The Canadian Investor - Musk vs. Zuckerberg and Cooling Inflation

Episode Date: June 29, 2023

In this episode, we talk about Elon Musk and Mark Zuckerberg's potential cage fight, Meta blocking Canadians news following the passing of Bill C-18 in the senate, Canadian May CPI, a Brookfield acquisition, Canopy’s earnings and Allied Property REIT selling its data center assets. Symbols of stocks discussed: BN.TO, AP-UN.TO, WEED.TO, META Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  TCI meetup registration Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

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Okay, well, I'm sure Mo, I don't know if everyone has seen this, but it's news came out that Elon Musk issued a challenge to Mark Zuckerberg, but I'll call him Zuckerberg because that's what we do. Yeah, exactly. yeah exactly um to have a cage match fight and it sounds like zuck agreed so ufc president dana white said that he spoke to both billionaires and that he thinks the fight would bring in the most revenue ever for a ufc fight and typically ufc pay-per-view costs about 80 but he thinks they could charge as much as a hundred dollars for the fight and that it could bring over $1 billion in revenues. The largest fight before that in terms of revenues was McGregor versus Floyd Mayweather in 2017, which brought in more than $600 million in revenue. Now, the billionaires have been going at it for some time now, for those not aware. Musk had even deleted his Facebook pages of Tesla and SpaceX in 2018 and he said that Facebook was lame. Not surprising with Elon Musk and both billionaires

have also been on opposite ends of the AI debate with Musk saying that there could eventually be some grave consequences to AI and obviously Zuckerberg using the opposite end of the argument here. And recently they both have been at odds because there's reports that Meta is working on building a rival to Twitter. Now for those who are not aware, actually I'll ask you a question. So who would you pick if you had to bet on the fight? And I'll just say that Musk does have the size advantage. So he's 6'2". And apparently, I've heard a lot of people say like he's a big guy, but he turned 52. By the time you've heard this, actually,

I think his birthday is like today or tomorrow. And Zuckerberg is 5'7 and 39 years old. So he's on the smaller side, younger, but apparently he's been doing jujitsu for a couple of years now. And he's recently won some kind of low-key tournaments. So anyways, what do you think about all of this? I'm so glad you brought up the story because business news, okay, that's one thing. That's exciting for guys like us you know and the wonderful listeners of this show but business news of that the business leaders are fighting in a cage match okay now we're talking for me this isn't even close zuck is in way way better shape yeah he trains martial arts he actually posted this mirror

selfie on uh veterans day that he was doing the murph with the weight vest and oh yeah he actually like looks pretty jacked um i'm not gonna be honest now he is short and musk probably has like 100 pounds on him. And he's a lot taller. But he's also a lot older than Zuckerberg. And the dude looks like a bag of... He's not fit. Yeah, he's not fit either. The dude looks like a bag of milk with his shirt off. He doesn't look jacked on his yacht like Bezos does.

He looks like a bag of milk. Now, he is heavier, he is taller, but he would have to be training intensely for this fight. And right now, Zuck looks like he's in fighting form. So it really depends on when the fight is. If it is tomorrow, Zuck taps out Elon in the first round. tomorrow zuck taps out elon in the first round if he has some time to train he's so much taller and bigger that now we have like an actual fight because you have someone who's training but someone who's like a lot bigger you maybe have a fair fight but this happens tomorrow zuck uh who trains jiu-jitsu will tap him out very quickly yeah and i mean i was listening to the all-in podcast and they were talking about a couple guys know him quite well elon musk and i think david sacks even

said like i'm actually afraid for elon which is kind of funny because dad they were saying the same thing like zuckerberg seems in really good shape and yes um the other thing too is how like where will elon have the time to spend to get fit and learn martial arts like he's a he's a busy fellow with spacex twitter um you know tesla i mean i i don't know where you'd find the time like if you want to get better and fit you probably need to dedicate at least an hour and a half, two hours every day to be able to do that. So I don't know whether he cuts back on sleep or not, and that's probably not the best thing either.

This is one of those things where it's like when Elon bought Twitter and he tried to backpedal out. He's going to have to try to backpedal out of this because he will get his ass kicked. He's not a guy you want to bet against. Neither guy is a guy you want to bet against because they continue to prove people wrong time and time again. That's what their career is built off of, is doing things people say are impossible, is basically who they are as people. So I don't want to bet against any of them, but if the fight is tomorrow, first round, Mr. Musk, the milk bag will be tapped out pretty quick. All right. Speaking of second news piece here, Meta is, so this is very related here. They're supposed to block news in Canada as this bill is forcing companies to pay for content to become law.

And Meta has confirmed that it intends to stop making news available to Facebook and Instagram in Canada ahead of this pending federal law. So that would force the company to pay to publish news content and the bill would require Google and Meta to pay media outlets for news content they share or otherwise repurpose on their platforms. The company announced changes to Instagram and Facebook on Thursday after the Senate passed the bill. The both companies have opposed the proposed law, of course. It's like, hey, you guys have to pay for all this free content. And they're like, we don't agree.

So shocker. So yeah, apparently the law is set to level the playing field between online advertising giants and the shrinking news industry. So to me, this is too little too late. Last week, we did the news on Bell Media cutting off a lot of jobs around their digital assets, their media assets, their radio assets. So big shakeup. Look, I mean, this is like, wake up. It's not 2006 when they made Facebook anymore. I don't know what's going to happen here. Well, yeah.

And I mean, at the end of the day, too, even if you take out Facebook, Google, it's just the way content is being consumed by people. It's just different now than it was 15, 20 years ago. I mean, I remember one of my first jobs. I remember like it was these ticketing booths where people would park in Gatineau Park, not far from Ottawa, to go and visit. And they had to pay. And I was in that booth and I took money and gave them the ticket for the day. Right.

And it was sometimes super dead because it was raining outside. So no one was coming. And I would bring a newspaper. Well, I haven't read a newspaper and I don't know how long and it's just a different way that people consume media. And I don't think it's going to really do much, to be honest. I don't think it's really going to move the needle. I think the big companies like Google and Meta will probably just not pay for it and people will just find ways to bypass that, whether it's, you know, getting their information somewhere else

or, you know, using VPN to access other content that's not from Canada. I'd be really curious on like, what kind of unit economics we're talking about here? Like, is it so high that like, the unit economics fall apart for Facebook and Google to do this? Or like, I'd be curious on like digging in on what that actually means. Because if they're saying we're just not going to go there, then it's clearly like doesn't make sense for them to show it at all. Yeah, there could be also a bit of game theory in place too, right? Because Canada is a relatively small country, probably doesn't move the needle all that much for them. But if they start abiding by these rules and, you know, paying for content, what happens if the U.S. comes

in and has a similar law, then there's precedent and the U.S. has the expectation that, you know, Facebook and Meta will actually do that. So I think it's actually they're looking at this from a bigger picture point of view where they don't want to set that precedent and then have other countries that have more importance to their bottom line following along. Hey, you're all right, Simone. That was actually a good call because that's probably exactly what's happening here. It is a precedent. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online

broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission-free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best

products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at Airbnb.ca forward slash host.

That is Airbnb.ca forward slash host. Setting type thing. All right, let's move on. Yesterday got uh canadian cpi we got the inflation print what did we what did we come in at well it was actually this morning but i guess it will be a couple days ago when you this is released but that's okay it just came out today and i'm not even sure what day of the week it is today it's all good summer's approaching canada day was actually saint jean-baptiste last weekend in Quebec. Joyeux St. Jean-Baptiste for any of our Quebec listeners. Now, for the May 2023 CPI, so the headline number was actually quite good at 3.4% year over year, and that's compared to 4.4% in April. However, as people know, hopefully by now, headline numbers rarely

tell the whole story. So I think it's it's pretty good overall. It's definitely trending in the right direction. So the month over month increase was still relatively high at zero point four percent. So versus April. But it was definitely better than April versus March, which was 0.7%. So again, trending the right way here. Food was up 8.3% year over year, so still quite high and 0.8% month over month. They did have some notes saying that food prices remain elevated, but are even more elevated when you're looking at restaurants. Shelter was up 4.7% year over year and 0.4% month over month. Gasoline was down 18% year over year and down 0.8% month over month. And energy was also down 12.4% year over year and 0.8% month over month. And obviously, energy is kind of the

bigger bucket here. But I think that's important to know because I've been hammering on this for quite some time. And even the Bank of Canada will acknowledge that if you look at some of their, whether it's TIFF or some of the deputies that will do some speeches and conferences, is they are well aware of that. And anyone looking at the headline numbers should always look at the categories because sometimes it does tell a different story. And services remain sticky here at 4.6% year over year and 0.5% month over month. All other categories except transportation were up year over year. So overall, I think it's a pretty good, but it's not as good I think as the headline numbers indicate and the three measures of core CPI which is really what the Bank of Canada tends to focus on because it zeroes out both energy and food prices it got better but it's still relatively high so the three measures

came in at four 5.2 percent 3.9 and 3.8%, which is slightly down compared to April. So it is trending to the right direction. But again, I think it's very dependent. There's a lot of data here that could be very dependent on gas prices as a whole, not obviously core CPI, which strips that out. Now, a couple of other things of note that's interesting. Mortgage interest costs rose to the largest increase on record. It was up 29.9% year over year. That's actually following an increase of 28.5% in April. So obviously, that was fueled by Canadians that are renewing their mortgages at higher interest rates. And it has an impact on the shelter cost component

of the CPI index. And what's interesting is that the Bank of Canada raising the rates to cool inflation down as a whole, but higher rates actually mean higher mortgage costs, which also puts pressure on inflation. So it's kind of this two-sided beast here when they're raising interest rate because it does increase inflation from that basket. Obviously, it's not an extremely large component of the CPI basket, but it's not that small either. The commodity hit by inflation the hardest, eggs. Yeah. If you check out the local grocery store. eggs. Yeah. If you check out the local grocery store. I was in the States this week and I bought two and a half dozen, which is like a big tray for $4.19. That's pretty good. I was like,

I was like, oh man, this is so much cheaper. Have we checked Truflation lately? much cheaper. Have we checked Truflation lately? Truflation has the US inflation rate at 2.46% compared to the US government reported 4%. So Truflation is reporting much lower than the Fed number, yet they were much, much higher than the Fed number in 2022 and 2021, which I think is quite interesting. Yeah. Yeah. And the truthflation, I was reading something where it's very interesting, where it tends to just be, it tends to follow CPI, but more volatile. So it's more volatile on the upside and more volatile on the downside, which tends to be the trend. So obviously they use a different methodology to calculate it. But I think whenever you're looking at it, whether you want to look at the government CPI data or something like Truflation, I think it's I've said this and I will say it again.

It's just an indicator. I think it's really important for people to just look at how things are being impacted for themselves, right? Because depending on what you're spending money on, you may feel the increase much more, much less than what is indicated by CPI figures. Just looking at the categories, it's going to be different for every person. You can see here food and non-alcoholic beverages total, food at home, food away from home, which is – that's come down quite a bit. Just you can see here on the screen. It's all very interesting, right? Like, dude, this is unrelated. Why is food away from home there is such high inflation on the tip number that they hand me on that little machine every okay so before it went up from the lowest to from 15 to 18 and now i don't even see 18 anymore

i never see at 18 anymore now it's like 28 25 and 20 or like 25 22 20 it's different like it's ridiculous man yeah it's different here a little bit i guess they want to force you to manually input it if you want to go yeah which is so awkward like as soon as you go into the manual like you're so you're so cheap um i have no problem tipping for excellent service but if if there is horrendous service you think i'm gonna press that middle button at 22 you are off your rocker there's no way um so i'm standing by my stance uh i don't i know i might get roasted but i don't care i think that the inflation on the inflation of the tip on that little machine you turn around

that ipad you made me a coffee and expect 22 i I don't know. It's better to be a damn good coffee, CMO. And that's what I think. I mean, I get annoyed with when there's now more and more places tip for things that are like super easy to do. Like you go and grab a coffee at Starbucks and it's literally a drip coffee, right? They just kind of pour it down, put the lid on. And then it's like prompts you like, oh, your coffee's for $5. So do you want to give one, two or $3 or whatever it is?

I'm like, really? Like, I mean, I shouldn't have to tip for that. If it's like a bespoke coffee shop and like, you know, I see them making my coffee. It's like a process, you know? Yeah. But I'd actually like to know this. If anyone listening will write into our inbox here, if they know this, I would like to know if I tip at a like multi-billion dollar company, like a Starbucks or whatever, like a burrito, a Chipotle burrito. Are those tips actually going out to the employees making minimum wage?

Like I sure as hell hope so, but I don't know that. I cannot confirm that. It's not like a restaurant where they do a proper tip out at the end. Yeah. Yeah. I think they do, but I'm not sure. I always assumed that the employees that were working on that, they would kind of share the tip.

That's how I thought it worked, but I could be wrong. I'm not sure. Be good to know. Because the people making my beautiful burrito, I'm happy to give them a tip. They deserve my tip. But if that's just going into the bottom line of Chipotle, the public company, I'll never tip again. You know what I mean?

They will get another cent from me. All right, Simone, next one. Yeah. So just to continue, basically same vein, not CPI here, but kind of related. So Bloomberg conducted a survey of 25 economists. Clearly, obviously, it's a small sample size, but I think it gives us a good idea. And it showed that what they expect the Bank of Canada in terms of what they'll do in terms of their terminal rate, which means that terminal rate is the max rate that they will reach in this rate hiking cycle. So for the most part, they think that there's going to be another 25 basis point increase in the coming months, most likely in July, and they expect the max rate to be at 5% or the terminal rate.

Now, the same surveys show that economists expect the Fed and the U.S. have a terminal rate of 5.5%, which is about, I think, I don't have it right in front of me, which would imply, I believe, two more increases of 25 basis points. But without going into too much detail here, I think it's just a good reminder that these economists, these surveys, these experts, I mean, I think they try to predict as best as they can, but they've been wrong and sometimes right. So I'll just give them credit. But I think a lot of them have been wrong over the past year and constantly revise their expectations. to interest rate. Just take these kind of things with grain of salt and not think that because you saw this survey, that for sure the terminal rate will hit that. I think like I've said it before,

I think it's much better to work on just a probability of various outcomes. And then you assign different probabilities and you make your decision based on that. Yeah, good call. Predictions are fine, but treat them as such. Just the same way that most people logically would predict, as rates keep hiking, software multiples would go down. That has not happened. Software multiples have gone up as hikes have continued. So it's all a reminder that you can make predictions, but don't put too much weight into them

because the rate of success on these predictions with broad macro are not good. The track record is not good. So just remember that. All right, Brookfield. Our friends at Brookfield are nearing a deal to buy American Equity, which is an insurance business ticker AEL. So Brookfield is close to acquiring American Equity Investment Lifeholding Co. This is under Brookfield's reinsurance arm of the business. They've made a cash and stock offer that is likely to be recommended. The acquisition would add to their acquisitions globally to $15 billion

for the past year. And Brookfield is already the largest shareholder of American equity with a 20% stake. They had received an offer from a competitor called Prosperity Life Insurance, but Brookfield's offer is higher and values the company at a significant premium to that offer. So it's one of these things where the best bidder takes and the fact that Brookfield is already the largest shareholder. This is a $3.5 billion market cap business today. It shot up a good 10% on the news that the premium was announced. And I've included a little graph here, Simone, of the earnings per share and net. Well, just earnings per share. That's supposed to be revenue, not earnings per share and net income.

You're like, wow, they're very correlated. That's because they should be. Earnings per share has compounded about 26% since 98 over time. It's been quite volatile. Like you had a monster 2022 and down quite a bit trailing 12 months. It seems to go up and down fluctuate quite a bit. But overall, this business has compounded value. It's been a very volatile stock to own because as you can see in their results, Simone, it's been very volatile as a business as well. Yeah, yeah. I wasn't familiar with them to be honest, just because my holdings with Brookfield

are primarily Brookfield Infrastructure Partners and Renewable Partners. But I think, you know, I don't know too much about insurance, but I think earnings typically can be a bit lumpy just because depending on the type of insurance they do, you know, a clear example would be an insurer that, you know, has tons of insurance with property in Florida and then a large hurricane hits. Obviously, it's going to take a big hit in its earnings because they'll have to be paying out some of those claims. So that's kind of the extent of my – I mean, I know a bit more about insurance, but it's not something I know in and out quite well. Dude, there's so many of these niche insurance businesses that trade between 1 and 5 billion US that are publicly traded that like, I couldn't tell you

the first thing about. But it's very ripe for consolidation as well, though. And I think that's basically a thesis with this reinsurance business here is be quite acquisitive because there is a ton of them that are ripe acquisition targets that, you know, kind of grind along, grow slowly, but someone's going to eventually roll them up. Yeah, no, definitely. Now we'll move on to different kind of news. Definitely not in insurance. I don't know if there's anything related to insurance here, but anyways, Canopy Growth released their earnings and they also provided an update on their biosteel business. So their earnings was for a fiscal year 2023, so they have a bit of a weird reporting schedule.

As we talked on the podcast, Canopy had launched a review of its fiscal year 2022 financial statements because of material misstatements relating to its biosteel business. So they actually had to modify some 2023 quarters as well because of that. So that resulted in a decrease of 10 million net revenue for fiscal year 2022. That was about 2% of total net revenues. And for the first nine months of fiscal year 2023, it resulted in a decrease of $14 million in net revenue, representing about 4% of the company revenues. They said that they are implementing new controls and changes to biosteel management. I hope so, because that is not a good look to have to restate. And it's pretty material, especially since, you since you know remember i think it was last year maybe like uh late 2021 and

bio steel was one of the like bright spots for canopy but now we we know that it wasn't that much a bright spot um yeah i don't know they got restated um yeah so they were misstating revenue so the management of the biosteel unit my understanding is they were just inflating numbers that's kind of the sense i got i didn't read the whole report but um well how about this maybe maybe they're putting all the bio-steels they give away for free as revenue because dude, they, in Toronto, there's always these, uh, like bio-steel branded cars. And as you walk into like high park or like Trinity Bellwoods park in the city, there'd be these like people that work for biosteel or like some

company marketing company representing biosteel and they give them out for free like and they're there all the time dude they're there like every weekend and it's like marketing for biosteel meanwhile the execs are just thrown in it as top line yeah and they have some pretty i can't remember but even the nhl right they have some pretty prominent I can't remember, but even the NHL, right? They have some pretty prominent figures. Like is McDavid? I think McDavid, yeah. Might be, huh? Dude, the flavors are so hit and miss.

I don't know how many you've had. Oh, I've not. Some of them are incredible. Like they taste so good. And some of them are like the watermelon one is horrendous. Like I don't know how it left the like taste testing meeting. Some of them are like the watermelon one is horrendous. Like I don't know how it left the like taste testing meeting. They're like, okay, here's the new flavor.

And they're like, that's good. No, it's dude, it's awful. So yeah, I'm not sure where this biz goes from here. Yeah. So basically the last thing is they said that they'll be shifting their strategy for biosteel by exiting all biosteel international business prior prioritizing growing its share of the canadian market refining their u.s strategy whatever that means implementing cost-cutting measures to improve profitability and exploring other options to reduce operating cash burn so it's clearly not that good of a segment right now.

And if we move on to their full year results as a whole for Canopy, revenue was down 21% to $402 million. Cost of goods sold was down 29%, but was still $507 million. So little issue here when your costs of goods sold are still 26% higher than your revenue. Probably you need to definitely make some big changes.

They lost $3.2 billion for the year, but to be fair, they wrote off $2.2 billion worth of assets during the year. But that would still amount to losses of close to $1 billion. They burned $567 million on a free cash flow basis. They now have $783 million in cash and cash equivalent, which is a 43% decline year over year. The company now has a market cap of only $400 million. They also said that their costting measures are expected to reduce costs by $240 to $310 million for fiscal year 2024. And if it wasn't bad enough, their share count has grown at a compound annual growth weight of 21% since 2018. So it's clearly, I don't know, it just gets worse and worse as you're looking at the business. worse and worse as you're looking at the business. And I read somewhere just as I was doing my note, I didn't have the time to add it to double check, but I'm 99.9% sure it's true. But apparently,

they issued a going concern warning in their latest annual report, which is not surprising at all. So for those not aware of what a going concern warning is, is basically the company saying that it may have difficulty meeting its obligation in the short term. So it's never great. A going concern just means generally that, you know, everything's good. So if you're good on a going concern basis, just means that you can continue your operation operating normally. If there there's a warning then there could be some some issues so it's never i mean it it's never a good thing when the company says that it doesn't mean necessarily that they'll go bankrupt but definitely it means that they are starting to have lesser and lesser options in terms of,

you know, right sizing the business and being profitable. This is a dumpster fire like no other on this. Every single time you talk about this business on the podcast, it just gets worse. And I like, it doesn't seem like it could. Can always get worse until you go bankrupt.

Oh yeah. Until you go bankrupt. I just mean like the last time we talked about them it was hey but look at this awesome bio steel business i don't know if we can say that anymore no i don't uh yeah i don't think we can say that and i mean it's interesting right because we've seen exo being bought out by another company i can't remember which one it's escaping me so we've seen exo um we've seen XO being bought out by another company. I can't remember which one. It's escaping me. So we've seen XO. We've seen Canopy really struggling. Aurora is really struggling as well. Afri, I believe, was taken private or bought out.

So the big kind of four that were there and were buying other capacity at these crazy prices and everyone was pouring in they're all struggling they're either basically you know on the path to bankruptcy or being bought on the cheap by another player and i think five years from now it'll be super interesting to see who's left in this space and i've said it time and time again, I think we'll just see one or two players that will have really efficient operation, will buy assets on the cheap, and they'll actually have a pretty good business model. It won't be great margins, but they'll have economies of scale and they'll actually... As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using

Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money.

Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network.

You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at Airbnb.ca forward slash host. That is Airbnb.ca forward slash host. So we'd be right-sizing the business. Yeah, good call. Time will tell tell there's gonna be uh a big shake-up do you want to do this last segment we'll be okay we'll have time so uh still pretty early in the recording so um this one i want to talk about because dude i told you i don't know what day it is yeah i'm saying that because people might be wondering brayden i'd put a note like

are we uh talking that on another recording? Are we doing this one or not? Yeah, go for it. So, Allied REIT is selling its UDC portfolio. UDC means Urban Data Center. So, last week, they announced that it had entered in an agreement to sell its UDC portfolio located in downtown Toronto to KDDI for $1.35 billion, which is $118 million higher than its net asset value. The portfolio has three properties, one on 151 Front Street West, 905 King Street West, and a leasehold interest at 250 Front Street West. KDDI is a Japanese

telecom provider and a Fortune Global 500 company. They own and operate data centers in Asia, Europe, and the U.S., so obviously a good fit here. The proceeds of the sale will be used for two main purposes. First, they'll be using $1 billion to reduce debt on the balance sheet and the balance of the funds towards upgrading and for development properties. And because the sale will be a significant increase in taxable income for fiscal year 2023, so this year because I believe they report it aligns with the calendar year, they said that they'll be required to declare and pay a special distribution to unit holder of record as of December 31st, 2023. They haven't figured out exactly what it will be, but REITs are required to pay a certain percentage of their profits

in distributions for preferential tax treatment. And the stock was down a bit following the announcement, but now is around the same level. As people know, I own shares of Allied and this was expected. So the market kind of reacted a bit where it was down like 3% when it was announced, which was a bit of a head scratcher for me mainly because they've been talking about this for close to a year now. So people were, yeah, at least if people were at least if people were surprised and they own the stock or the unit, whatever you want to call it. I mean, clearly they were not aware of what they were owning because literally management was doing an update on every quarterly call, just providing a general update. They were limited on what they could say. general update. They were limited on what they could say. And earlier this spring, they actually said that they were entering stage two of the process, which was advanced discussion with

just, I think, limited suitors. So they had narrowed things down. So I think personally, it's a great thing here because they're focusing on what they do best. So office real estate. I love that they're paying down debt with higher interest rates. So they'll be able to retire some debt, I believe, on the last conference call, or maybe earlier in the year, they had said that it was to retire some part of the well retire revolving debt. So that's like a variable debt and some other debt as well. And I also like that they're using part of it to upgrade some of their facilities or buildings because one of the things that's been really noticeable with office real estate is that

type A office real estate has performed much better than type B and C. And type A is just really either new buildings, so new office space that has all the amenities or older buildings that have been recently retrofitted to have all those amenities as well. And these nicer buildings have actually performed much better in terms of occupancy versus the older type of buildings. And, you know, it's easy to see why, because if you're asking your employees to come to the office, even it's easy to see why, because if you're asking your employees to come to the office, even it's hybrid, I mean, it's much more enticing for employers to ask their employees to come to the office when they have a really nice office space to go to than a B or C building, which might be fine, but it's not a, you know, not an enticing space, but something to keep in mind. And Dan and I actually talked about this specifically during the commercial real estate episode that we'll be releasing. I believe it'll be the second

week of July that we'll be releasing that. So part one on our podcast and part two, it'll be on the Canadian Real Estate Investor Podcast. Is this stock still getting crushed? No, it's done dec, if I remember correctly. They sold half of one of their large buildings in New York for higher than I think people were anticipating in terms of value. for higher than I think people were anticipating in terms of value. So I think probably Allied is benefiting indirectly from that, where they're seeing that there's still potential value and the price of these properties maybe are not as depressed, depending on the market, as some may expect.

One of the big issues is there is limited transactions in the space. So it's very hard to really assess the value when you don't have a big sample of transaction. So it's easy for the market to be especially bearish on it because they just say, oh, well, if they do sell it, right, they'll sell it at cents on the dollars, so it's not worth much. So I think that's played a part, but it will be interesting. I mean, it's yielding, I think, 8.5% right now, Ally. So it's a pretty juicy yield, but I'll say it again, I do own it and I've been adding, but I've done my research and obviously I have my thesis in terms of what I think will happen in the future. I think the market is

overly bearish. But again, there is some risk in this investment. So it's not like, you know, there's different outcomes that could happen the next five years. Even AI, you know, we've talked about it, maybe AI will change how the way we work and potentially reduce the amount of people needed for certain types of job, which will, indirectly affect office space so there's a lot of variables involved so don't be lured simply by the yield here know the investment know that there is risk if you decide to put money in office real estate I won't you know I'm fully transparent you know it's not like it's a sure thing for the faint of heart no exactly and it's not like you've seen my portfolio and joint TCI subscribers have,

where it's not a huge portion of my portfolio. It's just a small bet that I'm making that I'm pretty confident it will work out. But I also realized that it may not work out as well. But I think the probability, the way I assess it is that it will be a good investment. But I think the probability, the way I assess it is that it will be a good investment. Look, I know their properties pretty well because I've seen them firsthand and I used to be a shareholder. So I know their properties pretty well. I think you're on the money that they own some of the best real estate in terms of office in their major city centers. They are trendy. They're where, you know, if you have to go back to work where you want to be, people don't want to be in the gray cubicle if they have to go back to work. And that's not the type of office

space that they have. It's the exposed brick, fancy lighting, open seating, airy office space in a great location and not cookie cutter tower that the carpets need cleaning. It's not that type of space. So I'm with you on that. It's just, it's so uncertain about what office real estate looks like in the next five to 10 years. And that's why the stock is getting absolutely murdered. You're taking the other side of that bet, which I think is a fair one. And it's when it's the most uncertain and feels the worst that the stock has the best price. I have a rule that I don't go on the other side of long-term secular trends that I don't foresee turning around. And this is one of those. So I decided to exit the stock. But keep in mind, it has fallen in half since when I exited. So the multiple has literally gotten smashed since then. And now it's like

a high value play. Before it was like a fair valued questionable asset. Now it's a questionable asset that's priced like it's questionable. And that's what makes it exciting to own. So I'm with you. I can understand it. Yeah, yeah, exactly. And obviously, you're paid to wait too. But it is a name that I'm definitely listening to every single quarterly call, I want to make sure I stay on top of it. And my thesis here is not that we're going to pre pandemic. My thesis here is that the market is overly bearish and almost pricing in that no one is going to be going to the office. And I'm kind of more in the middle here. And I think that's where the value is.

I agree. Do you happen to know, like, roughly, if not, it's fine, like how much the div is covered by AFO? I think it's around AFF, I think it's the low 80s, which is pretty much on par for them. Obviously, it's probably going to go down a little bit in terms of, well, it's hard to say, right? So they're going to have less total AFFO. It's going to go up. Yes, way AFFO or AFFO, as Brayden says, it is just adjusted funds from operations. So it's a metric widely used in the real estate space.

So clearly with selling that UDC portfolio, they're going to have less AFFO, but they're also going to be paying less interest, less debt. So I think it should remain pretty similar. That's my guess. But it's no, it's stayed pretty, pretty in line with historical levels. So I think it's just people projecting and also looking at the US and some publicly traded office REITs are just being like smashed, like yielding, you know, 14, 15%. Some have exposure to New York, San Francisco, without going into too much detail, these cities have been like crushed by, you know, if you take San Francisco, I think this is the most common example. But people, you know, you just think about all the big tech companies that either

have laid off people or on the other hand, they've told that their employees that they're working fully remote or are not using the office space. So, yeah, I think it's just a broader market sentiment here that's affecting them. And people are concerned about where does this look in five years when these leases are up, right? Yeah. Like that's the big question to me. And, you know, recession talks, right? We've been hearing about the economy going to recession for what, like at least a good year now? going into recession for what, like at least a good year now. And if it does materialize, depending on how deep of a recession he is, clearly it could also impact demand for office

real estate. So that's another component to keep in mind. So like you said, I've said it like it's not for the faint of heart, but, you know, I allocate it accordingly and I have, you know, good conviction in what, you in what my assessment is. That does it for today's episode of the podcast. We appreciate you guys for tuning in. For tuning in for – whoa, that was a word salad. Thank you so much for listening to the pod. If you have not checked out Stratosphere or FinChat,

say you've not been listening to the podcast for very long. Stratosphere.io and FinChat.io are companies that show you financial data for when you're researching stocks. FinChat is an AI-powered one. Stratosphere is an investment research terminal. And the prices are going up. You're going to be grandfathered into your current price. So don't worry. And this is a chance to grab today's prices before they literally double on July 13th. We officially have a date. So July 13th is when the prices will double. So you have from now till then to lock in a subscription.

And we won't raise yours when we raise the new pricing. So you get a good deal there. And for those coming to Toronto to our meetup, I extended 15 extra tickets. So we have 15 extra tickets. So it'll be 115. If you have been thinking about coming to our meetup on July 7th in Toronto,

July 7th, 15 more tickets are now available. So you can check that out. It is a Eventbrite. Do we still have the link in the show notes, Simon? I guess we can put it back. If not. I had to remove that, but I'll add it back. Put it back.

Put it back. I thought it was full. Yes. So we'll put it back. Yeah. So go back to a couple episodes ago if you want the link. And well, actually, I will add it to this one. So forget about that.

Okay, so yeah, there's 15 more. We will see you there. Take care. Bye-bye. The Canadian Investor Podcast should not be taken as investment or financial advice. Brayden and Simone may own securities or assets mentioned on this podcast. Always make sure to do your own research and due diligence before making investment or financial decisions.