A Comment -- General Comments From an Expert (A Commentary)

We hit a spiky peak in late July, August was down, and when we close the books tomorrow it looks as though September will be down as well. Ongoing pressure on interest rates, plus a bias toward tightening at both the Fed and BOC. 

The other thing is economic gravity. You don't go through an epic cycle of rate increases over the last 18 months, the extent and pace of which is unmatched in decades, without eventually some fallout. It's often said that monetary policy operates with a 12-18 month lag time in the economy. Here we are 18 months into the tightening cycle, and we're starting to see the effects in the labour market and other parts of the economy. US manufacturing in particular, and in most developed countries, has been in contraction for 7-8 months.

The dot plots were higher than what markets were pricing. They're sticking to their guns. In terms of the BOC, it's coin-toss odds for another 1/4 point rate hike next month. We'll see what happens. 

Both of them still have work to do. BOC, in particular, has a singular mandate to ensure price stability which is 2% inflation, and we're still above that. They have to keep their foot on the brake until they get back to, or at least in line of sight of, a 2% inflation rate.

Indeed. In 2022, returns for REITs were down 24% in the US, down 17% in Canada, and down further this year. What's interesting is that private REITs were positive 13% last year. That difference of about 40% has to be explained somehow. 

The big question is who's right, the public or the private market? He actually thinks it's both. It all depends on which sector or geography you're talking about. Interest rates have really changed the return expectations. But when the fundamentals are improving, such as in single-family rentals or industrial warehouse, higher rates are just a headwind but not necessarily going to cause diminishing value. It's the inverse for office, and there's a lot to get through in terms of commercial real estate.

He's quite positive, given the setup in the public markets today.

Yes, this setup reminds him of opportunities such as the 2008 financial crisis or during the pandemic, where public real estate markets sold off more between 20-40%. An opportunity to buy great quality companies at a discount to NAV. 

In these periods of dislocation, you typically find that the smart money is looking to invest in quality portfolios in the public market. In time, you could see the M&A cycle return, once there's a better outlook and stability in the credit markets.

His mind went to the office sector. These companies were not set up for office assets, but the reality is that that's where the value is. One is HPP, which focuses on west coast office in San Fran, LA, Seattle, even Vancouver. 

For the dividend yield, look to the company's own website or to sites like the TMX.

For actual earnings yield of REITs, you have to go through filings or analysts' research notes to understand what the net operating income is, and then divide it by the enterprise value.

Real estate always has a place in everyone's portfolio, some institutions have up to 20%. 18 different property sectors, which all behave differently. Should be an inflation-protected vehicle. Today, sectors you might want to look at include grocery-anchored shopping centres, single-family rentals, industrial warehouse, manufactured housing communities in US. 

Look at supply/demand. The starting point has to be that demand is greater than supply and outpacing new construction. Ability to increase cashflow over time or to maintain/increase margins, especially during a period of elevated interest costs.

Provide quality housing at a fair market level. Unlikely to be a backlash from huge rents against apartment REITs. The solution is never rent controls, it's always supply.

Benefits of Insider Ownership:

Many of the companies we follow have high insider ownership. Of course, we like this attribute when it shows up along with other factors such as good management, a good track record of growing dividends and buying back shares, and a healthy balance sheet.  The appeal behind high insider ownership comes from the idea that insiders at a company, whether they are management, employees, executives, founders or even corporations is that they have more at stake. Because of this there is, in theory, a higher motivation from insiders for the company to perform well. This ultimately is positive for all shareholders alike.
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The S&P oscillator this morning indicated that the market was oversold--don't sell. Interest rates rose today to pressure stocks. Credit card delinquencies are higher too. As long as people have jobs, inflation will remain high. We need to see layoffs for interest rates to come down. We don't like that, but we need it.

Last Friday, there was a sell signal in his system, on the S&P. Volatility is rising. He is more cautious heading into October. He's buying GICs for clients, feeling bearish in stock. He's making money on fixed income for the first time in 13 years. He's bullish the USD, because there's a big shortage of USD globally. The US will probably go into deflation as the rest of the world inflates. They'll have to print more money since commodities are priced in USD; those world economies need USD to run and pay debt.  The USD has risen over 5% in the past 1.5 months vs. CAD. And the Chinese Yuan continues to weaken. Are many warning signs. Be cautious.

The direction of the CAD

Maybe the CAD is a trade with oil prices high, but he feels the USD will continue to strengthen. He's very bearish CAD--more inflation is coming and much higher interest rates. Nothing backs the CAD (i.e. gold), and we're tied so much to the USD. If the US deflates, Canada will inflate. CAD could easily fall to 68 cents.

oil companies

The best time to buy these companies was March 2020. We're at the end of the oil rally. These companies don't reveal how much it costs to produce a barrel of oil, but costs are surely rising. He's rather buy oil itself.

Dividend Income:

Dividend income is one of the most attractive rewards of being an investor. Because, unlike capital gains which could be subject to market volatility, the dividend received is “real money” at the end of the day, which could be either spent or reinvested.

Over the long term, companies that pay stable, consistent and growing dividends year after year even during economic downturns are attractive candidates for long-term investment. This consistency demonstrates not only the resiliency in the business model, or what investors usually refer to as competitive advantage, but also signalling that the company is well-run by a shareholder-friendly management team. As a result, these companies are usually rewarded by the market with a premium multiple compared to industry peers and the market averages.

Buying and holding companies that could grow dividends over a long period of time is a brilliant way to build generational wealth, which is the hallmark of investing. Therefore, we think investors should pay more attention to dividend growth rather than the dividend yield.
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