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Canada’s immigration plan boosts telcos, REITs

Canada’s ambitious plan to admit 500,000 immigrants a year over the next three years offers opportunities for investors, as these newcomers buy basic goods and services from their first day in the country.

Ottawa’s strategy is an effort to meet the twin challenges of labour shortages and an aging population in order to keep the economy growing. This year the target is 465,000 immigrants of whom 60% are expected to be skilled workers. Another 25% are reuniting with families already here and the remaining 15% are refugees. 

So, where are the opportunities? The first thing a newcomer wants after landing is a cellphone, along with a phone plan and an internet connection. They can stay in touch with friends and family, look for work and get access to relatively inexpensive forms of entertainment.  As important as a phone is a place to live, which for most people is the rental market.

The trend favours BCE Inc. (TSX: BCE), Canada’s largest and most diversified telecom company. Other big telecoms that stand to benefit are Telus Corp. (TSX: T), the second largest wireless telecom company, and Rogers Communications Inc (TSX: RCI.B). All three recently reported year-end results.

Telus Mobile revenue grew 6.5% year-over-year in 2022, and it added 401,000 new customers. During a conference call, Zainul Mawji president of consumer solutions at Telus, acknowledged immigration as a factor in the good performance of its mobile unit.

BCE CEO Mirko Bibic likewise pointed to immigration, which is combining with the payoff from capital investment upgrades that are enabling 5G networks (5G customers tend to spend more). In 2022, BCE’s mobile phone net activations rose 66% to 490,000 from the year before.

Rental accommodation is already in short supply and the additional pressure of newcomers is an energizer for real estate investment trusts (REITs) involved in this area. The Canada Mortgage and Housing Corp. highlighted the squeeze in a recent annual report, noting that Canada’s apartment vacancy rate has dropped to its lowest level in more than two decades. Not surprisingly, there is particular stress in Toronto and Vancouver.

For REITs, this means rents are rising and the underlying properties are becoming more valuable because of inflation and high replacement costs.

Canadian Apartment Properties REIT (TSX: CAR.UN), Boardwalk REIT (TSX: BEI.UN), and InterRent REIT (TSX: IIP.UN) stand to benefit. 

Veritas Research Corp. in Toronto noted in a recent report that Boardwalk reported robust fourth quarter results with free funds from operations (FFO) up 7% year-over year. Its net operating income was up 11%, driven by a decline in vacancy rates, lower tenant incentives, and higher rents.

Veritas believes Boardwalk is uniquely positioned to offset cost inflation through rental hikes since 75% of its properties are located in Alberta and Saskatchewan. Neither province has rent controls. 

In related research, RBC Capital Markets analysts point out that migration to Alberta added 50,000 residents in the third quarter of 2022, which was a record. Yet as of December 2022, new rental and condo units under construction was far less, at 13,000 and 7,000 respectively.

Andrew Moffs, a senior vice-president and portfolio manager at Toronto-based Vision Capital Corp., a REIT specialist, said in a recent interview that Boardwalk is the top holding of Vision’s Alternative Income Fund, an opened real estate mutual fund.

He also likes Ottawa-based InterRent, whose 12,000 apartments are concentrated in major centres in Ontario. InterRent’s strategy is to buy poorly managed properties in strategic locations, gradually upgrade the units, and increase rents. Here, Veritas Research is less enthusiastic, seeing high interest rates raising InterRent’s cost of borrowing with less room for rent increases given its concentration of holdings in rent-controlled Ontario.  

Canadian Apartment Properties REIT, known as CAPREIT, is one of Canada’s largest landlords. It owns apartments, townhomes, and manufactured home communities with properties primarily located in and near major urban centres.

Vision Capital portfolio manager Andrew Moffs sees growth ahead for REITs that own multi-family housing. Credit: Supplied photo

Another REIT of interest is Killam Apartment REIT (TSX: KMP.UN) which has a $4.8 billion portfolio, mostly in Atlantic Canada. Both Mr. Moffs and Veritas see it as poised for growth based on migration to those provinces, which do not have rent controls.

There does not seem to be any easy solution to the problem of rental demand exceeding supply. A recent report led the GTA-based Building and Land Development Association (BILD) says immigration will continue to be the main driver of population growth for Canada’s largest urban region.

It notes that in 2022 net new permanent residents to the GTA reached a record high of 154,000. This was in addition to 64,000 foreign students and temporary workers who came to the area.

Canada’s immigration goals are adding intellectual capital and the resources needed for economic expansion. While they are a long term tailwind for the economy, they offer an early advantage to the telecom and housing sector. 

Another area that stands to benefit is banking, where all players are wooing new Canadians with incentives.

It is another reason to view companies in these sectors as core holdings. They are recession-resistant, though not recession-proof. They offer safety in a weak economy and will grow as the population increases.

In the meantime, BCE and Telus pay high dividends with the former yielding 6.3% at current prices and the latter 5.1% Their payouts are rising on a regular basis. The REITs offer yields in the 2-4% range, while the yields for the big banks are between 4% and 6%.

This article appeared in the Internet Wealth Builder on Apr. 3, 2023.  For information on how to reprint this article please view this page.

Adam Mayers writes about investing and personal finance. He is a contributor to the Globe & Mail’s Globe Advisor and a contributing editor to Gordon Pape's Internet Wealth Builder newsletter. Adam was Business Editor and investment columnist at The Toronto Star and is the author of six books.

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