Analyst Corner – Utilities, Pipelines & REITs
Vice President, Equity Analyst,
CIBC Asset Management
“My name is Dominique Barker. I’m an analyst at CIBC Asset Management. I cover utilities, pipelines and real estate investment trusts.
The pipelines and utilities is, there’s approximately $230 billion dollars’ worth of equity market cap on the entire TSX, so that’s just what is publically traded. In addition to that, there are many private companies as well, and some of those are becoming public companies, such as Hydro One in Ontario for example.
The midstream is the sector that I cover, and that’s getting the gas pipeline ready, so processing the gas and it also includes for example the pipeline so getting it from the upstream to the downstream, so that’s called the midstream sector, so that includes pipelines. It includes companies such as Alta Gas, InterPipeline, Vereson, Keyera. They tend to protect themselves in terms of maintaining a monopoly position.
On the real estate side, real estate would involve for example office space, industrial real estate, retail real estate. The size of that industry is only about $80 billion dollars in publicly-traded equities but that segment is growing tremendously and not only in terms of market cap but also in the number of companies.
Ever since the REITs or the real estate investment trusts have become their own sector, that happened in September 2016, they’ve garnered a lot more institutional interest by investors because they’ve become their own asset class. I expect that to continue. There’s a lot of real estate that’s held in private hands, by pension funds for example and over time that will be a liquidity event for them in order to put that into the public markets.
It’s unusual that someone like me covers those two because one is kind of more financials and one kind of plays in the energy space but those two assets have a lot in common and pension funds have been attracted to both of those asset classes. They tend to be contracted cash flows. They tend to be inflation protected. Real assets such as pipelines and real estate, the value increases over time and so that’s why they tend to be a very attractive asset.
They do lend well to the way that we value companies, and we do discounted cash flows and we look at ten years, this is the perfect type of asset class because it doesn’t change that much, and so that’s why there tends to be some trading opportunities that either the stock overreacts on the downside or on the upside and so capturing that valuation is a little easier to do I think, in my sector, versus some of the other sectors.
What I would say is on the threat side would be interest rates, particularly on the real estate side. Both real estate and mid-stream companies tend to have a high level of debt and so to the extent that you’re refinancing debt at higher interest rates, that’s actually going to impact your operational cash flows. What I love about my job is really making money for clients – finding those gems that maybe are overlooked because of a bad quarter. I get a great deal of satisfaction when a thesis plays out and when the stock price actually increases, an investment idea that works, and that typically means making money for clients.”