advocis presentation...digital realty trust, inc. (nyse: dlr) reits digital realty (“dlr”) owns,...

Advocis Presentation Jonathon A. L. Gold, B.Comm., CIM, FCSI, DMS, CFA PresidentGold Investment Management Ltd.Edmonton, April 19, 2018

Income Investing:REITs vs. the Traditional 60/40 Balanced Portfolio

Discussion TopicsIntroductionJonathon’s Professional History and QualificationsDisclaimer

Traditional 60/40 Balanced Portfolio60% Equities40% Fixed Income Pros and Cons

REITsHistoryFeatures & BenefitsPublic vs. PrivateProperty TypesValuationTaxation

Discussion TopicsCase StudiesVentas, Inc. (NYSE: VTR) Digital Realty Trust, Inc. (NYSE: DLR) RioCan REIT (TSX: REI.UN)Summit Industrial Income REIT (TSX: SMU.UN)

Conclusion

Highlights of Jonathon Gold’s professional history and qualifications

Work History• 1987 – 1993: Banking (RBC) 6 Years• 1993 – 2001: Trading (TD, CT, TradeFreedom) 8 Years• 2002 – Present: PM (Global, GIM) 16 years

QualificationsB. Comm., CIM, FCSI, DMS, CFA

Introduction

Introduction

DisclaimerGold Investment Management (“GIM”) clients, employees andmembers of their families may at times have a long or short positionin the securities mentioned herein. This presentation is provided toyou for informational purposes only. The information containedherein should not be construed as investment advice. GIM does notassume any responsibility for advising the attendee or reader of anysubsequent change of opinion.

60/40 Balanced PortfolioEquitiesEquities are ExpensiveCurrent S&P500 P/E is ~24 vs. Historical Average of ~15

Source: multipl

http://www.multpl.com/

60/40 Balanced PortfolioEquitiesEquities are ExpensiveCurrent S&P500 Yield is 1.88% vs. Historical Average of ~4.35%

Source: multiplSource: multipl

http://www.multpl.com/http://www.multpl.com/

60/40 Balanced PortfolioEquitiesFlaws of the Cap Weighted Index

• Portfolios are typically constructed with capitalization or “cap” weighted indexes such as the S&P/TSX, S&P500 and MSCI EAFE as opposed to equal weight indexes

• Flaws of the Cap Weighted Index:• Tend to be Backward-Looking

• Shape of Index today is based on past successes, E.g. iPhone• Prone to Risk of Concentration

• During the telecom bubble of 1999/2000, Nortel’s market cap exceeded 30% S&P/TSX

• Today, the S&P500 is so concentrated that the top 20 constituents represent 30% of the index while the bottom 30% is spread across 385 names

• Prone to Mispricing / Asset Price Bubbles• Market Cap = Shares O/S X Price

60/40 Balanced PortfolioFixed IncomeBonds are ExpensiveCurrent U.S. 10 Yr. T-Note Yield is 2.83% vs. Historical Average of ~4.50%

Source: multiplSource: multiplSource: multipl

http://www.multpl.com/http://www.multpl.com/http://www.multpl.com/

60/40 Balanced PortfolioFixed IncomeBonds are Expensive

• Bonds are expensive any way you slice it. The U.S. 10 Yr. T-Note yield of 2.83% is equivalent to a P/E ratio of 35.33. In other words, the bond holder is paying $35.33 for every dollar of bond coupon – and the coupon is fixed for life.

• Risk/Reward of Short-Dated vs. Long-Dated Bonds:• Short-Dated

• Historically low current yield• Little duration risk but virtually nil real return (net of inflation)• Duration Explained - Duration is an approximate measure of a

bond's price sensitivity to changes in interest rates.• Long-Dated

• Historically low current yield• Relatively flat yield curve (2.83% 10yr. vs. 3.04% 30yr.)• Significant duration risk/reward

60/40 Balanced PortfolioPros and ConsPutting It All Together

Pros (Equities)• Expensive but not outrageously so• Hedge against inflation• No viable alternative - market is virtually impossible to

time successfully; stay invested like Warren Buffet and buy great companies at a fair price

Pros (Fixed Income)• Still offers excellent protection from an equity market

selloff; during equity downturns short bonds tend to remain flat while long bonds rally

60/40 Balanced PortfolioPros and ConsPutting It All Together

Cons (Equities)• Historically expensive• Low yield• Concentrated

Cons (Fixed Income)• Historically expensive• Low yield• Nil expected real returns (net of inflation)

REITsHistory

• What is a REIT? A REIT is a Real Estate Investment Trust

• History of U.S. REITsOn September 14, 1960, President Dwight Eisenhower signed intolaw the Cigar Excise Tax Act. Included in that law were the criticalprovisions for commercial REITs

• Origin of Canadian REITsCanadian REITs had their origins in 1993.During the ‘90s recession, open-ended real estate mutual funds wereunable to meet withdrawal requests and suspended redemptions;Instead, they converted to closed-end funds and listed on the TSX

REITsFeatures & Benefits

• Flow-Through - A REIT is a flow-through entity

• Access - REITs offer exposure to real estate that was previously only accessible to wealthy individuals and institutions

• High Yield - REITs typically offer higher yields than traditional equities

• MoPay - Canadian REIT distributions are paid monthly vs. quarterly for equities


• DiversificationAccording to a study by the National Association of Real EstateInvestment Trusts (NAREIT), the S&P 500 Index’s correlation withREITs is only 14 percent over 60-month horizons

• Flow-Through• Eliminates the double taxation found in corporations• REITs distribute 90% of their income to unitholders• Not subject to tax; income is taxed in the hands of its unitholders

This flow-through structure is a key advantage for REITs over otherforms of real estate as higher yields can flow to the investor


• Return of Capital (“ROC”)Significant tax advantage - return of capital vs. income

REIT distributions typically contain a return of capital componentwhich is tax-deferred until the year of disposition and then taxed atthe lower capital gains tax rate

E.g. for the 2017 tax year, Summit Industrial Income REIT confirmedthat 100% of its distribution was return of capital. Accordingly, 100%of the tax obligation is deferred until the units are sold – and is taxedat the lower capital gains tax rate

REITsPublic vs. Private

Public REITs are publicly traded - listed securities. This gives investors liquidity, transparency and "price discovery"

Public REITs are subject to strict corporate governance in order to meet TSX listing requirements. They typically have an independent board of trustees

Public REITs are subject to price fluctuations similar to equities. This means that Public REITs may also trade at a discount or premium to their net asset value

REITsPublic vs. Private

Private REITs claim "no volatility" as a selling feature, however it also obscures the price discovery process. In other words, Private REITs are subject to the same economic forces as their Public counterparts but appear fixed.

Private REITs have a limited or no secondary market. Investors buyand redeem units directly with the REIT.

The GIM REIT Portfolio invests only in publicly traded REITs

REITsProperty Types

Retail • Unenclosed supermarket-anchored retail properties • Enclosed shopping centres• New format retail centres

Industrial• Largest real estate asset class in Canada• Stable tenant base• Lower maintenance cost, capital improvements, tenant

inducements

Office buildings: • High quality of tenancy • Stable income stream• Long weighted average lease terms (“WALT”)

REITsProperty Types

Multi-Family• Apartment buildings are typically a very stable investment• Demand is typically strong through all economic cycles

Hotels• Fragmented market is quickly consolidating• Shortest lease term of all property types – daily reset

Health Care• Senior living facilities• Skilled nursing facilities• Hospitals• Medical office buildings

REITsProperty Types

Data Centre / Cloud• House servers and network equipment for “cloud” computing • High security• Critical power and cooling

Other• Diversified• Self-storage• Infrastructure (Cell Towers)• Timberland• Farmland• Specialty (Movie theatres, Charter schools)

REITsValuation – CanadaFairly Valued

Note: AFFO Yield is the standard REIT equivalent of the Earnings Yield (EPS/Price).

Source: BMO Capital Markets

REITsValuation – USAUndervalued

After trading at discounts around a 4%–7% to underlying net asset value(NAV) since fall 2016, the further price decline in January has increased thatdiscount to 15%. This is below the sector’s 2%–3% long-term average premiumand its close to zero average premium since 2005. It is also the largestdiscount to NAV in two years.

Source: Lazard Global Real Estate Securities

REITsValuation – USAUndervalued

REIT P/FFO valuations have now fallen one multiple point below the long-termaverage of 16.5x P/FFO. Note: P/FFO is the standard REIT equivalent of theprice-to earnings (P/E) ratio.

Source: Lazard Global Real Estate Securities

Taxation

Return of Capital or “ROC” offers a significant tax advantage to REIT unitholders. In some cases distributions are 100% tax deferred!

Source: BMO Capital Markets

REITs

Case StudyVentas, Inc. (NYSE: VTR)

REITs

• Ventas is a massive REIT• 2nd largest U.S. Health Care REIT• 10th largest U.S. REIT overall• $17.5B USD1 market cap = 28% of entire Canadian

REIT Index2• Stock price has declined by 33% over past 52 weeks• P/AFFO: 13.15X• AFFO Payout Ratio: 86.38%• Dividend Yield: 6.57%

1. FX Rate: 1 USD = 1.2605 CAD2. S&P/TSX Capped REIT Index Valued at $77.5B as at April 10, 2018Source: https://www.ventasreit.com/

Data as at December 31, 2017 in MM except per share dataFAD 1,317Shares O/S 360AFFO PS 3.66 Dividend 3.16Current Price 48.11P/AFFO 13.15AFFO Payout 86.38%Yield 6.57%

https://www.ventasreit.com/

Case StudyVentas, Inc. (NYSE: VTR)

REITs

Source: https://www.ventasreit.com/

https://www.ventasreit.com/

Case StudyDigital Realty Trust, Inc. (NYSE: DLR)

REITs

Digital Realty (“DLR”) owns, acquires, and operates a global network of data center properties.

DLR leases its data center space to more than 2,000 customers, including major household names like Facebook, IBM, LinkedIn, AT&T, and JPMorgan Chase.

Data center IP traffic is projected to grow at annualized rates of 31% for the foreseeable future. DLR is well positioned.


REITs

Source: https://www.digitalrealty.com/

Key Financial Metrics - 2018Current Cash dividend $ 4.0400 Core FFO Guidance 2018 (mid) $ 6.5250 Core FFO Payout E2018 61.92%Diluted AFFO Payout E3018 68.70%

https://www.digitalrealty.com/


REITs

Source: https://www.digitalrealty.com/

https://www.digitalrealty.com/

Case StudyRioCan REIT (TSX: REI.UN)

REITs

Source: https://riocan.com/

https://riocan.com/


REITs


The Well. This is not your father’s RioCan.

REITs

Source: http://www.thewelltoronto.com/

http://www.thewelltoronto.com/


The Well. This is not your father’s RioCan.

REITs

Located in the heart of Toronto at Front, Wellington and Spadina, The Well is a mixed use developmentfeaturing 500,000 square feet of retail, 1.1 million square feet of office, and 1,800 residential unitsincluding The Well Rental Residence.

https://riocan.com/development-portfolio/development/the-well-rental-residence/

Case StudySummit Industrial Income REIT (TSX: SMU.UN)

REITs

Source: http://www.summitiireit.com/

http://www.summitiireit.com/

Case StudySummit Industrial Income REIT (TSX: SMU.UN)

Demand for Data - One Minute On The Internet

REITs

Source: http://www.summitiireit.com/

http://www.summitiireit.com/

Buy REITs.

Conclusion

Questions?

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advocis presentation...digital realty trust, inc. (nyse: dlr) reits digital realty (“dlr”) owns,...

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