The Canadian Investor - What Railways Can Tell Us About The Economy

Episode Date: August 3, 2023

In this episode, we go over recent news and earnings including the US Federal Reserve’s latest move, the hype around superconductors and earnings from Teladoc, Mastercard, Allied REIT and Canadian National Rail. Symbols of stocks discussed: TDOC, MA, AP-UN.TO, CNR.TO 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  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.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Belanger. The Canadian Investor Podcast. Welcome to the show. Today is August 1st, halfway through the summer. My name is Brayden Dennis, as always joined by the majestic Simon Belanger. I just want to capture something that you and I just were talking about here before we started the show.

We're doing our portfolio updates for the Patreon. And I was like, oh man, I completely forgot that it's August 1st today. I guess I should do that. And then you and I are both like, we didn't do anything this month with our portfolios. And I think that that's an important kind of takeaway to our style and in a world where the market feels like you always have to be doing something. And a profession where you got to be doing something to look smart and feel smart. And the reality is, is it might be the only profession where the inaction leads to better outcomes. Yeah, exactly.

And I mean, there's nothing wrong too with like, I mean, I didn't do anything, but with my work, I'm still investing through index funds with my DC pension, but I didn't actively add money mainly because people know I'm a new dad and my wife's on maternity leave. So it's basically at this point, it's one income. So there is a reason why that's another reason why I didn't do anything. But also, I think as a higher perspective or another perspective, it's more that there's a lot of things that are in my view, a little bit frothy right now. So I'm more than happy dollar cost averaging

with my pension on that end. And then, you know, kind of sitting back and waiting till there's some names I have my own white on my watch list that become attractively valued. Yeah, sure thing. Well, I mean, like I have my like automatic contribution go in.

I just didn't do anything. And partly because it's summer and partly because sometimes just sitting on your good companies and doing nothing is the most profitable endeavor you can possibly do. All right. We have an earnings news roundup today. Let's kick us off here. Yeah, exactly. A new segment. I like how it rhymes too. So what the Fed said. What the Fed said. Yeah, it just came to me when I was doing that. So as most people know by this point, it was widely expected the fed raised interest rate by another 25 basis point last week if you're new and not familiar with that they just added 0.25 to the existing rates and as always it's more telling to actually listen to what jerome powell

says during the press conference and the answers or lack of answers that he gives during the question and answer portion. I always find that fascinating, so I listen to that. And there's some big takeaways here. First, you know, there's a lot of journalists that were asking about, you know, what are you going to do, trying to, like, get him to say something. And whenever that was the case, he always came back to, we'll do what makes the most sense according to the data. So first, he mentioned that the June CPI print came in lighter than expected, but they are still a long ways from their 2% inflation target.

A bit like the Bank of Canada Governor Tiff McLean said at his latest press conference. latest press conference between now and their next meeting, which is in September. There's going to be a lot of new data that will be coming out, including two more CPI prints and job reports during that period of time, which they'll be paying close attention to. But they said, and he said that again and again, especially when journalists were asking about kind of specific little tidbits of data, what he thought about it. He always came back to say, we look at the data in the aggregate. So it's not just specific data as CPI or even job reports. They look at everything as a whole and then they make a decision.

So it's possible that they will raise rates in September, but it's also possible that they will hold them at the current rate. He made a point during the press conference to say that they believe the monetary policy is currently restrictive enough and is putting downward pressure on the economy. He also mentioned that Fed staff are no longer forecasting a recession and that a soft landing is still achievable. There wasn't all that much in terms of movements for the market. And what's really interesting that I've noticed now the last couple of Fed press conference or meeting or announcements regarding the interest rates is that the markets are not moving as much now based on what is decided or even sometimes what Jerome Powell says, because now I think they've gotten the message that they will be honing in on those key data points that will be coming out. And then they'll try to figure out what the Fed will do

based on those data points. You know, it's kind of funny because we talk about how the market can be insane sometimes. You know, it can get extreme eras of pessimism and extreme eras of bullish said, the recession that never came, quote unquote looking well past this. The market is forward looking and things are absolutely ripping basically since this moment. Is that a fair characterization? Yeah. Yeah. I think the markets are doing quite well despite what the Fed is definitely doing. So that I think is fair. And one thing I found interesting, I tweeted about that on the weekend, is there is this CME FedWatch tool. So what's really cool about that tool

is you can go quite far into the future to see what the market is expecting in terms of interest rates and where the main interest rates for the Fed, the overnight rate will be going forward. So, you know, they don't really price in like it's kind of I think at this point, if I remember correctly, for the next meeting, it's a bit undecided. But if you go further out, that's where it really gets interesting into January of 2024, where the market is placing a 25% chance of a lower rate than currently by then.

So whether it's 25 basis point or 50 basis point, if you add both together, it's about a total 25%. So it's interesting what the market is kind of, you know, hedging a little bit or saying that there might be a possibility. Obviously, 25% is not that big of a chance, but it's always interesting to look at that tool I find and just see where the sentiment is there. Absolutely. And this stuff is fun. It's fun to chat about. And the reality is, you and I are going to buy good companies and hold them and keep adding regardless. Back to our first, how we opened the show. 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 questtrade.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, 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. All right, Simone. I got a segment called WTF is a superconductor. We should name that the episode title.

I'm going to be learning because i'm not seeing i saw this segment quickly and i haven't like seen to talk about it so i'll be listening oh you haven't seen the buzz about this no i haven't okay um you haven't been on enough degenerate stock uh forums lately okay probably why how about you head over to Reddit Wall Street bet? Actually, I haven't been there, but I'm sure that it's on there because some of these superconductor stocks are absolutely ripping. American superconductor, I think it's called. This stock is up a cool 54% today. All right.

up a cool 54% today. All right. So that gives you a bit, I mean, it's a 500 million in market cap stock, but still it's, so it's gained about 250 million in market cap today. Oh no, not that much, not that much, like 125 million. Anyways, you see where I'm going with this is that it is a hot, a hot topic. And I'm going to give you half finance lesson, half science lesson, actually probably more like 90% science lesson here. And superconductors, these experimental stocks have gone absolutely bonkers. And you're going to get my mostly rusty environmental chemical engineering degree here on the podcast. Not to be confused with a semiconductor, a superconductor is a material that has no electrical resistance in it. And frankly, for lack of a better understanding, bizarre magnetic properties.

Like superconductors can levitate. They have this outward magnetic pulse so basically you know you better not hold a superconductor in a lightning storm because you're in trouble you'll be in trouble it is uh it's the perfect conductor right you know it's okay it's a golfing in a uh in a lightning storm you're holding holding a metal rod, you're probably the most conductive thing within a few square kilometers in that scenario. And so that's the same science here, is that superconductors are materials that do not have any electrical resistance. not have any electrical resistance. And because of that, they have no heat created in the process because that's heat comes out as loss. It's energy transfer. And that comes out as loss in the

system. It's the same reason that this MacBook Pro overheats that I can fry a fried egg on it. It's because there's lots of resistance in there. Okay, so physicists have created superconductors through history. I think in the early 20s, they discovered that it was possible. And then in the 60s, don't call me on the exact dates here, but roughly at that point, scientists made a breakthrough in actually creating a superconductor. Now, that was a huge breakthrough for the people to even realize that, one, they can theoretically exist, and that, two, we can create them. A material where electricity can pass through with zero resistance. Think of power lines.

You have double-digit percent losses on high- high voltage power lines between the power station and it arriving in your house to plug in your iPhone each night. The problem with superconductors is there's just a few metals that can achieve it, but it has to be at extreme cold. That's the whole problem with superconductors. You have to have the material in minus 200 degrees Celsius. Some of them, depending on the metal, you have to approach nearly 500 degrees, negative 500 degrees Fahrenheit on the surface of this metal to achieve superconductor. And so you can imagine how useful is that, right? Like what do we got some power lines in the Antarctica times like 100 in terms

of cold. And so it's not very useful. But if you had superconductors that could be used at room temperature, you can use it for applications particularly important in nuclear fusion, MRI machines, quantum computing, electronics, power lines. And because of those magnetic properties I was talking about, literally levitating, like levitation. So you can have levitating trains, cars, like it, you have no friction transportation. You see what I'm getting at with this? So it's kind of like, uh, you know, those utopian futuristic worlds, you see see they kind of rely on a superconductor being possible at temperatures that are not impractical does that make are you with me so far yeah i mean you're essentially explaining star wars so i'm listening yeah exactly you know that meme where it shows like the world that like it could be if you if humans got together it's like that basically either that or the fifth element was

another one back in the day i don't know if you saw that yeah so so here here's where we've been at so far is you have this amazing potential material but right, up until now, a freezing cold minus 200 degrees Celsius metal is just completely impractical. So here comes the news. This is the relevancy here. A group of Korean scientists about four days ago have claimed to produce a material called LK99 that is a superconductor at room temperature. This is a non-peer-reviewed article, and it's coming with equal parts excitement and equal parts skepticism. I would say 50-50, and even from the same scientists are saying, okay, this is really cool what they pointed out. I'm not able to reproduce this part and so on. And it's been really interesting seeing kind of like

science being cool for a nerd like me in real time. It's pretty awesome to just kind of have these people who are way above my pay grade. They're talking about things that I don't understand, but then kind of going back and forth on, okay, there's something here, but this part I haven't been able to recreate. And so there's been a pretty balanced approach on both sides. So for now, it's just, you know, us paying attention and see if this can be reproduced at scale. Round this out here. There's two things that I'll leave you with. One, if the scientific discovery can be recreated, and these Korean scientists are on to something. And number two, if LK99, so if it is the right material, it's actually a really simple compound to make at scale. Like it's not a complicated material to make. Like it's not a complicated material to make. And so if both of those things are true, we have one of the largest breakthroughs in physics in our lifetimes, just due on the grid, the electronics, and the actual devices, medical devices like MRI machines are super, super, super expensive.

This could drastically lower the price of them. And probably most exciting is just like the magnetic properties of superconductors in floating zero resistance transportation. And that's badass. That would be super badass. I want that. So that's superconductors. That is WTF is a superconductor. Oh, that was really interesting. I mean, you know, that with what was it? The Congress hearings on UFOs too?

Yeah, between this and UFOs. Yeah, it's all a giant distraction from the fact that Sam Bankman fraud is going to get off on basically nothing here. I don't think he will. I think they dropped one charge, isn't it? Dropped one charge. Yeah, I think the, which one was it i think they dropped was the political donation i think right wasn't it like the financial crime one like didn't they drop like kind of the biggest one i don't i thought it was more um yeah like making illegal

financial contribution for political campaigns or something like that they did not drop all charges uh anyways we're gonna i'm gonna say things that i don't fully i'm not caught up on so i'll just shut up no no okay yeah we'll move on we'll move on before we ramble too much so we'll move on to some earnings here so i decided to do teledoc uh because i don't own it anymore but i'm still intrigued that what's happening with the business. Clearly, for those not aware, I sold it about six months ago and it was, I mean, it looks like it was a decent quarter. I mean, the market definitely did think about, you know, did think so because it was up like 25% on the day. I'm not sure if it was fully the market reacting or potentially some shorts

covering their position. But nonetheless, I think it was a decent quarter and I'll go over it. So revenues grew 10% year over year to $652 million. Free cash flow was $65 million for the quarter and $110 million for the first six months of the year, which is actually double that of last year. Gross profits margins were up 160 basis points year over year. Their operating margins were still negative, but better than last year at minus 7.3%. It improved by about 30 basis points there. Net loss of $0.40 per share, big improvement versus last year which was 19.20 to a share mostly due to the infamous at this point Livongo or the ill-advised Livongo acquisition I was a goodwill impairment expenses as a whole were higher than last year but the increase seems

to be moderating share count increased a bit less than 2%. It's not too bad, but this has always been an issue in terms of share-based compensation and share count for Teladoc. So something to keep an eye on if you either own the business or are interested in the business. In terms of guidance, they did increase their sell guidance a bit. The top end remained unchanged at $2.675 billion, but they increased the bottom end of their range. And the same for their adjusted EBITDA guidance.

And they also increased their guidance for their paid member, which is a combination of visit fee only. So people that just pay every time they go and members who have paid access through their insurer. So all in all, I would say, you know, it's a decent quarter. I'm not sure if it warranted the 25% increase. Like I said, maybe it's a combination of people were overly bearish on the company and just things kind of reverting to the means a little bit, showing that the business is not as bad maybe as a lot of investors thought, or also some short positions covering their short on the better than expected earnings release. It's definitely been part of a basket of easy things to short, part of that COVID crash, post-COVID beneficiary crash names yeah exactly so i i mean

all in all like a decent court i'm still happy with my decision of selling because i took the money and invested elsewhere but um you know they could very well turn things around and become a really good business going forward uh that remains to be seen but uh happy to report on it from the sidelines from at this point yeah isn't that the best right uh even if the business is doing well you can wish them well uh oh yeah i'm not saying that they're doing well particularly great or anything but you can wish them well as a spectator a spectator sport instead of exactly your hard earned cash uh anything else there on Teladoc? Nope. No, you're good to go for your next name.

All right. Let's talk about MasterCard. So here's a stock that the performance since the Q1 of 2020, aka right before the crash, is only up 15%. And I say only because the S&P has done more than double that during the same period. Meanwhile, MasterCard transaction volume has compounded at 13% per year since then, been an extremely good inflation hedge, saw the world go further into cash, saw cross-border volume come back with a vengeance and is now at all-time highs. It actually grew 23% year over year on this quarter. And earnings per share grow more than 20% per year on a very, very, very profitable business. You have 20% growth on EPS, nothing short of spectacular.

And so I absolutely love it because I'm a shareholder and I've been building my position on both Visa and MasterCard with equal weight with two, arguably two of the best businesses on the planet. And I don't want them to go up because I am relatively young and want to keep building positions in two of the greatest businesses on earth. positions in two of the greatest businesses on earth. So this is me, a very happy man reporting wonderful business results and largely sideways stock now for what's been three and a half years, it feels like. So the quarterly results, let's get into them. So this is their quarter, their second quarter. Net revenue was up. I'll do currency neutral numbers. They're very similar. They're usually like 1% different. Currency neutral net revenues were up 15% while expenses were only up 6%. Really nice to see.

It's kind of nicely bucking the trend of so many of these companies reporting huge growth on operating expenses. Seemed very inflationary. So operating income up 22% and net income up 26%. Earnings per share up 29%. That's the wonderful world of buying back stock there. On the actual business, the KPIs coming right from stratosphere here, total transaction volume grew 10% year over year, transaction volume grew 10% year over year, cross border grew 23% year over year, and they issued a 9.4% growth in active cards that are out there in the world, MasterCard branded cards. So business as usual, boring as usual, boring as beautiful. When you have margins like this business they have a operating

margin of 58.3 percent it is uh nothing short of spectacular uh for a business like this yeah and i put something up for our joint tci members and i'll just explain it for those who are listening essentially it shows since 2018 the free cash flow per share from mastercard and it's not a straight line into the right but it's pretty close so they've grown that free cash free cash never really is you got to kind of normalize it out no no exactly and this is over five year period but it's still i think people know by this time, this is one of my favorite metrics because it accounts for share count and free cash. It's really the cash coming into the company. So there's not all these shenanigans.

Sometimes that can happen with earnings per share, these accounting, you know, not tricks, but, you know, accounting things you can do that are non-cash items that you have on your income statement. So free cash flow per share over the last five years has increased just shy of 17%. So that's a compound annual growth rate for MasterCard. So this to me just shows how successful this business has been. And the further you look out, the better it looks. I mean, if you go down like about 10 years, it's even better the way it looks. So it just keeps going up and up. It's not like I said, a straight, what creates value, underlying intrinsic value growth for the business, for the equity? And the easiest answer, and what I believe is the most correct answer is free cash flow growth per share. You know, in a vacuum, assuming the business is still

in, you know, maintaining its competitive advantage, its competitive position in the marketplace. And to me, these businesses are only widening that right now. And I know that they have potential long-term existential threats. Regulators kind of have a target on them for good and bad reasons. But every business has long term existential risks, you know, maybe outside of the rails at this point. And so I think the price is reasonable here today. I think you have an incredible business and it's not slowing down because yes, we've hit saturation in North American developed markets, but not even in a

lot of Europe, not in Asia, not in South America, not in developing nations. They're building other tools, but a lot of it is still building on top of the payment rails. And so for reasons X, Y, and Z, I am happy to own the stock. Yeah. And I think there's also a lot of misconception by people when it comes to MasterCard and Visa. Everyone knows them, but I'm listening to an audio book right now. I won't, you know, I'll do a recap when I'm fully done on the podcast because anyways, it's a subject that I'm pretty passionate about. But he does talk in the book about Visa and MasterCard. And you can tell the author doesn't really know how it works just by the way he compares it.

And a lot of people think they're loaning money. Well, yeah. And he thinks also that, yeah, that's it, that, you know, they're the transaction, they're the ones who will loan the money, but also that there's an instant settlement, which is not the case. The settlement is actually done between the two financial institutions. lot of people that are supposed to know you know how things work in the finance world yeah or even saying that Visa and MasterCard they charge 2% where the reality is they do charge fees that's you know we never said they don't but there's typically about like I think it's five or six people or players involved in a credit card transaction so So there's the receiving bank. I'll make this really quick for people who are trying to visualize this.

When I, okay, so I have $100 and I'm going to use, I'm going to flash my Visa card. Simone, you sell me a t-shirt for $100. I tap that card. My bank who takes on the credit risk is going to take the largest fee at around, let's say for easy math sake, 1.5% of the total 2.5%. So they're taking more than half of that fee. Your bank as the merchant is going to take around 50 basis points again. So now we're at two out of two and a half percent. Then there's the interchange fees from Visa and MasterCard that you're looking at around what averages around 0.13% to give you an idea of kind of like the unit economics,

to give you an idea of kind of like the unit economics, the merchant bank and the issuing bank, like my bank, when I do this transaction is taking the large amount of the fees. So these are the actual banks. These are the financial institutions who take on credit risk. When you don't pay your credit card bill, you do not pay Visa or MasterCard. They are completely separate from the entire issue other than facilitating the network and the transaction technology between them. Yeah. And don't forget if they're also using a Square or a Paymentus or Moneris, that company also takes a fee, right? That's the remaining fee in that 2.5%. I think there's a lot of misconception. I do feel for Merchant because, yes, it is, you know, for a lot of them, it has a pretty big impact.

The overall, you know, the sum of all the fees. But, you know, to be going after the credit card businesses where there's often little to no one that talks about the actual banks taking a cut there and and charging and charging predatory rates interest rate yeah on the credit cards so uh no it was just a little i've noticed this oh time and time again especially you know you look at mainstream media and especially like journalists that should know or should at least do their research and they don't. I think it's just because it's so much easier to just say the same thing as everyone else has said and just say, oh, big bad Visa and MasterCard are taking 2%. And that's typically the number you hear, which is just not true. No, it's not true.

Like I said, it averages about 0.13%. The remaining unit economics in that 2.5% is Jandrex. You just laid out as the point of sale system, square. There's millions of them. How many point of sales? Toast, Lightspeed. Yeah, exactly. 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 gonna 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. Okay, well now we'll move on to a different type of business, completely different. So Allied Property REIT. So they had their Q2 earnings. And it was really, obviously, I own this company. I think it's a value play, in my opinion.

I won't go on it before I owned it. You can go back to past episodes. I've talked about it before. But they provide an update on the sale of their UDC portfolio. That's their urban data center, which they agreed to sell. The closing of the transaction is actually scheduled for August 16, 2023, which I believe, if I remember correctly, when it came out that they had found a buyer maybe a month or so ago, I thought it'd be by the end of this year. So, you know, good on them. I mean, the sooner the better because they'll be using that money to pay debt.

So, $1 billion of the proceeds will be used to pay debt, including $740 million in variable interest debt. Do you remember who's buying it? Is it one of the – It's this Japanese communications company. I can't remember the name, but I wasn't familiar with them. Is it like a data center roll-up? Yeah, I think they own, I think, telecoms and also data centers. So they have expertise in that.

Got it. I don't remember the name, though. I can look it up, but it doesn't matter that much. Yeah, so they'll use the rest of the proceeds for development and upgrades in 2023 and into 2024. Now, the results, they are seeing strong demand for their products, well, for their real estate with tour activity increasing during the quarter. They believe that this is a leading indicator that rental activity will be picking up. Interest expense was significantly higher than last year, 55%, but it will lower because of what I just talked. They'll be basically getting rid of $740 million of variable interest debt, which I think is a great thing.

It's a prudent thing for them to do. Interest expense was higher than expected and negatively impacted funds from operation, adjusted funds from operation, and net operating income. These are metrics that tend to be more specific to REITs. For those who are interested in learning about that, you can just Google them. They're not generally accepted accounting principles, so GAAP. You can just Google these metrics. They're kind of metrics that are very useful, but they're specific to REITs. And FFO per unit was down 3.3%, and AFFO was down 1.3% because of the higher interest expense that I mentioned. But like I said, it will be getting better because of the sale of their UDC portfolio.

Now, payout ratio was slightly up as a result of this, but nothing alarming. Payout ratio was slightly up as a result of this, but nothing alarming. Leased area was down 120 basis point to 87.6% compared to the previous quarter, so Q1 of 2023. So not year over year. That means that they have a vacancy rate of 12.4%, which is much better than the industry as a whole. So the industry as a whole, according to a recent report from CBRE, they come out every quarter with a report on office real estate in Canada. So class A office real estate, which is what Allied Properties essentially has their whole portfolio is that. So these are just, you know, kind of top of the line office real estate, whether it's old building fully renovated with all the amenities or newer buildings. So that compares to 16.5%. So they have close to 400 basis points or improvement compared to their peers in the class A real estate. So it's definitely, you know, they're doing pretty well.

In terms of markets, it varies per market in terms of occupancy and vacancy rates. But as a whole, I think considering what the space is doing, I think Allied is definitely, you know, doing pretty well, faring well in this space. And for the listeners of JoinTCIs, you'll be able to see some of the data here that I prepared. It shows the vacancy rates, which are all going up as a whole for the

economy or for the office real estate for Canada. But I think you'll probably see that moderating, mostly because you have less of new buildings coming up or finishing construction. So that's something I talk with Dan because you had all these buildings being built up and now they're finishing. But no one wants to invest in building new office buildings because the writing's on the wall, the future of work and so on. So I think in the upcoming years, you'll probably see the market stabilize because there's not going to be as much supply available, potentially some buildings being converted to apartments as well. Downtown Class A vacancies have gone from 5% to 16.5% over the last 10 years.

Am I reading that correctly yeah no you're correct yeah damn that's a lot yeah it is a lot i mean it's i i think it's never as low obviously as residential for example uh but it has gone you can see like in 2013 class a was around like you said 55 and then it came pretty, just before the pandemic, it was probably around 7-8%. But then it's kind of it's skyrocketed until since then, more than doubled. So there's definitely some challenges. And that's, that's something that, you know, I'm fully aware with the investments I made in. But overall, I mean, Allied is faring quite well in terms of their average in place net rent

per occupied square foot. So what this means is just, what's the average net rent per foot for what they're actually leasing? Well, it's up 3.7% year over year. So it was 2267 in 2022 and 2351 in 2023. So you can see that at the very least yes their vacancy rates are going up slightly but overall they're still able to um you know get a good dollar value an increasing dollar value for what they actually rent out and they expect their renewal rate. So these are existing tenants that have leases that are coming up to be around 75 to 80 percent by the end of this year, which is in line with their historical renewal rate. would make me change my view and my expectation that a market is overly bearish on this whole asset class,

but especially the premier REITs, which I think Allied is one. But it's something I'll be keeping an eye on. Like I said, this is a name that for sure I'll be checking every single quarter to make sure that everything's on track. on track. It's one of those things where that broadly, that increase of vacancy rates for downtown class A and suburban class A, and they fit into that downtown class A bucket. The properties that they have, yes, are class A, but they're also in the most premier locations. I can't speak for the other major city centers in Vancouver or in Montreal or Calgary. I can't say for sure, but I can say with a lot of confidence in Toronto. And it looks here that their largest city center, their largest market is Montreal. Am I reading that correctly? Yes.

Yeah, it's Montreal and they're doing quite well in Montreal. So in Montreal, their occupancy is higher than the overall Montreal market. In some of the markets, it's a bit lower. But like you said, Montreal is about half of all their square footage that's available so maybe a bit less and then toronto's second and then you have calgary vancouver kitchener and ottawa kitchener and ottawa are smaller markets but ottawa i know i believe they have i know one of their buildings they have two properties and one of the buildings i mean it's premium location. Like I know it's an old looking building that they completely renovated on the inside. Very familiar with it.

It's, you know, I can see why there's a demand. They have a certain style of property, which is old, you know, kind of industrial property, a lot of exposed brick. They put the, what do they call it? Beam. What is that architecture called? Beam. I think, yeah, they're beams. Yeah. Exposed beams. Yeah. Exposed beams. brick they put the the what do they call it beam what is that architecture called beam i think yeah

they're beams yeah exposed beams yeah exposed beams there's a there's a fancy name for it that some listeners will know and that's the kind of properties they have and that's the kind of properties that people want their employees in that's the hot fancy new but also timeless you know it's not like uh just trendy or anything like it looks good, but it kind of always looked good. And people like it. So that gives me a little bit less, less concern about that trend. And, you know, you got to isolate these issues on a property by property basis and a company by company basis. lesson for investors, right? Is if an entire sector is getting absolutely decimated and no one wants to touch it and they just don't want any broad exposure, but there's like an exception in some of the, like a particular asset inside of there, that's where you generate actual alpha by doing the research there. So I wish you luck. I'm going to participate as a spectator. Yeah, no, that's fine.

I don't want to fight that trend, but I do know their properties in there well. All right. Last one here. Yeah. And maybe just to recap, the last thing I'll add is I've done a lot of research for this investment and it's also a small portion of my portfolio. So I think it's just important for people to put that in perspective as well. Yeah. I thought you had like 100% of your net worth in it. Oh, no, no. 98. I'm just messing with you.

So now finishing here with another Canadian name, one that people know well. So Canadian National Rail Q2 2023. And this was really interesting. And I'll be interested in hearing what you have to say after this too. So I'll go over the results. I'll give my thoughts. So revenue decreased 7% to $4 billion.

They had lower volumes on intermodal crude oil, U.S. grain exports, and forest products. Lower demand for freight services to move consumer goods and custom outages caused by Canadian wildfires. Lower fuel surcharges revenues due to lower fuel prices. So essentially, they are able to charge more when the fuel prices are higher. Earnings per share decreased 8%. Free cash flow increased 10% to $1.1 billion. Free cash flow for the first half is up 8% to $1.7 billion. And they've grown free cash flow per share since 2018 better than MasterCard at 17.29%, which is simply amazing. I mean, they are returning a lot of capital to shareholder, the new CEO that now has been there for I think like a year and a half,

if I remember correctly, for a little bit of time. So Tracy, I think like a year and a half if I remember correctly for a little bit of time so Tracy I think it's Tracy Robinson and she's really that's been our focus is just returning you know capital to shareholder and making sure they're more efficient now their outlook is weaker than anticipated volume in the second half of 2023 they revised down their EPS projection and they now expect that it will be slightly negative versus mid single digits previously. What I found really interesting as part of that is the lower demand for freight services to move consumer goods. And, you know, we talked about the Fed. We hear the Bank of Canada. You hear economists. But I think this is a company that people need to really pay attention to what they're saying.

Because, you know, you can take as many economist projections and blah, blah, blah, going like, you know, flip a coin, whether they're right or wrong. We've seen that over the last two, three years. And, you know, it's always kind of been like that historically. two three years and you know it's always kind of been like that historically but when you have a company that's so tied to the north american economy not just canada north america as a whole and they're saying that they're seeing lower demand i think that to me should definitely raise some you know non-serious red flags but definitely but definitely people should pay attention to what a Canadian National Rail says because they – I think to me, they're as good an indicator as anything else as you can find. There are a few – I like what you're saying here because there's a few proxies for the economy that I like more than any macro data on a company-by-company basis. We just talked about MasterCard transaction volume and cross-border volume.

And here, actual volumes and demand expectations moving forward for consumer goods. I mean, that's more useful. Coming from the management team of a CN Rail, to me, I take that as more signal to the broader economy than any macroeconomist expectations. That's just me. And there's a few companies that fit that proxy extremely well and have an actual pulse. Like reading that transcript is more useful than anyone else's opinion, in my view. And CN Rail and CNCP and Union Pacific, they fit the bill there. Yeah, exactly. So I thought that was really fascinating what they were saying. And, you know, this new CEO, I think she's been

pretty straightforward to shareholders. I wouldn't have said the same thing about the previous one, Monsieur Roubaix. I can't remember his first name, but I remember the last name. And yeah, after that failed acquisition attempt of Kansas City Southern, which was so stupid to even attempt, I think they have, I mean, from stupid to even attempt. I think they have, I mean, from what I've seen, I think they have a good CEO and I have no reason to not, you know, take her seriously when she's revising downwards or guidance for the rest of the year. And clearly the forest fire, that's not something that's going to happen every year. So you have to, you know, put things into context. But the other things that they were mentioning, you know, lower demand, I mean, this is not due to forest fires.

Right. Yeah, that's right. That acquisition. It's just such a, like, dark spot on a resume, isn't it? Yeah. I mean, to me, like, look, it's at the end of the day, I think it's good because, you know, they got rid of him. And then they got an actual CEO that, you know, the company might not be growing super quickly. Obviously, growth would have been better with that acquisition, but there was no way it was going through with regulators.

So that's why it was so stupid to try and make that acquisition. But I love that she's, you know, focusing on returning capital to shareholders. she's focusing on returning capital to shareholders. You're not going to be doing like crazy returns, but you're probably going to be long-term 8% to 10% returns, maybe a little better for a stable company like Canadian National Rail. I think you could do a lot worse. I'm trying to find it right now. Oh, here it is. Do you remember TCI Fund Management, which is hilarious because this podcast is TCI, but Chris Hone is a very famous capital allocator from the UK and he runs TCI Fund Management, which is the children's fund or something is like the official name.

Oh, wow. The Children's Investment Fund or something. Okay. Do you remember when this all happened and Chris, Chris Hone wrote, he's an activist hedge fund manager, managing tens of billions. And he wrote like an active, like a letter basically being like our strategic plan or a potential like hostility towards the, because there's such a large shareholder in CN Rail to put them quote unquote back on track.

And you know, hilarious because they're a rail. I remember that, yeah. Yeah, hilarious naming and wording because they're a railroad, put them back on track. And it's an example where you have a large shareholder like that, that other shareholders, like small shareholders, want those kinds of activists on the board. And being critical of management when mistakes are being made, when blunders are being made. And that was a clear era of blunders. We're not expert in railways, but I know enough about railways to know that regulators for any acquisition, historically, especially in the US, they've been very afraid of too much consolidation and lack of competition in this space especially for something like rail

yeah exactly and it did not take uh you know a rail kind of professional or someone that knows the rails like in and out from a to z to really you know understand that that was ill advised you just look at the sheer geography that's covered by canadian national rail and you'd be like wow they would almost have like a stranglehold on a big chunk of canada us and mexico if that went through and regulators would just not allow that i guess the counter to that is like cp is no small small biz no but um canadian national already has a line that goes all the way to the gulf of mexico right so cp didn't have that cp was more located obviously west and then like throughout canada and had i think a few lines in the u.s but nothing much so you can, I mean, you if you look at a map, you would

have seen like, I, I remember when they made the offer. And just looking at a map of my why this like, there's no chance this gets approved by regulators. CP, I think it made more sense. And like we talked about when it was approved, there was still some conditions that were placed to make sure that competition is still there and cp is not taking advantage of their position what does warren buffett say you know own a business so good that an idiot can run it because one day an idiot will that's kind of the case here right luckily you can have some blunders and no one really cares because you have such a ridiculous competitive advantage in regulatory moat and everything else. So that's why people own these names.

All right. That was a very full episode. Let's wrap it up. Thank you so much for listening. We really appreciate you. Stratosphere just today launches midday when this comes out, a brand new, I want to say, and it's not a brand new platform because it looks and feels the exact same, but it's a brand new data set that does not have any more issues with financial statements. We have had a data provider for us that we've

been working with for the last two years, that the data was good with large caps in Canada and the US. But as soon as you got into some smaller cap names, or especially smaller cap Canadian names, really kind of the data quality kind of fizzled out a little bit. And I didn't love that and never did. So we were saving up so we could buy the proper data sources. And that is launching this Thursday. And I really think you'll like it. You can have it as your go-to, most trustworthy,

professional type platform because the data quality is institutional level. We'll see you in a few days. 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.