His team evaluates real asset investments based on quality-adjusted fair valuation.

“We believe the market will pay higher equity multiples and accept lower income yields for higher-quality cash flows,” said Antonatos in an April 15 interview. “Our goal is to identify companies trading at attractive valuations relative to their level of quality.”

And while he likes quality, he prefers “to allocate capital away from companies that are high quality and expensive, and into companies that may be of somewhat lesser quality, but significantly cheaper.”

His team allocates capital between real estate and infrastructure, as well as real asset debt, which is the debt of real estate, infrastructure and natural resource companies.

“For real asset equities, we are focused on equity multiples and dividend yields. And for real asset debt, we are focused on credit spreads,” said Antonatos, whose firm manages the Renaissance Real Assets Private Pool.

So where is he currently finding value? In infrastructure equities, U.S. office space, and U.S. healthcare real estate.

Infrastructure

Within infrastructure, Antonatos said he’s positive on global toll roads.

“Toll roads provide a higher-quality and faster alternative to crowded conditions on non-tolled infrastructure due to the many years of under-investment and deferred maintenance by governments on non-tolled infrastructure,” he said. “Toll-road cash flows can grow from both volume growth and pricing growth.”

He also likes energy infrastructure, due to attractive valuations and strong volume growth in North American energy production.

However, he warned there is high volatility in this space “due to the derivative commodity price exposure. The continued attractive valuations are an example of a sector that has not performed as well as expected.”

U.S. office space

Looking to real estate, Antonatos likes U.S. office space, specifically when it’s tech companies that are leasing the space because the companies are growing and creating demand.

“Office employment continues to grow, particularly in technology-focused markets,” he said.

Further, he said U.S. office construction has been below the long-term historical average. And with low office vacancy rates, landlords have pricing power.

In Q1 2019, the U.S. office vacancy rate declined 14.7%, while asking rents increased by 0.8%, according to JLL Research.

These strong fundamentals, he added, make office valuations attractive.

U.S. healthcare real estate

Another sector to watch is real estate for U.S. healthcare companies.

“[It’s a] sector that has experienced significant over-building over the past decade, and which has underperformed the broader U.S. REIT market,” said Antonatos. “New supply has pressured occupancy and rent growth, but we believe we are approaching an inflection point as new starts have fallen significantly since peaking in 2015.”

Further, he added, “demand for U.S. healthcare real estate should benefit from demographic tailwinds due to a growing population of age 80-plus.”

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