The Canadian Investor - Why REITs Should be on Every Investor’s Radar

Episode Date: January 19, 2023

In this episode, Simon talks about Real Estate Investment Trusts (REIT) with Daniel Foch from the Canadian Real Estate Investor Podcast. They cover the pros and cons of investing in REITs vs. buying r...eal estate, which sub sectors are attractively priced and some potential names to keep an eye on. Tickers of stocks discussed: AP-UN.TO, CAR-UN.TO, REI-UN.TO, SRU-UN.TO, GRT-UN.TO, DIR-UN.TO, NWH-UN.TO, SVI.TO, NNN, O, SPG, WPC, VRE, HCRE, SCHH, USRT, VNQ, DLR, EQIX, AMT, BIP-UN.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 Dan's twitter: @daniel_foch 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. Register for ShakepaySee omnystudio.com/listener for privacy information.

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Starting point is 00:00:00 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
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Starting point is 00:01:47 from The Real Estate Show, the Canadian real estate investor. What did y'all talk about? Yes. So we had a great chat. It was focusing primarily on REITs. So real estate investment trust is because Dan is the co-host of the Canadian real estate investor along with Nick Hill. And we had a great discussion because it kind of intersects both our podcasts and obviously theirs. They primarily focus on investing in actual real estate. So rental properties, that's mostly what Dan and Nick will do. But REITs do offer an opportunity for people like you and I, a lot of people listening that may not have the funds to invest in real
Starting point is 00:02:25 estate directly, but it offers them the opportunity to still be able to invest, whether it's office space, all different types of commercial, industrial. We even talked about all different kinds of sub-REIT sectors, if you'd like to call it, where the investment opportunities are maybe a bit more attractive in terms of yield comparing that with the cap rate so a metric that's often used when talking about real estate for investors when they're actually investing in that so it was a great conversation and I'm sure listeners will love hearing Dan. Dan is very knowledgeable on the topic and brought some great insights to the podcast. I did my research, of course. I always like to do it, but it was a great chat with Dan.
Starting point is 00:03:11 For people, though, I would just keep in mind this was recorded during the holidays, so the REIT market has changed a little bit. It's definitely not as depressed as it was. We're kind of seeing a little bit of a rally, generally speaking, right now. So just keep that in mind to put a little bit of context there. REITs got smoked in the year of 2022, down 31%. It was the worst performing asset class in the US and Canada. Dude, have you seen online? It's like ridiculous it's shocking seeing some of these numbers like zolo house sigma these all these like tools online have you seen the like before and after of buying and selling of like gta real estate yeah i have and i think for the most part it's related around the gta right i think that's where people are taking the the biggest hit where they they
Starting point is 00:04:03 bought at the peak and now are selling at a loss. And I think Vancouver too. But yeah, it's a bit disheartening. Definitely feel bad for people. But again, you FOMO and that's what you get, unfortunately. I wholeheartedly agree. Agreed. And look, if you are from the GTA or Ontario or any major developing city center, I'll call it, in this country, you have only seen the property values go up and up and up and up. And to see like a Burlington, Ontario, burlington ontario 2.1 million dollar house sold at the peak
Starting point is 00:04:48 then sold again recently for like 1.6 we're seeing this it's like 500 000 600 300 000 here on like six month flips like that that didn't go as planned, did it? And look, it's sad, but I think the lie that's been sold around here is that that asset class just goes up and up and up and has no risk. It's just a fugazi fugazi story that's been told. And this is the reality.
Starting point is 00:05:22 It's as harsh as it may be. Yeah, exactly. And I think it's, obviously I feel for people that overextended themselves are in a tough situation right now, especially if they relied on information that, you know, for example, the Bank of Canada governor who was saying in 2020 that rates would stay low for a very long time. They got into variable rate, not understanding fully how they worked. And I know mortgage brokers, you know, there's some very good ones out there. And I'm sure the good ones and
Starting point is 00:05:51 most of them are good. They do explain how the product works, but explaining how it works and the consumer actually understanding how it works. I think they're two very different things. And I've had discussions online on Twitter with some mortgage brokers about that and they were pushing back. And I said, look, it's not that I'm saying mortgage brokers don't explain it. I'm saying that they might be explaining it, but the clients don't necessarily understand the full implications behind it. And just being told by various people, like you just said, that real estate always goes up. So even though their payment might sound pretty high, they barely meet the stress test. For example, people have this false sense of security, buy these home at really high prices. And now, unfortunately, they're paying the price.
Starting point is 00:06:37 Well said. All right. Well, let's get into your conversation. You guys are speaking about Canadian real estate and real estate investment trusts. I'm going to be soaking it up like a sponge when this comes out. So let's get into it. Okay, so welcome to the Canadian Investor Podcast, Dan. It's actually the first time you're here. We played originally an episode, the first episode of the Canadian Real Estate Investor Podcast that obviously is hosted by you, Dan Foch, and Nick Hill, but haven't had the chance to have you on the podcast and actually interact with you. So I'm pretty excited to do that and talk about REITs today. Yeah, happy to be here.
Starting point is 00:07:14 It's an honor and a privilege, and I feel a little bit like I have big shoes to fill given that Bredo is actually absent today as well. Yeah, we won't have Nick either, but definitely encourage anyone who hasn't listened to the Canadian Real Estate Investor Podcast to give it a listen. It's fantastic. You guys know what you're talking about.
Starting point is 00:07:35 And what I really like is you also go over the basics, but talk about some more complicated stuff. And you have some episodes where I think you guys went over some real estate terms that are really useful. So people can make use of those older episodes. I think it's really useful. Anyone wanting to get into real estate, whether it's investments, or I think just anyone curious, right? Real estate curious would be good too. Absolutely, for sure. And I think, you know, it's something that we discussed so much in Canada. And we have a lot of it, even in the
Starting point is 00:08:04 equities market, a lot of exposure to it, pension funds as well. And it's a huge piece of our GDP composition. We also try and really be like full scope in the real estate space. So go all the way from macro all the way down to the tiny little details and the minutia of real estate investing. So hopefully, I mean, I think the macro piece, you guys talk about it a lot on here too. I think it's important if you don't get the macro right, then the micro doesn't really matter. The details don't really matter, right? So we try and touch on that regularly as well and make sure that we contextualize why
Starting point is 00:08:37 that matters for real estate investing. Yeah, no, exactly. But before we get started, people don't see that, but I have to say Dan has an FTX baseball cap on. I just realized it a bit earlier. I can't believe you got your hands on that. Yeah, I have quite the collection of bankrupt, I guess I'd call them deadcos, deadco dad hats. And this was the newest one to my collection. Not technically a deadco yet, but on the brink. And I figured I'd get it while it was too soon. A lot of people have said it's too soon, but... I'm sure. I mean, it's a good collection to
Starting point is 00:09:11 have. But let's get started here. I know we usually at this time of year, we get a lot of new listeners. So we'll talk about REITs. REITs are Real Estate Investment Trusts. And we'll talk about the basics. And then we'll also talk about some of the potential value you can find in REITs right now. And also look at higher levels for specific subsectors because real estate investment trusts, there's all different kinds of them, what type of metrics to look at. And I'll even go over some of the ETFs that people might be interested in if they don't want to pick a specific REIT and just get exposure to the broad market. So first of all, let's look at the pros and cons of REITs versus real estate. So I'll start off here with the pros and we can kind of go back
Starting point is 00:09:59 and forth for the REITs and then you can go for real estate. Does that work for you? Yeah, absolutely. So the first thing for REIT that comes to mind is that it's really accessible to anyone. So you don't need a large amount or large sums of cash to buy just a few shares of a REIT. Think about a type of investment that you'd be required if you wanted to buy, for example,
Starting point is 00:10:20 an industrial property, right? It would be, I don't know how much, you probably know better than I do, but I'm sure it's in the six figures, right? If you wanted to get started into a decent sized one. Especially if you're doing it as an investment. I think real estate is accessible as a house for a lot of people and because you can buy typically with 5% down as your primary residence. But we don't really like to think of the primary residence as an investment. And I know that's a little bit of a faux pas in Canada because everybody seems to think that it is, but it really is a savings vehicle and more of a
Starting point is 00:10:54 liability, you know, functionally, if you really examine it properly. The other piece is the diversification, right? One of the big keys in investing is diversification. And in real estate, as a regular Joe, it's very difficult to diversify across multiple different asset classes. It's not like you can go buy an office building and go buy a bunch of rental properties and then also buy some industrial. You might be able to in much smaller unit sizes or in very, very fringe sub markets. But for the average person, I think it's very difficult to do. So REITs allow you the ability to diversify across multiple different asset classes, each of which we're going to get into have their own pros and cons as well. Yeah, no, exactly. And it allows you to diversify also geographically, right? So
Starting point is 00:11:44 there are some Canadian REITs that do have exposure outside of Canada, not all of them. There are quite a few that are specific to Canada. I think that's a great thing. But again, it's very easy to invest in the US and the US stock market. So you have US REITs if you want exposure there a bit more internationally, and also different subsectors that we don't have have in Canada because we have what we're talking about around 22, you said. I knew it was around 20 REITs, I think, that are publicly listed. Yeah, I think it's low 20s. I think maybe 22. There's a couple stragglers that you don't really hear about. Yeah, exactly. And I think another pro here, it's hands off, right? And you and Nick have talked about that a whole lot.
Starting point is 00:12:27 Passive income from owning real estate as an investment where you have tenants, for example, it's not that passive. I mean, I can just remember about Nick talking about the whole bat situation. That was quite something else. And I know it cost him a decent amount of money to take care of that. And that's just an example of some of the things you have to take care of if you do own those hard assets. For sure. I think a lot of individuals dismiss that investing in real estate is very much investing in a business and you do have to run the business of property. And when you're investing in a REIT, you have the opportunity to invest in
Starting point is 00:13:05 somebody else's business so that you don't have to do a lot of those more, you know, or focus on those more minute details. The other piece that you mentioned, you know, about diversifying geographically is real estate is very much an asset that is tied to the intrinsic value of location, right? The first principle in real estate is location, location, location. And there are locations that I really like to invest in that are very far from where I live. And so I would never be able to possibly manage an asset in that location if it wasn't for vehicles like REITs. And so it also allows you to have that hands-off exposure to an asset geographically as well, to invest in places that you never would – if you're bullish on Calgary as an example, you can get exposure to a REIT that has exposure in Calgary and you can still live in Toronto or Ottawa or Vancouver as an example.
Starting point is 00:14:00 Oh, that's great. Yeah. I think the last one here is the liquidity, right? Oh, yeah. It's great. Yeah. I think the last one here is the liquidity, right? Oh, yeah. And we discussed this before the episode as well. One of the big differences between private equity funds and real estate investment trusts, but the public market nature allows you – I mean, real estate, and we're learning this right now, can often be a liquidity trap. The housing market is learning that right now.
Starting point is 00:14:25 You know, when you're in a market that goes no bid for property, you still got to pay the mortgage on that thing every month. And or if you have a tenant, maybe that's not paying you rent as an example, or you have a vacant unit, that's an asset that still has a liability, the debt attached to it that you can't just go and sell. Whereas if you have a share in a REIT, it's far more liquid than the actual real property. And the switching costs are far less, right? You're paying maybe nine bucks on the most expensive broker platform to sell a block of shares. Whereas you're paying 5% of the asset value, probably minimum if you're offloading a property.
Starting point is 00:15:01 Yeah. I feel like people forgot about the liquidity part in 2021, or I guess, you know, back half of 2020, 2021, and then the first couple of months of 2022. And then people are realizing right now when you see properties sitting on the markets for several months, I mean, it's not unusual that yeah, sometimes it's good to have things that you can obtain cash for very quickly. For sure. I think one of the big blunders, and it's good to have things that you can obtain cash for very quickly. For sure. I think one of the big blunders of, and it hasn't revealed itself as a blunder yet, but this is kind of one of my forecasts is, you know, a lot of people are rushing into buying
Starting point is 00:15:33 those staycation properties, right? Cottages especially. And cottages are typically very illiquid. They typically take, you know, on average two to three months to sell and they drop to about two to three weeks to sell during COVID. And now we're getting back to that longer sales cycle and those are costly assets. You got a lot of maintenance, you have no income in a lot of cases, but maybe some people are Airbnb-ing them or whatever, markets kind of evolved there. But that's where these are becoming liquidity traps. Whereas if your asset,
Starting point is 00:16:07 if your REIT stock drops 20%, you can just offload it at a loss. In real estate, it's a loss on the books and it's also bleeding you out on a monthly basis. And you don't even really get the choice to lose money fast or slow in that respect. No, no, I completely agree. I was actually just looking for fun during the pandemic because I'm in Ottawa and on the other side, there's a lot of cottages on the Quebec side that traditionally have been more affordable. And then the prices just got out of whack during the pandemic because everyone and their brother and sister wanted to buy a cottage that lived in Ottawa on the Quebec side here. buy a cottage that lived in Ottawa on the Quebec side here. So I can definitely understand what you're saying. But you know, maybe it'll be attractive in the next year or two, because people will be forced to sell. I definitely think so. That's, that's one of the asset classes that we're watching a lot is recreational property to see how that market evolves, because it's where
Starting point is 00:16:58 we anticipate there being a little bit of distress. Yeah, because that's where someone would sell first, right? If they have a home, a primary residence, and then a secondary residence, clearly they're going to try to offload their secondary residence if they need to come up with some cash. For sure. Yeah, and you can already see the fire sales of the recreational toys starting on Kijiji. I've been in the market for an ATV for years and just couldn't stomach the prices. And that I had an alert set for a certain ATV at a certain price. And just a couple of weeks ago, it just started getting flooded with emails for all of these ATVs. So I'm like, Oh, I guess it's started. I guess the recession's finally here. Okay. You'll have to talk to Braden cause he was bullish on BRP. So I would, yeah. I mean, they've done really well, but I'm a bit skeptical.
Starting point is 00:17:47 Yeah. They're just such a cool Canadian company from my perspective. And they've just mastered, they've mastered recreation, like the new pontoon boats that they came. I'm going to digress here. So maybe we'll keep going. We'll keep going. We'll stick to real estate. Maybe at the end, if people want to hear us blab about that kind of stuff. 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,
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Starting point is 00:19:40 Duolingo-style education lessons that are completely free. You can search up Blossom Social in the app store and join the community today. I'm on there. I encourage you, go on there and follow me. Search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, blossom social in the app store and I'll see you there. If you want to go over some of the pros of buying real estate, I didn't do cons because clearly, you know, if it's pros for actual real estate, buying the hard asset,
Starting point is 00:20:14 it's going to be a con for the REIT here. So do you want to talk to us how you can really maximize leverage investing in real estate versus REIT? For sure. Yeah. So for the most part, there are some exceptions, but REITs are capped on how much they can lever up because they, in order to have that flow through, which is the real estate investment trust, which basically means that any dividend income that you earn goes to your balance sheet and you pay taxes on it. They have to cap their leverage at 50% typically. And similar to the way hedge funds have to have a hedge position or whatever it is,
Starting point is 00:20:48 you know, legally to have that vehicle, they have to follow some rules. Consumers typically don't have the same rules. So consumers can often get into much bigger leverage positions. And, you know, you can buy investment properties as high as 80% loan to value. Loan to value is the percentage of the purchase price that ends up being debt or mortgage. Usually, you're seeing investors purchasing with, I want to say, 70% loan to value would be a little bit more tame or responsible investing. But Canada isn't necessarily known for responsible investing.
Starting point is 00:21:19 So the lever up, row down strategy is certainly prevalent in rental properties here. I think that that's probably the primary advantage of buying real estate directly. You can find better deals, I would say, than what your large scale investors are buying. Once you get to a certain scale, the cap rates tend to be the same. You're not getting the yields that you could go find in fringe market. We buy in Cornwall, Ontario as an example. We can typically get 7% cap rates on stuff like that. Whereas REITs are buying assets that are very much in the multifamily space in the 4% cap rate range. A cap rate is basically a yield valuation metric for real estate, which we can go through. It's your net operating income divided by the purchase price
Starting point is 00:22:16 of the asset. And so you lose a lot of the risk, I would say, like you, you know, when you get to the institutional scale, the returns are lower and the risks are lower, right? Low risk, low return, high risk, high return. There's also a case to be made that you can lever up a bit more if you buy REITs, right? So you could buy REITs and use margin, use a bit of leverage that way. So I just wanted to point that out because some people may say, oh, well, you know, you can still do that with buying REITs, but it is definitely not to the same level. I think most brokers probably like 25, 30% tops
Starting point is 00:22:53 that they would allow. Yeah. But then, I mean, I guess if you, it depends, like, because if you were to get 30% plus the 50% that the REITs levered in, because you are getting that leverage. I mean, on a yield basis, like you're probably actually going to get a better rate of return,
Starting point is 00:23:09 right? The trade-off becomes, you know, a lot of people in Canada buy or did for the past 25 years bought for capital appreciation. And maybe that's kind of the last piece that we can add in there. You know, you're not going to see that so much in share value appreciation with REITs. And a lot of that's because the dividend obviously defers that growth. Yeah. And you obviously won't get margin call if you have a mortgage either. So that's something to keep in mind. But then again, I guess you could compare variables with margin calls to some extent. Yeah. It is interesting, actually, because we are starting to see a lot of failed renewals,
Starting point is 00:23:49 right? So you're getting investors who their debt service coverage ratio or even homeowners who their income could no longer service the mortgage in the current market. And the lenders are saying, we don't want to renew your mortgage. And so what typically happens in a bull market, which we've been in for real estate, for the housing asset, basically since the last time the market crashed, 1994 probably was the last major real bottom of the Canadian housing market. Since then, people typically step up in housing products.
Starting point is 00:24:21 So they go from a one-bedo to a three bedroom house to a four bedroom house over their life cycle. But they also step up in mortgage products. So typically, over the past couple of years, you might have been stretching and you really wanted to get this investment. So you bought with a private lender and you're paying 10% interest. And then after a year, the property went up in value, maybe you made some changes and improved the returns of the asset, and then you renewed your mortgage with a B lender and you dropped your interest rate to 6% or 5% even in the past couple of years. And then, or alternative scenario, you bought with a B and go
Starting point is 00:24:57 to an A lender and you're getting basically the best rate that you could get in the market. Right now, so that was before, right now what we're seeing is the opposite happening. People who had an A lender happening are actually moving down in the type of credit, the quality of credit, and therefore moving up in the interest rate that they have to pay because the A's won't take them anymore, so they have to go to a B, or the B's won't take them anymore, so they have to go to a private. And so, these are major things happening. So, the margin call risk, I guess to say, is not something that the real estate space is completely immune to. It's just that it didn't seem apparent over the past 25 years because, well, the rising tide lifts all boats, right?
Starting point is 00:25:38 Everybody is a rocket surgeon for the past 20 years. Yeah. And just for the people who are not aware, so A lenders would be like big Canadian banks, B lenders would be what like kind of credit unions that are still very reputable and then private, not that they're not, but then you're getting into a whole other category, right? Yeah. There's sort of like two spheres of private. So your A's would be big six Canadian banks and then like first national and a couple of others. Bs would be credit unions, monoline lenders. Mix, in a lot of cases, will fall into that kind of B category or B plus category. And then private ended up very much being individual private. So like me lending money to you or vice versa.
Starting point is 00:26:17 And a lot of people actually borrowing HELOCs and lending their money out as an example. So those are individual private loans. Yeah. Okay. are individual private loans. Yeah. Okay. Thanks for clarifying. So another pro, I think buying real estate, I think there's a case to be made that you can find better deals, especially, you know, if you're thinking, you know, I've seen people I've, I've had that happen to me where I get notes in my mailbox and saying that they'll buy my property, you know, no realtor commission and anything like that. But I know it's work. I've heard of people doing that and they actually managed to buy investment properties or builders who just want to tear it down, build something new on it. So
Starting point is 00:26:57 I think there is a case to be made that you can potentially find better deals as just buying the hard assets. Yeah, for sure. For sure. And definitely gives you, I think, more control as well as an investor. I think that it would... You have really no control on the asset under management on the REIT side. Yeah, but you got a couple of votes on your share, but that's really more company operational stuff rather than asset level decision making. Yeah. And I guess it provides... The last point here, I think, unless you have another one, the last point here I'm thinking about is you have the opportunity to invest in underserved markets. I'm thinking Cornwall, you just mentioned. I'm going to go on a limb and say there's not that
Starting point is 00:27:38 many REITs that have properties in Cornwall. Maybe I'm completely wrong, but that's kind of my impression. No, I think you'd be right. Yeah. And if they did, like they wouldn't have massive exposure, like it'd be a tiny portion of their portfolio, right? That's it. Okay. Anything else you wanted to add? Well, yeah, I think on that note, right? And I mentioned this kind of in a little bit, like the diversification of the geography that REITs gives you as a benefit. If you are super bullish specifically on one municipality, you can't get, you know, that you lose that ability to go long that one municipality when you jump into a REIT product. Whereas if you are an individual
Starting point is 00:28:19 investor and you say, okay, I want to invest in Calgary, which tons of people are emailing us now on the podcast about Calgary as an example, or a lot of interest in Halifax or Atlantic Canada, especially. If you want to go and invest, if you're super bullish in that specific area, then you can't really get a REIT that maybe like Killam might be an example of one where they're a little bit more Atlantic, but it's harder to get that very, very targeted exposure through a diversified asset fund. No, that's a good point. So any other pros that you can think of, or do we just want to move on and talk about the different categories of REITs? Yeah, I might as well jump over to that because that does kind of give you a little bit of the specificity that is lacking on the real estate on the geography side because there is no – I mean, in the US, there's a New York REIT that's like I think it's Empire State REIT.
Starting point is 00:29:15 And it was like literally just the Empire State Building was their first asset. But otherwise, you're typically – if you're going to specialize, you're going to specialize in a specific asset class. So we can go through the list here for those just discovering REITs. We can go over maybe the common types. There would be office, an example, maybe Allied REIT or Dream Office REIT. Industrial, I guess, Pure Industrial, Real Estate Trust. Yeah, Grant would be another one. Retail, RioCan probably would be the most notable one, although they're very much becoming a development play, I think.
Starting point is 00:29:47 I don't know if there's anybody else you'd think of there. Well, smart centers or – Yeah. Yeah, I guess so. Yeah. Yeah. I think the interesting part about – and we can get a little bit more into it, but the interesting opportunity on the retail side is that a lot of these retail REITs own massive acreages in urban areas on major arterial roads. And so while they are retail REITs today, they're also development companies tomorrow. And I think that's
Starting point is 00:30:13 an important thing to note. The best iteration of that to discuss would be talking about Rio Can Living, which is their development department. Okay. Yeah, that's right. Next on the list here is residential. So multifamily stuff. So large scale residential property. That one's typically going to have the lowest cap rate on the list here. So cap rate, is that valuation metric that I had mentioned. Your multifamily on the high rise side, like the best quality high rise is going to be below 4% on a cap rate. So that's your net operating income divided by your purchase price. And so your cap rate there is probably between, let's say, high threes, let's say 4% to 5%. Whereas, you know, office mentioned before, you're kind of in that.
Starting point is 00:30:58 And these are national cap rates from Q3 2022 from CBRE's report. from Q3 2022 from CBRE's report. Downtown office is mid 5% to on the worst asset, the B grade asset would be in the low 7%. Industrial is 4.8%. So that's probably the closest you're going to get to multifamily cap rates. Industrial would be 4.8% to 5.67%. And retail is where you get your 5.8% to high sixes, even let's say 5.8% to 7% on the cap rates there. Yeah. And some alternatives are, we're talking mostly about Canadian ones, but obviously some people may want to look at American ones. So retail, there's national retail properties, ticker NNN, there's Realty Income, Simon Property Group, different types of retail. But for people interested, those are kind of the ones that come to mind there.
Starting point is 00:31:56 For sure. Yeah. And then quickly, the remainder would be kind of your diversified REITs, healthcare specifically. So like a Chartwell would be a good example there. I guess they wouldn't be healthcare, so they'd be more seniors living. There are some, I think there is a healthcare specific REIT in Canada. Yeah, I think it's Northwest Healthcare Properties. Yeah. And then lodging and resorts. Just to touch back on diversified REITs. So diversified REITs, most REITs will tend to focus on a specific kind of subsector, like you mentioned.
Starting point is 00:32:28 But there are some REITs that will be pretty well diversified in terms of sectors. I don't think we really have some in Canada, but in the US, I know WP Carey is a pretty well-known one that has pretty well diversified their ownelette, things like industrial, office, retail, and self-storage. So that's just an example of one. Yeah. I think Dream probably would be... So Dream had that global REIT before, but Blackstone bought the whole Dream global REIT. So I mean, we're pretty good at putting out good REIT products, I think. That was a $6.2 billion acquisition, I think. But that was 200 office and industrial properties across Western Europe, a lot of Germany, Netherlands,
Starting point is 00:33:11 and then Canada as well. Another one I think you wanted to touch on a little bit was self-storage and then data as well. And in the States, we see a lot of mortgage REITs. In Canada, we have MIX, which is the similar way that somebody could publicly invest in a... So they're the same vehicle almost that in the States, you would have a mortgage REIT. In Canada, you have a MIX or a mortgage investment corporation where you can buy shares and it'll flow through to you. A lot of people do it. They're not as publicly traded as REITs, I would say in Canada, but you'll, these are often offers that people will get through wealth managers or whatever, and you can invest through your RRSP and stuff like that. Yeah. And mortgage REITs, I've never really looked into them, but they are pretty much,
Starting point is 00:33:55 you know, companies that will invest in a vast amount of REITs and then they collect the interest on it. Right. That's what they do. Right. Yeah. Or they'll invest, like they'll take the money, they'll pool the funds and then they'll lend it out as debt, right? So there's like NYMT is one that I used to invest in and play with during COVID. Probably would not recommend anybody play with it because you'll look at some of these yields and they're just like crazy. I'm trying to think of some other ones, like ORC was like Orchid Capital. These are all like mortgage REITs that basically like, they're basically your private lenders in the States. And in the States, it's definitely pretty wild west the way that they do. They're hard money lenders, a lot of these guys, right?
Starting point is 00:34:33 Yeah, exactly. And I think one that we skipped over, lodging, resorts. So you'll have REITs that do kind of buy these type of properties. I don't have any one that comes to mind, but I know there are some that will own, for example, a lot of real estate in Vegas. So they don't run the actual hotels. They own just the property and then they rent out to whoever manages the hotel. Data REITs, you touched on them. We don't really have any data REITs. I know Allied Property REITs has a little bit of urban data centers, but they did say, I think it was in November, that they were looking at potentially selling that part of their portfolio to concentrate on the office real estate. So in the U.S., I mean, you do have some data reads.
Starting point is 00:35:17 There is one play actually in Canada aside from that. So BIP, Brookfield Infrastructure Partners, they do own some data reads. I think it's in South America. And then the US, you have DLRs. So can't recall the name. So Digital Realty Trust, there you go. Equinix, another one. I think American Tower REIT also has some as well.
Starting point is 00:35:38 Amazing. And the hotel side as well, which you just touched on there. I mean, that's a really interesting comparison for people who are, you know, if you're bullish on recreation or hotel lodging, hospitality industry, you know, we get a lot of people and it's not something that we necessarily encouraged prior a ton on the podcast. Although it is becoming easier to become an Airbnb investor in Canada and the States, the infrastructure is built out like so well. They have property managers and all of this stuff. Hotels are trading at over 7% cap rate. If you're to buy a hotel, which none of us can afford to do, but those lodging REITs are buying assets that are 7% cap rate. Airbnb is you're trying to get, okay, can I go get a 7 plus percent cap rate on an Airbnb? Yes,
Starting point is 00:36:26 but it's more management intensive than owning a REIT. And I think that's where one of those good comparisons evolves because that's much more of a service business on the real estate asset. Yeah, exactly. As you were talking about that, you kind of reminded me something that I wanted to point out to listeners is that depending on the type of real estate, right, you're gonna be looking at different type of rent. So I'm thinking here self storage, where you typically have a month by month rent, which it could be a plus or a negative, depending what kind of environment if you're seeing super high demand for self-storage or inflationary period, you can actually increase your rents very quickly. Or on the other side, if you're seeing that there's a lack of demand, you can play with your, you have prices that are a lot more flexible. Whereas if you own residential units, right, you're kind of locked into those
Starting point is 00:37:21 long-term contract, which, you know, has its advantages, don't get me wrong. But I think that's something for people to understand is, depending on the type of REIT, you'll have sometimes triple net leases or the short-term rents that can be adjusted quite quickly. But again, you don't have that safety net. You have a high turnover of tenants. Yeah. And I think definitely worth thinking about in an inflationary environment, like a triple net is the best position you want to be in when we're in an inflationary environment and management costs are accelerating. Whereas, you know, in a multifamily side, those management costs are costs that you're seeing come out of your, you know, as an input cost to providing the product, which is housing. And your rents are indexed at what in
Starting point is 00:38:07 Ontario, 2.5%. But typically indexed at below inflation right now in Canada. So you don't have the revenue growth that correlates to the growth in costs. Yeah. And triple net for those who are not aware is just basically the landlord doesn't pay any of the costs essentially, right? It's the tenant that pays everything where it comes to maintenance. I think they also pay for taxes, right? In those cases. TMI, so taxes, maintenance, and insurance. There you go. So it's definitely an interesting, but that'll be certain types of properties that will have that. That'll be certain types of properties that will have that.
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Starting point is 00:40:40 analytics tools. So go ahead, Blossom Social the App Store, and I'll see you there. Now, as we're talking a bit more about specific terms, I think it's good for people, just so we go over a few important metrics that anyone looking at REITs should be aware of. So I'm gonna kick it off. I think these are the two terms, in my opinion, that are very, very important
Starting point is 00:41:03 that you need to get familiar with. FFO, so fund from operations, and AFFO, which is adjusted fund from operations. So FFO is just net income from, you know, you get the income statement, you get the net income that's at the bottom of the line here, and you add back depreciation and amortization. That's simple because real estate, you have these accounting principle that reduces your income. But in reality, the value of the real estate doesn't necessarily go down. Right. So that's something that, you know, you kind of add back that in because it's a non-cash item. And then you remove any gain losses from the sale of the property and any interest income whereas affo same kind of thing and probably the one thing i'll say is depending on the company
Starting point is 00:41:51 sometimes they'll be slightly different the way they calculated because these are not official measures so they're non-gap or non-ifrs if you're in can AFFO, you just take the funds from operation, but you also factor in rent increases or another way of saying that is straight line rent, capex related to maintenance, and then routine maintenance amounts. So personally, I tend to prefer AFFO. I don't know about you, if there's one of the two that you like best, or you prefer to looking at net operating income on a property by property basis? so i'm i'm typically looking at really more like as long as the the technical analysis like fundamentals check out relatively well you know and i would i would probably defer to somebody like you or reading a post online about that. Yeah. I'm typically looking more asset level.
Starting point is 00:42:46 What are these, what's this organization doing? Where are their acquisitions? How are they, you know, repositioning existing assets or increasing revenue? So it's, you know, not so much granularly, like what on an asset by asset basis, what's their net operating income, but are they running efficient? Like that net piece really matters. Yeah. And then also like, is the asset that they're holding doing well right now? So, you
Starting point is 00:43:10 know, I'll look a lot at vacancy rates because I think that that's probably the biggest thing right now on an asset level basis that's impacting the way that REITs are, you know, where we're seeing the stocks tumbling a little bit, because there's a lot of uncertainty around what are, you know, where we're seeing the stocks tumbling a little bit, because there's a lot of uncertainty around what's, you know, how certain assets are going to perform for the next decade or two decades. And that's typically the investment horizon for a real estate asset. So, you know, as an example, looking at industrial in Canada, there's, you know, most, I don't think there's only a couple of markets that have vacancy over 2% as an example, right? Victoria, as an example, has vacancy of 0.1%. Vancouver's is 0.2%. Edmonton, I think,
Starting point is 00:43:53 is the highest at 4.2% vacancy. And if you're, that's the industrial space. Toronto is 0.3% vacancy. So below 1% vacancy on the industrial assets. On the office side, the tightest markets, I think Victoria at 5.9% vacancy and Vancouver at 5.9% vacancy. Calgary being the highest at 27.5% vacancy in the office asset. So over a quarter of office space in Calgary is vacant. So looking at, okay, what does this REIT have exposure to? And are those assets that like, yeah, there's a lot of lease up risk. There's a lot of time that's going to take for them to maximize the returns that they're getting. Allied, you used as an example, they have Toronto class. they actually have their own asset class class i they call it in
Starting point is 00:44:46 a lot of cases offices so industrial class i because it's a lot of brick and beam stuff they have a lot of converted old which is like that sexy space that tech companies really like which could be a good thing or bad thing moving forward but toronto is at 10 office vacancy right now according to colliers um their colliers national investment snapshot from Q3 of this year. So again, are these trends that I'm happy with as an investor? No, if I had owned those shares for the past several years. But these are also things where I'm looking at, okay, the market's pricing in these vacancies. And Allied, as an example, I liked for the past little while because I
Starting point is 00:45:26 believe a little bit in the resurrection of the workplace. I think that their space is going to be set apart by comparison to a lot of the other stuff in the urban markets. And so those are really the... Are they running assets efficiently? And is the asset in a good position in the market right now? Yeah. And obviously, you talked about vacancy rates, but you can just look also the opposite of that occupancy rate. So same thing, right? Just the opposite of it if people are ever getting started into looking at it. I would say for me, in terms of metrics, the one thing I do like to look at, and I'll take either funds from operation or AIFFO
Starting point is 00:46:06 or both, and I'll look at the payout ratio for the distributions because that's really important. You want to make sure that distribution or dividend, but they call it distribution for REITs, is sustainable. So that is probably the one thing I would recommend to people to, at the very least, be aware of that. And you want it to be relatively stable. You know, I can change a few percentage points. That's normal. And if you're looking to find some really good information, like these metrics we're talking about, for the most part, they'll be available on the investor relations side. So you don't have to calculate all of them. It's already done for you. If you can't find them, oftentimes they'll be in the supplemental information document. So usually they'll kind of have the official GAP or IFRS
Starting point is 00:46:51 documents that they have to publish. And then on top of that, they'll have that supplemental information. Yeah, for sure. And thinking about those, like there's also ways that you can kind of combine a couple of different metrics as well. So, you know, we had discussed like one of the things that I've been looking at recently, because I've heard this sentiment a lot from people in institutional real estate is it almost makes more sense for, because of the way the real estate market is right now, and the real estate market takes a long time for assets to correct in value, it almost makes more sense for REITs to be buying back their stock than buying more real estate. So, you know, I mentioned some of these assets like, well, the downtown class A
Starting point is 00:47:35 office would be an exceptionally good example at 5.5 is for your AA class. So that's what the cap rate would be, the net operating income divided by the purchase price. It's a valuation metric, kind of like, you know, valuing a stock based on EPS as an example, or PE ratio. And if you look at that versus the yield that their stock is giving, you know, Allied as an example, I think when I pulled it last was in the 6% range. Oh, it's almost 7%. I pulled it up while you were- Yeah. So you're getting access to an asset class that if you were to go buy it on the open market, it would cost you or you'd be buying it at a, you know, return based valuation of in the 5%
Starting point is 00:48:20 range, you're getting it in almost a 7%. To me, that makes sense, right? And you hear about all of this rule number one investing or value investing plays like Buffett. Am I getting this thing at a good price? And to me, I think there are certain ones that are, and there are certain ones that aren't. So that's one of the things that I like to look at is I wouldn't necessarily put them all side by side and calculate which one has the best spread because there's both numbers that jump around a lot, cap rates and their returns. But am I confident that I'm buying the book of assets that this company owns at a better value than the market would be willing to pay there? Because that's your long-term hedge on the value of their underlying assets, which is really the protection and the strength in that company and the longevity. Yeah, exactly. And I think for me, the last thing I definitely always keep an eye on, especially in, you know, as everyone knows, interest rates have gone up a
Starting point is 00:49:14 little bit in the past year or so. And so definitely having a look and just having a general idea of what debt looks like for this company, whether it's the leverage ratio, which is essentially just taking the total amount of debt versus the value of the assets. I mean, that's a little bit, I think it's an okay metric. I don't know what your opinion is on that. It's just because the value of, you know, can change. I think it's just a general idea is probably the best way to put it. Yeah, I think typically it's – if you're buying into a REIT, you're usually doing it because you like real estate and you don't like leverage as much as – because if you like real estate a lot and you're not afraid of leverage, then you're often just levering up and buying real estate. And so REITs are typically at a 50% leverage position. The reason for that is so that we're not seeing major problems with insolvency or them bleeding out or whatever. And they do have much better debt than the average consumer does, right?
Starting point is 00:50:14 They're having investment grade debt. In most cases, they get good facilities. They can issue more or issue for more. And so, I don't think that it's something necessarily to worry about for the average real estate investment trust, but always worth thinking about and just seeing, you know, if you're, if we're really thinking about it, I wouldn't be thinking so much as like, how much do they have, but how well is their income servicing it? So maybe looking at a metric like a debt service coverage ratio rather than total debt as an example.
Starting point is 00:50:44 Yeah, no, that's perfect. And that is something I look at is debt service coverage ratio rather than total debt as an example yeah no that's that's perfect and that is something i look at is the the interest coverage ratio i like you mentioned invest grade versus non-investment investment grade i think that's really important personally just because if they're refinancing they'll get better rates on that uh the type of debt that's something i always look at just because if you see a high amount of revolving debt, that's a big alarm bell because revolving is essentially a line of credit and it's sensitive to interest rate hikes where if you have term debt, which will usually be on fixed term, whether it's secured or unsecured. Secured means it's tied to an asset. Unsecured means it's not
Starting point is 00:51:22 tied to an asset. Something to be aware of, just how it's structured, especially right now with higher rates. That's something I've been looking at personally whenever I've started some position recently in REITs. And I just make sure that there's not too much debt coming due in the next few years. You know, they all have some coming due, but a lot of them, it'll be, you know, just a small amount. And as long as it's not overwhelming, because you know, it's going to increase when it's coming due. So that's the type of things I like to look at. Maybe I'm just a nerd, but or extremely cautious. I think that that makes sense. You know, as a rule right now in the market, when we're
Starting point is 00:52:01 guiding direct investors, so people going to purchase property, we typically say if the cap rate isn't better than the interest rate that you're buying that property with, it's likely not going to be a viable investment. And so making sure again, that the spread on the cap rate, the net operating income, or the ability, it's just does this company produce enough income to weather those? We know those increases are going to happen. Does it, is it going to produce enough income reliably over the next five years to get through four or five different rollovers in debt, getting into potentially, you know, double the interest rates that they might've been in over the past couple of years? No, no, exactly. So now we'll move on. Look,
Starting point is 00:52:45 are REITs good value right now? I think people can probably get a hint a bit how we've been talking. I think we both share a belief that there are definitely some sectors of the REIT market that are pretty good value. Obviously, it's not without risk. I pulled a chart here and I'll just explain. It's pretty simple. It's from sectors PDR so it tracks the S&P 500 index and there's our REITs in the S&P 500 index so basically you know the REITs sector within it was the third worst performing of last year behind communication services consumer discretionary and then you had technology and REITs at minus 28% in the past year. So it's done really poorly in terms of returns. And I pulled the stat that I got from NARIT, the site
Starting point is 00:53:34 is www.reit.com. Great resource if you're looking to invest in REITs in general, but specifically in the u.s and further 2022 2023 outlook i mean they were looking back at 2022 and they pulled this out when we were talking about recording which blew my mind where reits like i just mentioned were down 28 percent in 2022 versus private real estate funds being up 13 percent so they are obviously making the case that that's a pretty wide discrepancy. I mean, it's 40%. It is pretty wide, right? Right. So I just wanted your thoughts on that.
Starting point is 00:54:15 Is the public markets, you know, obviously being publicly traded, is it being too pessimistic on REITs? Are they freaking out too much about higher interest rate? Like, what's the, what's your best guess on what's happening here? Yeah. So I think the, you know, the, the primary question becomes like, is this, is it an overcorrection? Is, is the market pricing in a lot of these changes inefficiently by comparison to, you know, what you could argue, maybe more sophisticated investors who are in those private real estate funds who have access to those gated funds. There's going to be a couple of different elements. Number one is, you know, we're hearing about Blackstone REIT
Starting point is 00:54:53 freezing redemptions, right? So they're not allowing people to take money out of these REITs. So a lot of it could be, you know, they're forcing their investors to dime in hand, you know, in quotation marks and not have these liquidity events that could prevent the returns from really maximizing. Because real estate is a long-term hold and some of these repositioning plays, if you really want to maximize an asset, can take one, two, three years to even decades to really maximize the vision of what that asset holder is trying to do. And in a private equity deal, like a GPLP, General Partner Limited Partner private equity deal,
Starting point is 00:55:37 in a lot of cases, they have more control over what the investor can do in regards to taking their money in and out. And not that that would matter too much for REITs because again, that liquidity means that somebody else is picking up those shares. But you have a less, in a lot of cases, less sophisticated consumer consuming REITs, right? It's people who aren't as familiar with the asset class, who don't have access to these almost pension fund-esque private equity opportunities that are performing at that plus 13%. And those people are more likely to be scared, more risk averse, offload the shares very quickly in a downturn and being more pessimistic, like you're saying, in their pricing when we're heading into a recession. And so I think, you know, there is probably a little bit of an inefficiency in the market right now, almost like a dislocation in valuation based on
Starting point is 00:56:31 the returns that are available to each of those two different almost types or styles of investing. Yeah. And Blackstone is an interesting case. I mean, I find Blackstone super complicated because they have so many different kind of investments, just not real estate. But, you know, I work in the pension retirement space and I've seen that happen before, especially when the pandemic happened, where you have institutional grade funds that froze redemption for a similar reason because it was so illiquid at the time. If there was a slew of redemption. They would have been forced to potentially sell some asset. At a most likely discount.
Starting point is 00:57:12 So that's what they ended up doing. They freeze the assets. Because let's be honest. You can probably always find a buyer. But you probably won't get the price you want. If you're forced to sell. Right? Absolutely.
Starting point is 00:57:24 And I think you mentioned pension side there as well. And I did want to touch on that a little bit. And we were talking about it before, but it was almost conspiratorially. But if you think about, you know, the way I think right now, the REIT space is cool because it's like a stock picker's market in the sense that like you can pick an asset class. And if you pick the, if you formulate the right investment thesis, if you think office reopening is going to be a big thing, a big meaningful thing, if you think Tiff Macklem's war on unemployment or war on
Starting point is 00:57:55 job vacancies is successful and he gets unemployment up and employers are now dictating whether or not people can return to the workplace, then offices probably will benefit from that. As an example, that's not to say that that's what's going to happen, but you could formulate an investment thesis in either direction. And so I think there is a degree of polarity and like there are – the range of potential outcomes is enormous. And if you pick the right potential outcome, you can probably make a lot more upside than you would be able to in a lot of other asset classes.
Starting point is 00:58:28 And you can do it with a higher degree of safety, given you have the dividend yield, you have underlying asset of real estate, etc. Yeah. And of course, we have the disclaimer, but it's not real. It's not investment advice, obviously. Do your own due diligence here. But I think office real estate is very intriguing, because I don't think we're going back to pre pandemic in terms of the amount of people working in an office. But I also don't think it's going to be like we've seen the past two years. So I think it's going to be somewhere in between where I think a lot of organizations will try to be flexible with their employees and do a more of a hybrid model.
Starting point is 00:59:06 That's what I believe, whether it's two, three days a week. But at the end of the day, if you go two, three days of the week, how much less real estate do you need as an organization? I mean, you can probably downsize a little bit, but it really depends when people go. If everyone goes the same two, three days of the week, you still need a decent amount of office real estate so i think it's somewhere in between and i started a position recently in allied i'll probably add more to it i actually just want to see what management has to say on the whole shopify lease thing which sounds like there's stuff going like in behind the scenes a little bit. But I just want to see what they have to say on that.
Starting point is 00:59:49 I think that's an interesting element of the discussion, too. Like, you know, Allied being probably the most exposed to the tech space, right? So you can also get you can get layers of exposure to things like, you know, we buy bullish on the Walmart distribution center in Cornwall as an example. And so we can get real estate exposure to that thing. So if you like tech, Allied would be a decent place. So you can also look at the types of tenants that different REITs are attracting as. So that's piece number one. Piece number two is there was a lease sign. So the reality is like there is an underlying
Starting point is 01:00:19 intrinsic degree of security there. Your leases are your security. And it's not like individuals, this could suck in five years or when a lot of these renewals aren't, or people actually have the, tenants actually have the ability to downsize in the office space. But it's not as agile as one might think
Starting point is 01:00:41 where everyone's like, oh yeah, we're done. It's work from home. Cancel or we're not paying you anymore. Right. So you're not going to see an impact on the bottom line for a while. Yeah. And we've seen tech companies kind of pivot on that. Right. I think for a while, the big tech, everyone was doing remote work. And now more and more, they're asking employees to come back. So that's definitely interesting. And I mean, obviously, the Shopify thing, they're still leasing space from Allied. So people kind of forget that as they do have a slightly smaller space that they're renting from Allied. So I think they're going to come to some kind of agreement. Because if you already have them as a fairly important tenant, excluding the
Starting point is 01:01:20 space they were committing to, and they signed a lease on. You also want to have a good relationship because it, you know, could also look bad for future tenants, right? If, you know, future tenants want the sign and says like, well, you know, if something happens, like it's kind of good to see that you'll work with us to try and make it work. So I think there's probably, you know, well, I don't know. We'll see what happens, but I think there's something in the background happening. Yeah, I think, you know, one of the things that a lot of people dismiss is that the some of the largest holders of office assets, as an example, in Canada, our pension funds, and so we almost have this degree of systemic
Starting point is 01:01:58 dependence on that space doing well, right. And, and so I think that, you know, that's probably in policymakers minds as well. So I think that there's a lot of the that the regular thesis, but there's also that piece. Okay, so I'm gonna finish here. I'll finish with some ETF ideas for people. But first, I'm gonna ask you a question we didn't know, I'll put you on the spot a little bit so aside from office REITs do you have like let's say two other sub-sectors of the the REITs um ecosystem whatever we want to call it that you think is looking pretty attractive right now um i am really liking u.s mortgage REITs but again like a lot of the ones that i would say um you know the just definitely do your homework on these things because they're they're high risk high return. Like you'll see some yields and they're just not sustainable. You might get paid that for a couple of months. Um, so I do like that space. I like, like,
Starting point is 01:02:53 I think private lending is going to be especially important as people are getting pushed down that, that, um, that ladder into worse credit over the next couple of years. Um, so probably, you know, mortgage REITs in the States and mix in Canada would be a good comparison. Definitely. And I think that there are some ETFs that have exposure in the lending space. And then, you know, the other piece would be, I think, Canadian banks as they start, like, as we start seeing more and more, so like kind of going off script a little bit outside of REITs, but as we start seeing more and more, like right now, your fixed rate mortgage is often priced better than your variable rate mortgage. And the spreads, the money
Starting point is 01:03:31 that banks are making on fixed rate mortgages is amazing by comparison to variable rate mortgages. So variable rate typically is prime minus 65 basis points, let's say, or 95 basis points. So they're really not even making money on it, assuming that their prime is true. On a fixed rate, they're typically charging the GOC, the Government of Canada five-year bond yield, plus almost usually 2%, so GOC plus 2. So GOC is at 3% right now.
Starting point is 01:04:00 You can get a fixed rate in the mid-fives right now on the posted basis. So banks are, from my perspective, a good exposure piece if you like the debt side. And I'm a lot more bullish on the debt side than the asset side in real estate right now because I think that you can get exposure to other people's investment theses without the risk. Whereas if you're buying like assets, they still haven't corrected in value from my perspective. Like those cap rates that we were just discussing, they need to come up significantly to be viable. And that means valuations, the prices need to come down to make those returns
Starting point is 01:04:36 make sense. So I'm honestly, other than office, I think Allied being a great candidate. I like Office. Industrials is expensive. Retail, I think, retail would probably be the next really big one. Rio Can, you know, just as a very good example of people who own power centers, who own massive, you know, 20, 30 acre retail plazas. All of those, if you go look at the development pipelines in most major municipalities in Canada, all of those high-rise towers that are coming in are on power center, strip mall sites, your old Walmart plazas. And so your smart centers, your choice properties, your Canadian tires, your Rio Can, I think really those are from a long-term perspective over the next decade, that's going to be a big theme as we deal with the housing scarcity problem that we have in Canada. As we deal with this housing crisis, more houses is going to be the solution and you need more land to do that and well-located land with municipal services and retail owners have that. That's a good point.
Starting point is 01:05:42 I mean, I do like industrial. I know it's not as cheap and i know that compared to the cap rate it's probably around the yield cap rate probably around what uh flush i would say yeah yeah they're pretty pretty close the reason why i like industrial it's because of what we've seen during the pandemic and the supply chain issues and now the issues we're having with China I think we're going to see a lot more companies on shoring production and having you know we saw in the U.S. for example in Arizona we have Taiwan Semiconductors that is building a fab over there so there there's
Starting point is 01:06:20 definitely obviously they're not American company they're a Taiwan company, but it just shows that I think there's going to be a willingness to kind of forget the just-in-time and just making sure that, you know, you're prepared just in case something goes wrong. So I think industrial REITs could really benefit from that. So that's why I'm probably a bit more bullish on them than you, but that's the main reason. And I think the valuations are quite reasonable for industrial REITs. I would totally agree with that for sure. I just don't know from my perspective if there's like, I don't know if I don't see the development upside, not that you're really going to realize the development upside as a REIT investor in even in a lot of these REITs. But you know,
Starting point is 01:07:02 there are definitely some layers of protection and last mile being a huge thing in Canada distribution. We can't keep up with the industrial demand. And so you're going to see, even if the cap rates aren't where we want to see them right now, all it takes is one lease term for what you get through five years at 0% vacancy in any of these and rates and your lease rates are going to start climbing very aggressively. And we've seen that happen in other asset classes. We're seeing it happen in the multifamily residential space right now. But you actually – industrial REITs or industrial landlords actually have the ability to negotiate with their tenants on those renewal rates.
Starting point is 01:07:39 Whereas in the multifamily space, you often can't capitalize on the rental increases because you can't evict tenants unless they're basically abusing the unit or not paying rent. No, exactly. So I guess the last thing I wanted to finish off, like I said, for those who don't want to look at individual REITs, which is fine. I know some people like investing, but they may find it a bit overwhelming. That's completely fine. So I'll give five different ETFs that will provide you with some really good
Starting point is 01:08:08 exposure to Canadians three Americans these are broad base the first two VRE which is the Vanguard FTSE Canadian cap rate index ETF has a management expense ratio of 38 basis points so 0.38 percent this one is market cap weighted the other one the hcre is your horizons equal weight canada read index so the main difference here again they have similar names because we have about like you know 20 or 20 or so reads in canada so you'll you'll notice the names, but this one they're equal weighted. So they're about 5% each in terms of weighting. So if you wanted something a bit more uniform, 30 basis point in terms of the management expense ratio. And then the three US are all very low fee
Starting point is 01:08:56 below 12 basis points, each of them. So SCH8, this is a Schwab US REIT. USRT is the iShares Core US REIT and VNQ, the Vanguard Real Estate ETF. All of them have similar names, but they are, you know, slightly different allocations. So definitely something to consider if you want exposure to the broad US REIT market. This will give you some, you know, you can just own one of the US ones and you're fine. The Canadians, same type of deal. You own one of them, you get exposure to all of them. Anything you wanted to add before we let people go here of where they can find you, you and your wonderful co-host, Nick? Yeah. So Nick and I have a podcast on this network called the Canadian Real Estate Investor Podcast. We talk about REITs, I would
Starting point is 01:09:46 say maybe once a month, but we also talk about direct investing in real estate in a variety of different ways to make money in the real estate asset class. We'd really appreciate it if people checked us out. We release our episodes on different days than the Canadian investor does as well. So if you if you like listening to Braden and Simone, then you can, you know, you can have Nick and I on the Tuesdays and Fridays. No, that's awesome. Well, thanks for joining us, Dan. I definitely can vouch for Dan and Nick that it's an amazing podcast. I mean, it's under our network, but I listened to almost all of them. Usually, you know, I'm doing something else, but I've learned a whole lot. So I'll keep listening and hopefully a lot of our listeners will enjoy that too. Thanks for joining us. Thank you.
Starting point is 01:10:33 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.

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