A Q & A with CBRE Clarion’s
Jeremy Anagnos, CFA, Principal, Chief Investment Officer, Infrastructure and
James Crutcher, Senior Vice President, Senior Analyst, Europe
Covid-19 has impacted companies and consumers all over the world. What is its impact on Global Listed Infrastructure investments? Portfolio Managers Jeremy Anagnos and James Crutcher talk about how their strategy is weathering the storm by taking a long view.
How are the COVID-19 pandemic and associated economic developments impacting infrastructure investments?
The situation varies by sector, but the general answer is that there has been minimal impact. Most infrastructure companies are actually growing earnings and dividends—this is expected to continue into next year.
Let’s take a look at the four main sectors:
The Communications sector has seen a boost in usage as work-from-home policies increase demand for connectivity and data storage needs. As a result, wireless and broadband companies will likely increase their spending this year to improve their connectivity and fiber networks, which will benefit the communication asset owners.
The Utilities sector has been very resilient due to its regulatory profile. Utilities provide essential services and they play an incredibly important role in keeping the lights on, our homes heated and our ovens and refrigerators working. While there is some reduced commercial & industrial demand, higher margin residential consumption has increased during the pandemic and many companies are protected against demand declines through regulatory protection.
Within Transportation, airports have been very impacted by travel restrictions, and toll roads to a lesser extent. We have seen a number of airport operators suspend or cut dividends, due to either government requirements for taking state aid or to shore up balance sheets. Railroad traffic for freight has been less impacted overall, but will be sensitive to economic recovery.
Midstream Energy infrastructure companies have also been impacted. Oil exposed midstream companies are most at risk, while natural gas benefits from the long-term decarbonization theme as gas will remain a major cleaner power source in the U.S. and in emerging markets.
What are your short-term and long-term expectations for infrastructure investments?
Near term, we believe there is increased potential for well-capitalized private infrastructure investors to target the listed infrastructure companies as a source to deploy their capital. We would expect such activity to be supportive of listed infrastructure valuations. This activity was seen last year when there was a record USD 50bn of listed infrastructure companies privatized across the four key sectors. These privatizations occurred at more than 30% premiums to the unaffected stock prices. Private infrastructure investors have seen record inflows as allocations to the asset class continue to rise. However, the investment options are scarce due to the extreme difficulty in building new assets. As listed companies continue to trade at 20-30% discounts to private values and represent a significant source of assets, we expect more activity.
The long-term drivers of infrastructure assets are not impacted by the Coronavirus. The need to invest in aging assets for safety, reliability and efficiency purposes remains in place. Moreover, the global decarbonization of our energy sector will continue for the next decade driving investment in new renewable generation, transmission and grid modernization. Finally, the secular growth in data consumption and transmission is unaffected by these macro events and requires new communication infrastructure.
What do you look for when selecting infrastructure companies for the portfolio?
We seek companies that have strong risk-adjusted return outlooks backed by stable and predictable cash flows and dividends, with flexible balance sheets and management teams that have solid track records with their constituents – including regulators, customers, employees, creditors and shareholders. Infrastructure assets are essential, but their nature also makes them highly sensitive to the well-being of communities and individuals so companies that take care of their assets and invest for the long-term typically are outperformers.
CBRE invests in both listed and unlisted infrastructure – are there advantages to having a platform that invests in both?
CBRE Global Investors, the asset management arm of CBRE, is a USD 113bn real assets manager focused on real estate and infrastructure. Our infrastructure platform includes 30 investment professionals that manage over USD 8bn in listed and unlisted infrastructure. Our process is designed to incorporate the knowledge and information from our private market colleagues into our investment decisions.
Private investors are very active in the market and have raised significant amounts of capital. We believe that we have an advantage relative to our peers as we incorporate the private market views on regulation, fundamentals, transactions and valuations into our underwriting. We are able to gather additional information, particularly on the pricing dynamics and required returns, which gives us more insight into return potential and helps us identify risks.
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