Dennis Mitchell of Starlight Capital.The Globe and Mail

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While money manager Dennis Mitchell does see an economic slowdown on the horizon, he doesn’t believe it will turn into a full-blown recession. The chief executive officer and chief investment officer of Starlight Capital in Toronto points to stronger-than-expected job growth in the U.S. and Canada and consumers still flush with cash saved up during the early years of the pandemic as key factors.

“Some people think that we’re in for a meaningful recession, which I don’t see just yet because the consumer has been extremely resilient,” says Mr. Mitchell, who oversees about $1-billion in assets.

Starlight, known for its real estate and infrastructure assets, expanded into diversified equities after acquiring Stone Investment Group Ltd. in July.

The firm’s Starlight Global Real Estate Fund was down 7.4 per cent for the year ended Jan. 31 and up 8.4 per cent in January of this year. The Starlight Global Infrastructure Fund was up 2.4 per cent for the year ended Jan. 31 and rose 3.5 per cent in January. The Stone Dividend Growth Fund was down 3.2 per cent for the year ended Jan. 31 and was up 4.7 per cent for the first month of this year. The performance data are based on total returns and net of fees for the firm’s Series F funds.

The Globe spoke with Mr. Mitchell recently about his investment strategy and what he’s been buying and selling:

Describe your investment strategy.

It’s simple: We try to buy great businesses when they offer us enough return for the risk we’re exposed to. We’re looking for businesses that generate strong, recurring free cash flow from a portfolio of irreplaceable assets capitalized with low leverage and run by management teams that behave like owners and treat us like partners. If you can find those four things, you’re generally dealing with a good business. The key is figuring out what that business is worth and being patient enough to wait until the market allows you to buy it for less.

What’s your outlook for the real estate and infrastructure sectors?

Real estate and infrastructure are essential services. In times of economic weakness, people will give up their Starbucks habit or wear three-year-old suits, but they’ll keep paying their rent. When it comes to investing, the earnings of real asset businesses don’t collapse; it’s their multiples. Last year, for example, real estate multiples fell by about 40 per cent, but their earnings were up 11 per cent. We don’t anticipate much of an impact on earnings in real estate or infrastructure this year. People believe higher interest rates impact real assets because they have higher debt, but most of that debt is long-term to match the duration of their leases. By the time your debt matures, your lease is up and rents will have increased, so there’s a natural matching.

When it comes to diversified equities, there’s an advantage to owning businesses that have demonstrated their ability to grow cash flows and dividends over long periods. An example is the Canadian banks that consistently drive strong returns on equity and have been consistent dividend growers. Another example is Cargojet Inc. CJT-T, which controls more than 80 per cent of overnight cargo delivery in this country at a time when e-commerce continues to grow. These are examples of companies that can protect our portfolios in an economic downturn.

What segments of the real estate sector do you favour right now?

We own real estate investment trusts, allocating capital to parts of the sector that we believe will protect our investors from an economic downturn. Some examples include Vici Properties Inc. VICI-N, specializing in properties that are “triple-net lease” [in which the tenant pays all expenses]; Killam Apartment Real Estate Investment Trust KMP-UN-T, which invests in apartments and manufactured housing communities; and logistics real estate investor Prologis Inc. PLD-N.

We look for segments with significant demand that aren’t being met by material increases in supply. That generally leads to rising rents, rising occupancies and rising cash flows. We see that most with residential and industrial real estate right now. Both are seeing significant growth in demand and, as a result, significant rent growth and cash flow growth.

The fundamentals for residential real estate in this country continue to be very robust, driven by demographics and immigration. With industrial real estate, we see continued demand for data centres and cell towers that’s unlikely to change anytime soon. We’ve also been allocating more capital to the health care sector as demand for medical procedures grows, driven in part by the backlog from the early days of the pandemic.

What segments of the real estate sector are you staying away from?

Retail has been out of favour, but that can be broken down into a couple of groups. There are necessity retailers such as grocery stores or drugstores that are more resilient, and we would expect that to be the case going forward. Retailers that cater more toward apparel and electronics – mainly those in enclosed malls – have been weaker, and we would expect that to continue. I also think we’re still far from the bottom or stabilization in the office market. More organizations are looking for reasons to take less space. There are some outliers; for instance, wealth management is a growing business, and the pandemic has unleashed a torrent of entrepreneurialism, so there are smaller businesses opening up. You need to know where to allocate capital.

What’s your advice for new investors?

Pick companies that you come into contact with regularly. That’s invaluable to understanding these businesses and whether or not there’s accelerating or declining demand.

This interview has been edited and condensed.

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