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

REITs are a hedge against inflation. He thinks inflation will persist and this bodes well for real estate. Rents can capture inflation, and so cashflows go higher. Valuations go higher as replacement costs are higher, so inflation is positive. Unique this time is we're going into an environment where inflation rates persist and rise, but we still have lower interest rates. Combination of the two could be a great tailwind for real estate.

Trends in rental rates? Differs sector by sector. Office and retail have been difficult, and you see this in the vacancy rates. The antitheses are industrial, single-family rental, and apartments. Inflation is coming through in those sectors where supply and demand justifies it.

M&A activity in real estate. Really picked up. For the right real estate, valuations have gone higher since the pandemic. There's a lot of capital trying to chase real estate because of inflation protection and the nice yields that this sector generates.

Price of real estate assets. Private market dwarfs the public. His goal is to buy real estate cheaper than the stock market. You look at the valuations in the private market and compare them to the public. He sees a lot of value, especially in industrial, apartments, residential and even on the grocery anchor-shopping centre side. It's the right time to be looking at the sector.

Definition of FFO. Metric for earnings for real estate, whereas other publicly traded companies use EPS, earnings per share. The difference between cash coming in and cash going out. In real estate, they add back the depreciation expense to the earnings line to get more of a cashflow metric. It's important, as REITs pay out all their income as distributions, so they need that FFO to support the dividend.

Positive factors for residential REITs. Immigration. Demand and supply. During the pandemic, so many in the age cohort between 20-30 moved back home or doubled up and moved away from urban centres. So this fall, you may have a doubling up of people looking for housing, so demand is very attractive. Rents for apartments being built today are at a much higher level, as they have to justify the high costs of development.

REIT cap rate explained. Denominator in the equation of earnings divided by cap rate. It's the inverse of a multiple, similar to a bond yield. If he purchases an asset, the 5% means that's the first year return for that asset. The lower the cap rate, the higher the value.

Increasing number of stocks assume growth trajectories that defy logic. Some of the large cap tech stocks are in this camp. Huge difference between a great company and the price it's trading at. For example, look at Shopify. Amazing Canadian success story, brilliant management, fantastic execution. One has to assume a spectacular growth rate for the next decade to justify the share price. No margin of safety if things don't work out perfectly. Utilities as well. Depend on central banks keeping interest rates where they are today, and relying on investors to keep on buying bonds at 2% or less. Consumer spending is starting to accelerate. Governments remain in spending mode. Suggests Fed will start tapering next year, and investors buying bonds are going to expect higher yields. This will put pressure on the pricier parts of the market.

Transitory vs. durable inflation. He doesn't expect any long-term, huge inflationary pressures. If inflation goes back to 2%, investors will simply require a 10-year treasury yield of 3%, and this will put pressure on valuations.

Are FANG stocks must-own? He doesn't put the FANGs in the dot.com basket of crazy stuff. At the end of the day, the value of a business is a function of its financial stability and long-term earnings growth. There's a price at which it makes sense to buy that stream of cashflow, and a price at which it doesn't. Some of those companies are not wildly expensive, but few of them are really cheap. So he doesn't "have" to own anything. If you pay too much for something, it's going to be hard to generate a good return.

Banks vs. lifecos. Banks are the heaviest weighting in his dividend strategy. Canadian banks are protected from competition. We have immigration, so we're a growth economy. Insurance companies offer diversification, so he likes that sector. But Canadian banks are uniquely positioned.

US banks. Investors have to look at the world on a long-term basis. When the Fed comes out with a surprise rate hike, or even a surprise announcement, the market can easily correct. Banks are incredibly well positioned. They're over-capitalized, so they have tons of room to raise dividends and buy back shares. Rising rates are extremely bullish for bank earnings over the next 5 years. Whole sector is poised to benefit. JPM is great. He owns MS and GS.

Stigma attached to European banks? Some truth to that. After the financial crisis, European regulators couldn't move as quickly to reach consensus as the US regulators. The whole sector suffered. Trade at a discount to the US banks.

Investing in the oil patch. Trying to predict commodity prices is impossible. If you have strength and the world looks bright, let these stocks go. It's so much easier to buy companies whose earnings and revenues are growing over time and don't depend on commodity prices.