Diversify with Alternative Real Estate

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<b>Subtitles are AI Generated</b>

 

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Hello and welcome to Fidelity Connects.

 

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I'm Rory Poole. If the last few years have taught real estate investors

 

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anything, it's that markets don't move in straight lines.

 

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The challenges have been significant at times, but so have been the

 

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opportunities created by the reset we're seeing in various pockets of the asset

 

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class. Today we'll cut through the headlines, talk about what's really

 

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happening in real estate and discuss where investors may be finding value

 

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today. Here to discuss his take on the fundamentals,

 

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evolving market dynamics, and the Fidelity Alternative Real Estate Trust is

 

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portfolio manager, Don Newman.

 

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Don, welcome to the show.

 

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Thanks, Roy. As I mentioned in my intro, real estate has

 

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been known to many for a long period of time as a relatively cyclical

 

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asset class. So maybe where we start is, what are

 

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some of the key changes that you've witnessed as a real estate investor over

 

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the course of the past five years that define where we today

 

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relative to that.

 

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Yeah, so I would start off as saying, I think we're sort of broadly in a

 

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probably in a better place than we were five years ago.

 

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If we think about sort of where we started 2021

 

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ish, you look at it like US tenure was like

 

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a percent and a half.

 

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The real estate market had to go through a period of adjustment where interest

 

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rates, and this is an interest rates sensitive sector where companies do use

 

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leverage, But interest rates went from one and a half all the way up to close

 

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to five. We had a tripling of interest rates, and that obviously is gonna put

 

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pressure on some valuations.

 

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At the same time, you did start five years ago with a

 

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period, for a long period before that, with very, very low interest rates.

 

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And that allowed... A lot of financing, a lot a cheap money,

 

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and a lot of sort of building construction of real estate, because

 

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you could do it and the costs were, the financing costs were very cheap.

 

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So you had a combination of, which we sort of have now thankfully mostly

 

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worked through, interest rates, putting pressure on the sector as

 

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they rose or tripled, which just won't happen again.

 

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And a lot supply coming online, which now where interest rates are

 

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higher, financing a little bit tighter.

 

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That supply has been working its way down and supply and demand fundamentals

 

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for a lot of the different sectors in commercial real estate actually looked a

 

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lot stronger and has started to inflect and that's really shown

 

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up in asset returns for the real estate class this

 

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year.

 

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So a bit of a reset.

 

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Yeah, we've gone through the reset and I think now we're

 

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sort of in a position where supply and demand starts to look better.

 

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We have interest rates that are higher, but they're not going to triple again.

 

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And that's the position where once you get supply and

 

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demand moving in the right direction, you got relatively stable interest rates.

 

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You can go back to fundamentals and you can start getting price appreciation

 

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in the asset class.

 

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I will use the trough word, but you know, wink, wink nudge, nudge.

 

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Hopefully we're looking forward as opposed to looking back.

 

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Yeah, and I think the market has started to reflect that.

 

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That's great.

 

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With the exception of data centres, you and I have chatted about this in the

 

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past.

 

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Real estate, generally speaking, is not necessarily

 

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as encumbered or impacted by the overwhelming

 

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dominant narrative in the market these days, which is obviously AI.

 

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Talk to me a little bit about what are some of the positive signs that you're

 

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seen, that maybe some investors out there may...

 

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Not necessarily be noticed.

 

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Yeah, and I think this is a really important thing for investors to note,

 

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because there is a huge portion, especially the S&P 500, right

 

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now in a lot of the world industries that are driven by one overwhelming

 

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theme, which is artificial intelligence.

 

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And it impacts many, many companies.

 

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And there's a lot of companies that.

 

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Will they or will they not be disintermediated with this?

 

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With real estate, you're talking about hard assets.

 

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So it's real estate.

 

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You are going to need an apartment.

 

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You are gonna still be ordering things from Amazon.

 

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So you're gonna need logistics. You're gonna needs senior's care.

 

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You're going to needs healthcare facilities.

 

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There's a whole bunch of sectors out there that It's

 

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not like software where you're thinking, okay, well, is all the code going to

 

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be written and these companies aren't going to exist in five years.

 

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These companies are going to around for the next 20 years and it's a really

 

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nice place for investors to say, hey, I can diversify myself

 

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away from the broader narrative in

 

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the market, find some really good quality assets that are going be around a

 

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long and I don't necessarily have to look at worrying.

 

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What's, you know, how powerful is this going to get?

 

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And, you know, is my sector going to be around in the next little while?

 

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And sort of like the interesting things you're you're seeing that, you

 

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know, that I've even noted, just off the side is like, you know, I own

 

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a bunch of malls, and especially in the US.

 

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And, you know people are starting to we've talked about experiences and young

 

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people wanting to go back to experiences. Well, it's one thing to now go to a

 

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$500 our concert. But maybe you want to go to a movie and we've seen people

 

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who've actually started movie sales are out for the first time in years

 

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I went to the Odyssey recently, and I probably haven't been to a movie in

 

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close to a year.

 

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Yeah, Odyssey, Spider-Man, the numbers are like, these are some of the biggest

 

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movies of all time, and no one was supposed to go to theatres.

 

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People actually want to get off their phones and be social again, and

 

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instead of going to a concert that cost you $500, maybe you go to a movie.

 

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Maybe you go them all with friends.

 

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But it's sort of the experiences. You go on a trip, you go and you stay at a

 

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hotel or something like that, and that sector has been doing really well.

 

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So, there are things that are not AI and social

 

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media related that people are actually trying to do again that play

 

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really well into real estate.

 

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Yeah, no, I feel like the markets picked up on it a little bit.

 

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You know, I remember earlier this year, you know, the, the next best acronym

 

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came to markets being halo people talking about heavy assets,

 

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low obsolescence.

 

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Yeah.

 

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As we move forward and so, you know, it's interesting to hear

 

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that not only, you know, within the stock market but also on

 

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the ground, you're noticing some changes as an investor.

 

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Let's talk a little bit about those data centres though, because I mean,

 

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those have been the focal point within real estate for the last little while

 

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for a variety of different reasons.

 

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Obviously that ties more so into the AI theme.

 

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It ties into a lot of this, you know, hyperscaler spending that's

 

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been occurring. And it's been a hotspot, you now, as a

 

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subsector, if you will, within the asset class.

 

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Robust demand, no doubt, but.

 

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Relatively speaking, you know, higher valuation.

 

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What are some of the kind of risks that you're seeing within this space or is

 

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it an area that you are still pretty bold? Yeah.

 

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Yeah, so it's actually been, I do own, I have some data centre exposure in

 

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the public section of the fund.

 

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There's not too many of them left actually, but they've done really well this

 

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year. Their pre-returns, you know, like 25 to 30 percent total returns, which

 

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has been absolutely great.

 

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They're benefiting from the ability to, they've already got existing data

 

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centres. So they were benefiting from the ability.

 

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To re-contract higher, demand is insatiable

 

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for the sector, been a really good place to be.

 

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I think the thing to watch for data centres is just

 

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going to be the ability to contract, the ability, to permit

 

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and build going forward for that sector.

 

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This is going to have impacts across

 

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supply chains and across the markets.

 

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You've recently seen, as recently as last couple weeks.

 

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You had Governor Abbott in Texas has slowed down

 

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the permitting of data centres.

 

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We saw last week actually Governor Shapiro in Pennsylvania and said, okay,

 

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we're going to pull back and just take a little time and actually analyse

 

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how much we can do.

 

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The demand, the capital is there. The question is, for all

 

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these states, is, okay.

 

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How much can we actually draw off our grid?

 

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How is that gonna impact the power costs to the

 

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average person? Can we actually supply all the power that's needed?

 

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And then number two, what are the environmental impacts of this, whether it be

 

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sort of noise or water use?

 

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We need to step back because there's more demand than there is possibly supply

 

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of power and.

 

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Does it make sense? That will have broader implications for

 

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sort of a lot of the tech sector.

 

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For the specific data centres that already have capacity,

 

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that have already built all this stuff out, it's actually a good thing, because

 

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they're gonna be able to, the demand for existing capacity is going to be

 

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driven higher, and their ability to re-contract at higher prices

 

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and push pricing for existing opacity should do well.

 

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There is certainly a question about how much can be built and.

 

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How much time it's going to need to actually build some of these things

 

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outside of the like the insatiable capital that's available right

 

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now?

 

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Yeah, I mean this is part of the whole Rubik's Cube that I think investors

 

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in the space are trying to solve where it's like there's a lack of certainty

 

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around the future and profitability as

 

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it relates to the real estate assets themselves or the company.

 

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Yeah, so you want to find for the assets, you don't necessarily

 

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want to be want to be looking at well located things that are they're

 

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not just AI, they're just centrally located for businesses that are that

 

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are using the data centres.

 

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You don't necessary want a data centre out in the middle of nowhere that is

 

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contracted for 15 years for a business that is negative

 

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cash flow and is being financed and may not, if

 

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that one particular client goes away, that dentist centre is completely

 

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obsolete. So it does matter your location, who you're contracted to,

 

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what the financial position of that person or the company you're

 

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contracting to, and what sort of the terms of that contract

 

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look like.

 

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Yeah, Real Estate 101. Yes. Know your tenants.

 

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Know your tenants. Have good tenants.

 

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Okay, let's talk a little bit about the funds.

 

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So Fidelity Alternative Real Estate Trust, a strategy that you have now managed

 

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for Fidelity and Canadian investors for the better part of about a year and a

 

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half. We launched it in March of last year.

 

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This is a different type of product.

 

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Obviously, for accredited investors, it's kind of a hybrid fund in terms that

 

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it invests both in private real estate as well as public real estate.

 

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You do the asset allocation on the top fund.

 

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Brookfield is there to help out with the asset acquisition with respect

 

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to the private portfolio. Then you do the security selection and the public

 

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portfolio. Let's first start with like, what does the fund look like as we're

 

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moving into the fall?

 

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Sure. First of all, the fund has been really

 

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good because it's done exactly what it's supposed to do.

 

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It's provided good stable returns.

 

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I think year to date, we're up somewhere around 12% as of July.

 

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We've put, Brookfield has done a great job, has put about a billion dollars

 

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to work on private asset.

 

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Portfolio, really well-timed logistics acquisition

 

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or multi-hundred million dollar logistic assets purchase earlier

 

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this year. Logistics is now sort of turning up in Canada.

 

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Supply and demand has tightened up a little bit.

 

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So we've got a number of assets where on the

 

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private side, Brookfield has got a sort of

 

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a good weighting part of the largest part of portfolio is in Canadian

 

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logistics. As I mentioned, supply and demand is really improving there.

 

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I think you should start to see some nice rental growth, really well-located,

 

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well-purchased. We've got some apartments, really, really

 

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Well-locate apartments that serve irreplaceable.

 

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The apartment market is probably a little soft right now, but

 

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the location and the purchase price of the assets is great.

 

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That'll sort of just be steady state for a while and then...

 

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As the market recovers over the next couple of years, I look forward to

 

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some sort of improving returns there.

 

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We've brought some really good senior housing assets

 

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where supply and demand is tight.

 

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That's a great asset class right now.

 

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And we've got some student housing assets.

 

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So you put it all together, it's a really nice sort of private portfolio,

 

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should sort of offset inflation, nice rent escalators, really well

 

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located assets.

 

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That should allow us to

 

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sort of beat inflation over time, and the portfolio is 98% occupied.

 

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So it's in demand and sort of well-located

 

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good assets.

 

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On the public side, we've had really good returns.

 

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And it's been really nice to see sort of across the

 

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asset classes, and we can get into that if you want.

 

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But the combination that you mentioned of data centres,

 

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malls, sort of strip malls.

 

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Healthcare has been a great asset class.

 

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It's been sort of recognised as a little bit of an anti-AI

 

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trade, but also supply and demand in the commercial sector has

 

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actually really picked up, especially in the US.

 

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And so if you're a Canadian, just sitting there...

 

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Thinking, oh, geez, the housing market isn't good.

 

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Real estate is not a great market.

 

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Couldn't be anything but different.

 

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You just have to look in different sectors.

 

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Yeah and I don't know you can correct me if I'm wrong but there's rarely times

 

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when we're in a bull market like we're right now where if you look over the

 

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course of the past year, at least in the US, you know, REITs and

 

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the S&P 500 have been pretty close to par in terms of total return.

 

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Maybe slightly below but I mean I think it's a good thing to see and speaks to

 

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what we're talking about. You know at the beginning of our conversation with

 

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respect to the fact that you know, there's been a big pick up within the space

 

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More recently. I want to ask you one more question about the strategy

 

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particularly as it relates to your portion of the portfolio So the the

 

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liquid REIT side of things, you know you mentioned the

 

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composition at a high level What do you think have been some of the key

 

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drivers of return over the course of the past year or so?

 

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And in particular, layer in your approach towards that.

 

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So is it discount to NAB that you're looking for?

 

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Is it the potential for a significant cap rate compression,

 

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good management, a combination of all these things.

 

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Yeah, no, I think you lay down a lot of the things we're looking for.

 

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So number one is just like I run the dividend fund here.

 

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It's very similar to sort of dividend investing.

 

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It's just sort of real estate is fundamentals improving.

 

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So, in real estate, it's just supply and demand.

 

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Are we gonna see sort of rental growth is demand improving and

 

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supply supply going down? We get a pinch point and suddenly things start

 

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to start to Improve cap rates were a little little

 

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bit higher in some cases. They've compressed So you've got the wonderful

 

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combination of just like in dividend investing.

 

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You've got a good dividend yield You've Got improving earnings and

 

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you've Got the ability for multiples to increase and coming into this year

 

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all those situations were in place.

 

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And if you look at sort of like what's been driving the portfolio,

 

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we talked a little bit about it, but like there's since supply

 

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and demand imbalances like in healthcare, sort

 

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of seniors care and anything to do with sort of

 

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an age wave of baby boomers now hitting 80 years

 

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old and needing a lot more care.

 

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And during the early 2000s when COVID, or 2020

 

16:21.280 --> 16:25.284

when COVID was hitting, no one would put their parents in

 

16:25.284 --> 16:29.922

either a senior care facility or home care or anything like that.

 

16:29.922 --> 16:33.959

And supply basically went to zero at the same time you had

 

16:33.959 --> 16:37.463

this largest wave of all time hitting a point where they need all these

 

16:37.463 --> 16:41.900

services. And so supply is really, really

 

16:41.900 --> 16:45.704

sort of underrepresented or underserved right now for the cohort that's going

 

16:45.704 --> 16:46.338

through there.

 

16:46.338 --> 16:49.341

Probably difficult to build, too, right?

 

16:49.341 --> 16:53.312

Given the increase in financing costs and the environment that

 

16:53.312 --> 16:55.481

we're in right now, putting a shovel in the ground.

 

16:55.481 --> 16:59.585

If you're someone that is doing capital budgeting or anything like that,

 

16:59.585 --> 17:04.256

looking at a project and saying to yourself, especially if you're using debt,

 

17:04.256 --> 17:06.859

when am I going to be profitable on this?

 

17:06.859 --> 17:09.862

It's a lot different of a conversation than it is when rates are at zero.

 

17:09.862 --> 17:14.199

The financing rate, but also it's the cost of materials went

 

17:14.199 --> 17:18.370

absolutely sky high. So I remember sort of a year ago or something,

 

17:18.370 --> 17:22.641

I had one of the sort of strip mall REITs

 

17:22.641 --> 17:26.879

in from there's like grocery anchored retail from the US and just saying,

 

17:26.879 --> 17:29.715

and I was like, well, how's supply? And then he said, done.

 

17:29.715 --> 17:33.385

Supply has been non-existent for the last 10 years.

 

17:33.385 --> 17:37.389

Why? He's like Well, I need, because of the cost of finance and

 

17:37.389 --> 17:41.493

the cost to construction, to actually build anything new, I need

 

17:41.493 --> 17:45.297

rents that are 30 to 40% higher than they are right now.

 

17:45.297 --> 17:48.434

And you sort of wonder, and then suddenly you've got all these retailers that

 

17:48.434 --> 17:52.371

are saying, well, we're doing everything online, but like,

 

17:52.371 --> 17:55.074

okay, well where do people return things?

 

17:55.074 --> 17:57.109

They actually want to get in the store and...

 

17:57.109 --> 18:00.312

Believe it or not, still try things on or look at things.

 

18:00.312 --> 18:02.848

People still gotta buy food.

 

18:02.848 --> 18:06.385

They wanna go to sort of like grocery anchored retail.

 

18:06.385 --> 18:08.387

We've got no supply for you.

 

18:08.387 --> 18:12.591

So would you like us to start, and we start eating into that 30 or 40%.

 

18:12.591 --> 18:14.593

But that's in the very early stages.

 

18:14.593 --> 18:19.798

And it still doesn't make sense to develop new.

 

18:19.798 --> 18:23.102

To develop new construction because you just can't get the return on it.

 

18:23.102 --> 18:27.806

So it's a nice place to be in terms of supply and demand, physical assets,

 

18:27.806 --> 18:31.710

where you're getting rental bumps and you're getting really good cash flow off

 

18:31.710 --> 18:33.345

the asset as well.

 

18:33.345 --> 18:35.581

That's great to hear.

 

18:35.581 --> 18:39.618

Maybe we'll talk a little bit about, you know, you've been a real

 

18:39.618 --> 18:43.288

estate investor at Fidelity for a number of years, and you obviously have a

 

18:43.288 --> 18:47.359

team of analysts that work around you.

 

18:47.359 --> 18:50.629

Like looking at this sector and this space, and so you're probably a little bit

 

18:50.629 --> 18:54.366

of a coach towards them as well, in terms of what to look at and what questions

 

18:54.366 --> 19:00.139

to ask. You've mentioned a bunch of the popular

 

19:00.139 --> 19:02.641

topics or themes that are going on within this space.

 

19:02.641 --> 19:06.745

But, you know. What are you talking to them about in particular these

 

19:06.745 --> 19:08.814

days? What types of questions are you having?

 

19:08.814 --> 19:12.784

Yeah, it's like it's sort of listen, talk to me talk to me about the

 

19:12.784 --> 19:16.822

sector understand it always comes back just like even looking at normal comes

 

19:16.822 --> 19:19.858

like industry company valuation. So in this case, it s like particular

 

19:19.858 --> 19:23.529

subsector. Talk to me how the company is doing in the sector.

 

19:23.529 --> 19:25.430

Like are they are they winning? Are they losing?

 

19:25.430 --> 19:28.500

Do they have the really good assets? Like are their rents going to go up faster

 

19:28.500 --> 19:31.603

than other people? And then tell me about valuation.

 

19:31.603 --> 19:34.840

So like, tell me what's going on in the sub sub sector?

 

19:34.840 --> 19:36.542

What is supply and demand look like?

 

19:36.542 --> 19:39.878

Are we finally tightening, are we finally typing up?

 

19:39.878 --> 19:43.749

So like one of the things I'm looking at is like US multifamily has not been

 

19:43.749 --> 19:47.886

good for a number of years. It's been sort of flattish for about 10 years.

 

19:47.886 --> 19:49.621

Supply starting to come down.

 

19:49.621 --> 19:52.958

Demand starting to improve a little bit.

 

19:52.958 --> 19:55.360

Rents, you know, like been flattished.

 

19:55.360 --> 19:58.964

Maybe they start ticking up a little. That's like something that I'm kind of

 

19:58.964 --> 20:01.567

interested in because it hasn't worked.

 

20:01.567 --> 20:06.738

But I want to see before I get really, really heavy into it, I want things

 

20:06.738 --> 20:10.108

to get tighter and I want rents to start really bumping up.

 

20:10.108 --> 20:14.079

And companies, are they telling you yet that they're able to

 

20:14.079 --> 20:18.050

push rents? And it's sort of, ah, like it's okay, it's tightening,

 

20:18.050 --> 20:21.186

you can see it, but it's not quite there.

 

20:21.186 --> 20:25.390

But you just tell me when it's there.

 

20:25.390 --> 20:29.361

The same thing goes to, you know, we had one of the CFOs of one

 

20:29.361 --> 20:31.096

of big mall rates in the U.S.

 

20:31.096 --> 20:35.167

On, and he was saying, jeez, we're now, people

 

20:35.167 --> 20:38.170

want to be, we've got really good assets, and this is a company that was a

 

20:38.170 --> 20:40.973

little bit over levered years ago, and it's like, well, actually, our stock

 

20:40.973 --> 20:42.674

price keeps going up.

 

20:42.674 --> 20:46.745

We're issuing some equity at really good levels.

 

20:46.745 --> 20:50.716

We're now able to delever and go out and buy assets, and the demand for what

 

20:50.716 --> 20:54.820

we've is the best it's been in...

 

20:54.820 --> 20:58.056

In a decade, and it's like, well, that sounds really good.

 

20:58.056 --> 21:01.593

And evaluation, oh yeah, well let's model it out a couple of years, what does

 

21:01.593 --> 21:04.830

this look like? If they keep buying hundreds of millions of dollars of stuff

 

21:04.830 --> 21:09.001

and it has done it creatively, and you've got rent escalators

 

21:09.001 --> 21:12.504

in, and they're de-levering, what is this look like in a couple years?

 

21:12.504 --> 21:15.040

Let's use our financial models and model it out a couple year.

 

21:15.040 --> 21:18.043

So like, what's it worth now? Okay, that's fine, the market can figure that

 

21:18.043 --> 21:21.046

out. Let's figure out what it's worth in three or four years if they can

 

21:21.046 --> 21:24.116

actually execute on this. And if the answer is a lot more, Let's go and buy

 

21:24.116 --> 21:28.186

more of the stock. So it just comes down to subsector, supply and

 

21:28.186 --> 21:32.157

demand, where the company's located in the sector, and then can we get this at

 

21:32.157 --> 21:36.428

a reasonable valuation, whether it be a cash flow metric versus

 

21:36.428 --> 21:40.532

NAV, look at the particular dividend yield, and then make sure we

 

21:40.532 --> 21:43.769

understand the capital structure and whether they've got an appropriate amount

 

21:43.769 --> 21:47.472

of debt, an appropriate number of leverage, and can really grow the business

 

21:47.472 --> 21:49.007

without being covered by that.

 

21:49.007 --> 21:51.109

Pretty comprehensive, which is great to hear.

 

21:51.109 --> 21:55.881

That's what we do at Fidelity.

 

21:55.881 --> 21:58.050

Um, let's address quickly.

 

21:58.050 --> 22:01.119

What was the elephant in the room a number of years ago?

 

22:01.119 --> 22:03.322

Where are we on office?

 

22:03.322 --> 22:07.359

Like, we, we had talked about at least, you know, a year

 

22:07.359 --> 22:11.029

or two ago, call it, you know, there's a bit of like a bifurcation, if you

 

22:11.029 --> 22:15.200

will, where it's like, you know, the high quality, great location type

 

22:15.200 --> 22:19.638

assets, you know, There's some runway there, but you know the obsolete,

 

22:19.638 --> 22:21.840

you know, poor location.

 

22:21.840 --> 22:25.444

You know, light fixtures hanging from the ceiling, types of places, like that's

 

22:25.444 --> 22:28.113

a disaster. Are we still kind of in that?

 

22:28.113 --> 22:30.415

Yeah, we're still there.

 

22:30.415 --> 22:33.719

So, but it's sort of in a difference.

 

22:33.719 --> 22:37.756

We went through sort of that where no one want to touch any office and it was

 

22:37.756 --> 22:41.860

sort of like even a was class, especially like Toronto was

 

22:41.860 --> 22:45.397

difficult because a lot of supply was coming online, but a lot of that supply

 

22:45.397 --> 22:48.033

has been sort of absorbed.

 

22:48.033 --> 22:53.572

We're still bifurcated, but the demand for A and A plus

 

22:53.572 --> 22:55.974

Assets and office is really good right now.

 

22:55.974 --> 22:59.444

Most of the people, at least in New York, have been back for a couple years.

 

22:59.444 --> 23:03.181

We had an scare earlier in the year, and this is actually one of the few parts

 

23:03.181 --> 23:07.285

of real estate that was sort of perceived to be

 

23:07.285 --> 23:12.557

impacted by AI. The idea was AI is going to employ everybody.

 

23:12.557 --> 23:15.260

So everyone's going to lose their job because AI is smarter and everything it

 

23:15.260 --> 23:19.364

can do every time. That has completely not been the case, and people

 

23:19.364 --> 23:21.666

have realised it, and actually The hiring trends have been...

 

23:21.666 --> 23:25.604

Quite good. But people were like smashing off his stocks

 

23:25.604 --> 23:28.240

earlier in the year with the idea well.

 

23:28.240 --> 23:30.475

No one's gonna be employed in the office.

 

23:30.475 --> 23:33.512

And it turns out, actually, you take your, a lot of your high quality

 

23:33.512 --> 23:37.482

employees, you want them in the Office, and it hasn't worked out that way.

 

23:37.482 --> 23:40.919

And job and hirings have actually been pretty good and Office has come back.

 

23:40.919 --> 23:43.755

But it's still very, it's very bifurcated.

 

23:43.755 --> 23:45.757

You don't want the B and the C class.

 

23:45.757 --> 23:49.594

People want amenities. They want to come to work and feel good.

 

23:49.594 --> 23:53.698

They want the sort of the atriums, the Starbucks,

 

23:53.698 --> 23:55.567

the gym in the building or whatever the case.

 

23:55.567 --> 23:57.869

So things that are well-amenitized.

 

23:57.869 --> 24:01.840

In really good locations where employers want to be and

 

24:01.840 --> 24:05.610

sort of on whether it's subway systems or transit systems Are actually doing

 

24:05.610 --> 24:09.548

really well right now. So I own some really well located Office properties

 

24:09.548 --> 24:13.485

like sort of rates that you know big sort of New York exposure

 

24:13.485 --> 24:17.622

New York is really tight for high class office and they've been really

 

24:17.622 --> 24:21.126

good stocks They've been good stocks this year and certainly come off.

 

24:21.126 --> 24:25.096

They serve the AI scare There are certain stocks I still don't want to

 

24:25.096 --> 24:29.167

own because they're not located in what are central business

 

24:29.167 --> 24:33.638

districts with easy access to public

 

24:33.638 --> 24:37.676

transit. The amenities aren't particularly well, great,

 

24:37.676 --> 24:41.680

employers don't wanna be there. Employers want people to come to work

 

24:41.680 --> 24:45.884

and enjoy being at work and then being in a nice location.

 

24:45.884 --> 24:47.819

They don't to be in the C class.

 

24:47.819 --> 24:52.591

So I'm still of A class, A plus class, really interesting.

 

24:52.591 --> 24:55.060

BC class still not, it's like they don't look at.

 

24:55.060 --> 24:56.828

People are getting a little more picky, which is not that thing. Yeah, and

 

24:56.828 --> 25:02.367

employers are too. And it sounds like it's forcing the

 

25:02.367 --> 25:06.505

dynamics that exist within the market, whether

 

25:06.505 --> 25:10.976

it is developers or whether it is landlords or

 

25:10.976 --> 25:15.313

individuals that lease these assets, they're having to conform

 

25:15.313 --> 25:18.884

a little bit more in order to get that occupancy rate.

 

25:18.884 --> 25:22.387

Yeah, and you have to watch, because one of the things, there's a big

 

25:22.387 --> 25:26.324

difference because it's fund from operations and adjusted fund from operation.

 

25:26.324 --> 25:30.028

And the difference between the two is just the amount is capex.

 

25:30.028 --> 25:34.165

So AFFO is just basically cash flow after

 

25:34.165 --> 25:37.736

capex, but capex can be really big in office, right?

 

25:37.736 --> 25:41.840

Like if you want a new tenant and you've lost a million square feet,

 

25:41.840 --> 25:45.744

OK, the new tenant wants a whole bunch of things that we don't have, we're

 

25:45.744 --> 25:47.779

going to have to bend through the roof.

 

25:47.779 --> 25:51.650

To actually bring in new tenants, you've got to be very careful about the

 

25:51.650 --> 25:55.754

difference between just your cash flow and the net cash flow you bring in

 

25:55.754 --> 25:59.791

if you have to incentivize tenants with a whole bunch of upgrades and a whole

 

25:59.791 --> 26:03.295

lot of capex. So office is capex intensive.

 

26:03.295 --> 26:06.164

Spend the money up front. If you've really got good assets, you don't have to

 

26:06.164 --> 26:10.669

spend as much going forward. If your assets are a bit outdated, it can really

 

26:10.669 --> 26:14.639

hurt your cashflow for years years to come as you try to sort of catch up

 

26:14.639 --> 26:16.308

in some cases your assets just aren't.

 

26:16.308 --> 26:18.109

Up to par for what people want these days.

 

26:18.109 --> 26:21.379

Yeah, it's really interesting. There's so many knock-on effects that I think

 

26:21.379 --> 26:25.183

come out of this, and you know, I mean, our employer, as we sit here in this

 

26:25.183 --> 26:27.652

room, like, we've recognised pieces of it, right?

 

26:27.652 --> 26:30.956

And I see you in the coffee line every day in our cafeteria upstairs, which is,

 

26:30.956 --> 26:34.659

you know something that was kind of refurbished, you know in the post-COVID

 

26:34.659 --> 26:35.260

era.

 

26:35.260 --> 26:35.860

People in the office.

 

26:35.860 --> 26:37.862

No doubt.

 

26:37.862 --> 26:41.967

Okay, there's only a couple minutes left that we have, but I wanted to kind of

 

26:41.967 --> 26:46.137

end on relating this back to your average investor

 

26:46.137 --> 26:48.006

and real estate.

 

26:48.006 --> 26:52.110

So with where we are today and as we head into the final few months of

 

26:52.110 --> 26:56.348

the year, what do you think the benefit is of owning your

 

26:56.348 --> 27:00.452

fund or even real estate in general within the context of

 

27:00.452 --> 27:00.819

a portfolio.

 

27:00.819 --> 27:03.989

Sure. So I'd say there's a couple of things.

 

27:03.989 --> 27:08.493

One is just diversification.

 

27:08.493 --> 27:12.230

Sort of two would be kind of lower volatility and I had to talk to that in

 

27:12.230 --> 27:17.235

three is just like this is a product that you really can't do yourself.

 

27:17.235 --> 27:22.340

Like we've got an incredible expertise between the private side in

 

27:22.340 --> 27:25.276

Brookfield and the public side in Fidelity.

 

27:25.276 --> 27:29.581

But diversification, we mentioned just you're away from the

 

27:29.581 --> 27:32.250

sort of the dominant theme in the market, and that's great.

 

27:32.250 --> 27:36.688

It's been working incredibly well, but having some diversification away from

 

27:36.688 --> 27:40.892

one theme that's basically driving the entire market in

 

27:40.892 --> 27:45.096

real hard assets that over time will sort

 

27:45.096 --> 27:49.801

of help you beat inflation is

 

27:49.801 --> 27:51.503

a really good idea.

 

27:51.503 --> 27:55.974

Two, just volatility. Generally, we think about the fund as

 

27:55.974 --> 28:00.879

a neutral mix in the fund being 70-30 private-public.

 

28:00.879 --> 28:05.216

The stuff that Brookfield owns is really

 

28:05.216 --> 28:09.354

high-quality assets in good locations that are, I mentioned right now,

 

28:09.354 --> 28:12.457

like 90% lease with good rent escalators.

 

28:12.457 --> 28:15.794

The volatility in that portfolio should not be very high.

 

28:15.794 --> 28:20.465

It is sort of like core plus type stuff.

 

28:20.465 --> 28:25.270

That is a really nice thing to have in your portfolio

 

28:25.270 --> 28:27.439

over time.

 

28:27.439 --> 28:31.910

You beat inflation. You're not moving up and down when

 

28:31.910 --> 28:35.413

markets get super volatile. It's a nice thing to have, which generates good

 

28:35.413 --> 28:39.350

cash flow, and then you have the opportunistic sort of portion of the fund,

 

28:39.350 --> 28:43.354

which is the sort of the public reach where I can go into

 

28:43.354 --> 28:47.325

the US, play around in some different sectors, and if they're not

 

28:47.325 --> 28:49.794

working, I can just move out of them.

 

28:49.794 --> 28:53.498

A little bit of combination of stability and sort of being opportunistic.

 

28:53.498 --> 28:55.967

Yeah, complimentary. Don't sell yourself short either.

 

28:55.967 --> 28:57.736

You've had a pretty good year.

 

28:57.736 --> 28:59.871

It's been a nice year.

 

28:59.871 --> 29:03.908

And then the third is just like, this is a portfolio you

 

29:03.908 --> 29:05.810

couldn't do yourself.

 

29:05.810 --> 29:09.814

So it's not like, oh, I'm just going to go and buy myself a

 

29:09.814 --> 29:13.518

rental property. These are hundreds of millions of dollars worth of logistics

 

29:13.518 --> 29:17.756

facilities, apartments,

 

29:17.756 --> 29:20.558

diversified portfolio, student housing, and senior housing.

 

29:20.558 --> 29:24.562

In a billion dollar portfolio, it

 

29:24.562 --> 29:28.666

is... Managed by Brookfield the the capital markets

 

29:28.666 --> 29:33.004

deals are done by Brook field the All the the leasing is

 

29:33.004 --> 29:37.008

done by a huge leasing team This is something like you just couldn't do

 

29:37.008 --> 29:40.211

by yourself and you've got the biggest team in Canada sort of and the best team

 

29:40.211 --> 29:41.880

In Canada doing it for you.

 

29:41.880 --> 29:45.917

It's a really really Nice proposition if you're looking

 

29:45.917 --> 29:50.522

for diversification lower volatility a great team managing things And

 

29:50.522 --> 29:51.790

just something you couldn't to yourself

 

29:51.790 --> 29:55.560

Those are all great points, and if I think about it myself, like as an

 

29:55.560 --> 29:59.664

investor, I want to own this AI theme in some way, shape and form, and

 

29:59.664 --> 30:03.868

everybody's got different limits on how they want to do it or how much exposure

 

30:03.868 --> 30:07.405

they want towards it. But as we've seen, especially recently, there's

 

30:07.405 --> 30:11.509

volatility inherently, and in some cases there's excessive valuation.

 

30:11.509 --> 30:15.380

And so in order to allow you to continue to invest in that in the future and

 

30:15.380 --> 30:18.016

stay invested in that, which is probably the way you're going to make the most

 

30:18.016 --> 30:21.186

money over time. I want different.

 

30:21.186 --> 30:24.789

Pieces within my portfolio. And I don't just want different pieces in my

 

30:24.789 --> 30:26.724

portfolio because they're different.

 

30:26.724 --> 30:30.195

I want different places in my portfolio where there's actually some, you know,

 

30:30.195 --> 30:32.463

there's a fundamental light at the end of the tunnel.

 

30:32.463 --> 30:36.134

Like there's some tailwind behind it, if you will.

 

30:36.134 --> 30:38.937

You know, I just don't, I don't want it to just be a placeholder there.

 

30:38.937 --> 30:43.074

And so I guess that's how I'm thinking about to real estate, you now, in

 

30:43.074 --> 30:44.008

a very simple sense.

 

30:44.008 --> 30:48.079

Yeah, it's also a sector that, for the better part of 10 years,

 

30:48.079 --> 30:52.150

hadn't done very much, unlike the S&P 500 and the TSX.

 

30:52.150 --> 30:56.020

And now we've started to get, as I say, interest rates have tripled.

 

30:56.020 --> 30:58.790

They may go a little bit higher, but they're generally not going to triple

 

30:58.790 --> 31:02.894

again. And supply and demand have taken a number of years to come

 

31:02.894 --> 31:06.998

back in order. There's still some weak pockets, but there's a lot of sectors

 

31:06.998 --> 31:10.368

that are just starting to inflect. And have just started to inflect this year

 

31:10.368 --> 31:12.403

and will probably inflect in the next year.

 

31:12.403 --> 31:14.939

That's very different from the rest of the market.

 

31:14.939 --> 31:19.277

So you've also got a good fundamental story

 

31:19.277 --> 31:22.847

behind you on top of the diversification and lower volatility.

 

31:22.847 --> 31:26.818

And that combination is, for a portion of your

 

31:26.818 --> 31:29.454

portfolio, is fairly compelling.

 

31:29.454 --> 31:33.658

Sounds like a great setup and you know enjoy the conversation as

 

31:33.658 --> 31:37.896

always and I'm sure we'll be back here in a handful of months to

 

31:37.896 --> 31:39.664

recap what's happened over that period.

 

31:39.664 --> 31:41.699

Sounds great. Okay.

 

31:42.901 --> 31:44.969

Thanks for watching or listening to

 

31:45.003 --> 31:47.205

the Fidelity Connects podcast.

 

31:47.205 --> 31:49.040

Now, if you haven't done so already,

 

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please subscribe to Fidelity Connex

 

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And if you like what you're hearing,

 

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please leave a review or a five-star

 

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31:56.981 --> 31:58.716

Fidelity Mutual Funds and ETFs are

 

31:58.750 --> 32:00.051

available by working with a

 

32:00.084 --> 32:01.586

financial advisor or through an

 

32:01.619 --> 32:03.321

online brokerage account.

 

32:03.354 --> 32:05.556

Visit Fidelity.ca slash howtobuy

 

32:05.556 --> 32:07.125

for more information.

 

32:07.125 --> 32:08.927

While on Fidelity dot CA, you can

 

32:08.927 --> 32:10.528

also find more information on future

 

32:10.561 --> 32:11.529

live webcasts.

 

32:11.562 --> 32:12.730

Don't forget to follow Fidelity

 

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and Instagram.

 

32:17.001 --> 32:18.803

We'll end today's show with a short

 

32:18.803 --> 32:19.871

disclaimer.

 

32:19.871 --> 32:21.472

The views and opinions expressed on

 

32:21.506 --> 32:22.907

this podcast are those of the

 

32:22.941 --> 32:24.676

participants and do not necessarily

 

32:24.676 --> 32:25.877

reflect those of Fidelity

 

32:25.910 --> 32:27.745

Investments Canada ULC or its

 

32:27.812 --> 32:28.713

affiliates.

 

32:28.746 --> 32:30.248

This podcast is for informational

 

32:30.248 --> 32:31.783

purposes only and should not be

 

32:31.783 --> 32:33.484

construed as investment, tax, or

 

32:33.518 --> 32:34.552

legal advice.

 

32:34.585 --> 32:36.621

It is not an offer to sell or buy,

 

32:36.621 --> 32:38.356

or an endorsement, recommendation,

 

32:38.356 --> 32:40.325

or sponsorship of any entity or

 

32:40.325 --> 32:41.826

securities cited.

 

32:41.826 --> 32:43.261

Read a funds prospectus.

 

32:43.261 --> 32:44.729

Before investing, funds are not

 

32:44.729 --> 32:45.630

guaranteed.

 

32:45.630 --> 32:47.031

Their values change frequently and

 

32:47.031 --> 32:48.299

past performance may not be

 

32:48.299 --> 32:49.367

repeated.

 

32:49.367 --> 32:50.868

Fees, expenses, and commissions are

 

32:50.868 --> 32:52.236

all associated with fund

 

32:52.236 --> 32:53.404

investments.

 

32:53.404 --> 32:54.939

Thanks again. We'll see you next

 

32:54.939 --> 32:55.907

time.