(Runtime: 6 min, 05 sec; size: 4.18 MB)
Larry Antonatos, portfolio manager, Brookfield Asset Management.
Our process for valuing real asset investments is based on quality adjusted fair valuation. We believe the market will pay higher equity multiples and will accept lower fixed income yields for higher quality cash flows. Accordingly, we spend significant time assessing the quality of each listed real estate and infrastructure company, focusing on asset quality, balance sheet quality and management team quality.
Our goal is to identify companies that are trading at attractive valuations relative to their level of quality. We like quality, but we prefer to allocate capital away from companies that are high quality and expensive and into companies that may be of somewhat lesser quality but are significantly cheaper.
We also allocate capital between real asset sectors, real estate equities, infrastructure equities and real asset debt, which is the debt of real estate, infrastructure, and natural resource companies. Our asset allocation process is based on relative value between real asset sectors.
For real asset equities, we are focused on equity multiples and dividend yields and for real asset debt, we are focused on credit spreads. Currently we find infrastructure equities to be attractively valued, while real estate equities and real asset debt are fairly valued. Within infrastructure, we are 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 underinvestment and deferred maintenance by governments on these non-tolled infrastructure. Toll road cash flows can grow from both volume growth and pricing growth.
We also like energy infrastructure due to strong volume growth in North American energy production and attractive valuations. However, we acknowledge the high volatility of this space do to the derivative commodity price exposure. The continued attractive valuations are an example of a sector that has not performed as well as expected.
Within real estate, we like U.S. office generally, and within the office sector, we like technology focused U.S. office.
Since the financial crisis, U.S. office construction has been below the long term historical average and construction has slowed in the past year. Meanwhile, office employment continues to grow, particularly in technology-focused markets. Accordingly, in many markets, office vacancy rates are low and landlords have pricing power. Despite these strong fundamentals, office valuations are attractive.
We also like U.S. healthcare real estate, a sector which has experienced significant overbuilding over the past decade, and which has underperformed the broader U.S. read market. 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. Meanwhile, demand for U.S. healthcare real estate should benefit from demographic tailwinds due to a growing population of age 80 plus.