E18: Real Estate Investing with Jeffrey Olin

This podcast is brought to you by Gensler Wealth. The information discussed today is meant to be general in nature and not tailored to your specific investing circumstances. This means that you should talk to your regular Gensler wealth advisor or your own advisor before acting on any information we discuss today. Nothing in this podcast is intended to be a solicitation and past performance does not guarantee future returns. While we we are speaking with a real estate expert today, we will not discuss residential real estate and what you should do with your mortgage. Oh, but hey, that's a good idea for another podcast. Today on the Unlimited podcast, we welcome Jeff olin, President and CEO of Vision Capital, managing approximately $1 billion focused solely on public real estate investments. Today we cover Real Estate Investing 101, why publicly traded real estate might be better bargain than private real estate, and just outlook on the good, the bad and the ugly when it comes to different real estate sectors. Let's go.

Foreign.

Well, welcome everybody to the Gensler Wealth Unlimited podcast. Today our topic is real estate and real estate investing, a topic that I'm sure and I'm hoping a lot of listeners are interested in. We have the pleasure of having Jeff Olin, president and CEO of Vision Capital, with us today. Vision Capital is an investment management firm solely focused on investments in publicly traded securities in the real estate sector and has been doing so since 2008. And they do this through their management of over $1 billion in the vision Opportunity funds, which have been globally recognized with many industry awards. Jeff Olin, as I say, is the President and CEO of Vision. He has over 35 years of experience in the real estate space. In addition to 14 years running vision Capital, Jeff has previously held senior real estate and investment banking roles at Desjardins Securities, HSBC Securities, Canaccord Capital, Bramley Limited and Olympia and York Developments, among others. And as usual, Jeff's full buy will be in the podcast notes if you want more detail. So, first of all, Jeff, thank you so much for taking the time. I really appreciate it.

You're welcome. Thank you for having me.

So, I don't know, Jeff, if you've. If you're an avid listener of the Unlimited podcast, you should be, I hope. But we typically like to do a little bit of a back to the basics for our listeners. You know, we don't assume everyone knows everything about the topics we're exploring or talking about. So was hoping today we could do a little bit of real estate investing 101 with you. You're the guru and you can give us some, some, some explanation. And color. And then we'll dive in and talk a little bit about your approach to investing in real estate and why you've chosen the approach you have and why you think it makes sense and maybe share some thoughts there. So, right back to basics 101, I guess. Can you just describe the real estate asset class and what it encompasses? Because I think people have a sense of real estate. It's not super complicated as to what real estate is, but it's a very, very large, very large asset class basically. So maybe just give us some color there and we'll start and go from that point. Sure.

I mean, to take it right down, as you say, to the very basics. Technically, you know, real estate asset can be defined as land and any permanent structures like a home or a commercial structure, that's classified as real property and is ascribed value by the economy. And clearly the owner of real property has all the rights of ownership, including the right to possess it, sell it, enjoy the land. So the, the, you know, you can invest in real estate both directly and indirectly. And direct examples are sold direct ownership, joint ventures, consortiums of investors, and indirectly there are many paths. Private equity, real estate funds, unlisted REITs, publicly traded REITs, exchange traded fund indices, mutual funds, and alternatives such as vision.

Okay, good. So most people think of real estate as the home they own or they, or the home they want to own. But there's a whole variety of different real estate categories. You've already sort of given us a high level, but maybe a little bit more color on some of the different types.

Sure. Nareit, which is the North American REIT Industry association, has identified 12 real estate subsectors. So this includes retail, office, industrial, self storage, non traditional sectors such as data centers and cell towers. And their business models are all highly differentiated. They operate with the, you know, wide term and different structuring of leases. There's even a prison REIT one can invest in. And so, you know, it's quite diverse.

But I hear a lot of people are trying to get out of that one.

There we go. You know, and it's changed significantly. I mean, for 2010, infrastructure data centers weren't even publicly traded. Now they account for 27% of the whole sector's market capitalization. You know, industrial real estate has grown from 4% of the universe to 11% on the growth of E commerce and is directly impacting the decline of retail from 29% to 11%. So it's quite diverse.

And so look, that's interesting. So if you put all this together. You know, I like to think about how big are these markets? When we thought we had a bond topic a little while back and it turns out bond market is way bigger than the equity market. For example, like you put all the real estate markets together, is there a, like what's a size or what does that look like in terms of size, maybe relative to some other comparables.

So let's start in the United States. The publicly traded universe in the United States is $1.8 trillion. In Canada, that's about 89 billion. Conversely, at least 80% of the value of real estate is owned in the 20 trillion dollar private market, which dwarfs the public sector. And I think what's interesting about the fact that you can buy it through the public markets or the private markets and what makes this asset class unique is there is an arbitrage that is rather unique to the real estate sector between these markets. And when there's pricing disconnects, you see this arbitrage taking hold as we've seen recently up here in Canada with government of Singapore pension plan buying a summit reit, a publicly traded REIT here in Canada.

Sorry, just for our listeners, just in case, what do you mean when you say arbitrage.

Means that Blackstone, for example, has bought 49 REITs since they started their real estate group. Blackstone between December 2021 and June 2022 bought five REITs. So often if you're looking to affect a portfolio transaction, the fact that the public markets may have a valuation that is disconnected to the private markets, which is why revision exists, frankly, they find that it's either cheaper or more effective to buy real estate through buying publicly traded REITs or real estate operating companies where they can efficiently and effectively acquire that real estate by buying the publicly traded entity itself. And that arbitrage is something unique. And you know, real estate, we can debate whether something's worth A$1, 10 or 95 cents, but it's not like Google, it's pretty transparent. There's just a relatively to other asset class. There's a relative narrow range of value that can be objectively determined because the leases are the leases, the balance sheet is the balance sheet, the markets are the markets. And so you don't see 50% takeovers or 70% takeovers premium. And so when you have this arbitrage and value is roughly as sustainable, you, you have this unique opportunity that's relevant to the real estate asset class.

Okay, got it. So you know, in our business, we, we at Gensler wealth, we help people build Portfolios and one of the key things we always think about is concentration. You don't want to over concentrate. Know when I think about real estate, if investors already own a home, quite likely that's potentially the largest financial asset that they own and that's real estate. So if I already own a home, why, what's the argument for adding more real estate to their overall, you know, wealth portfolio through your fund or through other real estate opportunities?

You know, it's a great question and I'm going to magnify Your question by 100 and just speak to our experience. And perhaps this is unique to what we do to some degree, but we have 40 family offices and real estate executives that for multi generations, their entire lives their family has invested in real estate and they become investors in our fund and we say what the heck is a family that their entire net worth has been made in real estate. Doing investing in a real estate securities fund.

Right.

And the answer we get one or two of four answers. Firstly, the opportunity to buy real estate cheaper in the stock market than the property market. You can't do that. Why do you need to be that 17th entity to compete against a pension fund or REIT or entrepreneur to buy property in an auction hosted by CBRE or Colliers when you can buy real estate at a discount? These guys are smart. They can't buy property in the property market at the discount. So that's one thing to what we do. We operate both long and short. And so if the fundamentals are negative or deteriorating, you can't do anything about that in the property market. You can do something about it in the stock market. You know, Calgary office market 2013 we began to short the Calgary office market. You can't short an office building building in Calgary. 3 and this is critical. You might be the best office family. Been in the in Toronto. You know everything about the office building market in Toronto. You've been in the market in and market out of the market. You've got broker relationships, you've got political relationships, you got banking relationships, but you may not know anything about the office market in Vancouver or the apartment market in Dallas, Texas or the industrial market in Los Angeles. And so this is an asset class. You're comfortable with real estate, but it gives you the opportunity through some of these vehicles to get geographic diversification and property type diversification. And lastly of course is liquidity to have an investment in an asset class you're comfortable with and get diversification for your family by property type. The geographic region and have liquidity is Something you just don't have nearly to the same degree in the property market itself. And so when things change, you can decide to move quickly.

Okay, good. Makes sense. So speaking of investing in public real estate, I think the main way to invest, and you'll correct me if I'm wrong, is investing in REITs. Can you explain what REITs are? What does REIT mean? What are they? How do they differ from regular stocks?

So REIS were initially established in the United States. They've grown globally since then in 1960 by U.S. congress. And it was a way to allow individual investors the opportunity to invest in scaled income producing real estate without the need to physically own the underlying properties. And what is important to understand is the REIT structure, subject to certain conditions, is a flow through for income tax purposes. So there's no tax exigible at the corporate level. And what this means, it enables the individual investor to get the similar tax benefits of depreciation expense that they would get by owning the properties directly and have that flow through to them as an owner in the shares of a reit, their total return investment vehicles. Meaning would you benefit both from the required dividend payment? I'll come back to that, yeah. And the capital appreciation of their property. So to qualify for REIT you have to invest at least 75% of your assets in real estate and you have to derive at least 75% of your gross income from rental income, interest from mortgages or the sale of direct property and pay out 90% of your taxable income in the form of dividends each year. So they retain features of both bonds and stocks. And as I say, it's changed significantly. From 202010 to 2020, the Footsie Day Real Estate Index added 70 names to its benchmark 46% growth. They become extremely liquid. The secondary markets. Over 10 years, from May 2011 to May 2021, the liquidity grew from 3.3 billion to 8.7 billion. And in recognition of the importance of this sector with something called gics, Global Industry Classification standard, added the financial sector to for the first time since 1999 and 2016, where REITs and REOCs were broken out of the financial sectors to their own newly created real estate sector. So it's become a major asset class.

Okay, got it. Just a follow on question. If they have to pay 90% of their income out each year, how are they continuing to grow their asset base or reinvest in the business if 90% of the income is flowing out?

Great question. As you recall, I said taxable income.

Right.

So there's a big difference between the taxable income and the cash flow. And the biggest component of that difference is that depreciation, depreciation is an expense to derive net income, taxable income, but depreciation is a non cash event. And so you get that benefit in terms of the flow through from a tax perspective, but there's no cash. And so the REITs are retaining that cash and they have that to continue to invest along with the excess 10%. And of course they can access capital markets in many forms to where they see compelling growth opportunities, more so you can in the private market.

Okay, perfect. That's very, that's very clear. And just, just for listeners, Reed stands for Real Estate Investment Trust. We've been using the acronym. And speaking of acronyms and jargon, I guess I feel like the real estate industry has a whole bunch of different terms or concepts that you know is specific to it. One that I hear a lot is something called a cap rate. I'm sure there are others, but if you are advising a new real estate investor to look for some specific features, terms, etc. Can you just first of all explain what cap rate is and maybe let us know if there are other key terms that we should be focused on?

Sure. So cap rate is short or capitalization rate, and it's the unlevered return on investment. So if you buy a building for $100 and it has $10 of net operating income, that's your operating income before interest expense on leaver, $10 divided by $100, the cap rate is a 10% unleavened return, unlevered return on your investment.

Okay, and so, so, so what are you looking for is cap rate. You want the cap rate as high as possible, as low as possible. Or, or when do you want it to be high? When do you want it to be low? I guess is another way of asking.

Well, if you're looking to make an investment and purchase it, you want to get a high return. So if you can buy at a 10% return, that's better than an 8% return. So when you're looking to sell, you want to sell at a lower cap rate. And so you want to get a mortgage, you want the value as high as possible. So as we said, it's the unlevered return. So it's. How, how is the cap rate used? It's the inverse of that formula I just described. If you have, you know, $100 of net operating income and the cap rate is 10% to get value value equals the net operating income, $100 divided by the cap rate, 10%. 100 divided by 10% is a thousand. The job, the asset is a thousand and the cap rate is 10% and the net operating income is $100. And that value is the other. Another term that is quite relevant in it is critical to what we do is net asset value. So what is the net asset value? The net asset value is the estimated market value of the REIT's total assets. Everything they own, every building, every mortgage, they might own, every piece of furniture, whatever they own, the total value of their assets, less the value of its own liabilities, primarily debt. And the difference between value and their liabilities is the net asset value. Two other terms I think are of importance. One is FFO funds from operations and the other is AFFO adjusted funds from operations. Fund from operation is cash flow. It's the operating cash flow. So it's equivalent to net income and like any other stock, plus depreciation, non cash event, less any gains on sale and non control. But it's essentially net income plus depreciation to get you cash flow and adjusted funds from operations. Because FFO is focused on operating cash flow, but you have some expenses. You have capital expenditures, maintenance capital expenditures. So AFFO adjusted funds from operation is attempt to give you a true cash flow after deducting capital expenditures, normalized capital expenditures, new carpeting, new drapes, a window cleaning that may not be operating, and you know, any flattening of rents. Because under accounting, if you have rents that vary every year over the course of a lease, under accounting terms, they flatten out that rent, well, one year might be lower, one year might be higher. So that's one of the adjustments that is done to AFFO to give you a true sense of the cash flow in any particular year.

Okay, got it. And when we talk a little bit more maybe about your portfolio, you can fill us in as to how all those come into play. When you're looking at investments, what I come across reasonably often with clients are folks that say, you know what, we're going to invest a bunch of money in equities, bonds, maybe some public real estate, et cetera, or we might want to save up and invest in some sort of property, a income producing property, a rental property, whatever. How do you think about those types of decisions for investors? You already talked a little bit about the benefits of investing in public real estate versus, you know, sort of the families that own real estate. But you know, if investors are in front of us trying to make a decision. Do I buy my own property and deal with that, or do I just, you know, invest in a whole bunch of other stuff? Is there a guide for making a decision of that nature?

Listen, as you said, we touched on this a little bit, but I think it is worth repeating to emphasize the answer to your question. Firstly, as you said in my introduction, although it may not be clear, you know, I've done direct real estate investing. I began my career with two global real estate operators, owners, developers. I've done development, I've done leasing, I've done operations. I've done planning and design. I've done acquisitions, I've done dispositions. So none of that we're doing at Vision today, but all of it's certainly relevant to our analytical investment approach. And not only do we think what we're doing is easier, more effective, but frankly, one of the reasons that we've been successful at Vision is we have much less competition doing it. But coming back to the heart of your question, as I said, you can't buy real estate cheaper in the property market than the property market. So one of the reasons to consider it is if you like to buy things at a discount, you can do that in the stock market selectively, it's not the majority, but if you're good at what you do, you can find opportunities to buy that real estate cheaper. And the opposite is true. As all if things are too expensive or you have a negative outlook on an office building or a shopping mall or whatever it may be, you could do something about it by being a little short, you get diversification. So do you really want to put all of your capital in that, you know, one industrial building, if that's what you can afford, or that bigger house? So it allows you to spread your capital over a range of different properties and regions. You know, public markets have much more diverse access to capital. If you're going to buy real estate directly, you can go get a mortgage, right? You might get a partnership. But if you're going to invest in public markets, you can get use unsecured debt. You can use convertible debentures. You can as the issuer, you can have a common equity offerings or you bought deals, you can issue preferred shares. These are securities unique to public markets. Liquidity is a big, big, big factor. And it's years like February 2023 where liquidity you read the newspapers, you see what's going on, and we can talk about this perhaps later about livestock, Starwood, reit, Brahmspan and mortgage funds that have all put up Gates and quality investments. You can get access to best in class properties that may not be available at all in the property market. Even if they are an institution or a family office might have to allocate too much of the capital up by that one off asset. And nobody calls you in the middle of the night to fix the heater.

Yeah, but you have to get the calls in the middle of the night from investors if things are rocky out there. So they're calling you.

I guess they do call us. Thankfully things haven't been too rocky. But they don't call us in the middle of the night.

Right, right. No, but that is, it's a very good point. There's a lot of heavy lifting if you're going to buy and own your own property. A lot of headaches. This is a different approach to getting access to the asset class for sure. But speaking of challenges, so for a real estate investor of any type, I guess what are the biggest risks? Maybe they're different than other types of investing, maybe not. But what would you say the biggest risks are for real estate investing?

I think the biggest risk, and we call it our blood is, you know, our investment thesis is based on supply and demand. And so the biggest risks are factors that change supply and demand where you don't have the liquidity to reposition. So you know they can be positive or negative. Positive, it's not a risk. But you know you have significant employment losses. The number one factor in demand for real estate is employment growth, not the unemployment rate is misleading. If you got a job, you can buy a house or you can rent an apartment or you can work in an office or working in a factory or shopping in a mall or traveling and staying in a hotel. So population growth changes are key. Climate events can be impacts to supply demand fundamentals as well as. So some things that change supply and demand where you don't have the opportunity, certainly relative, you might have the opportunity, but everybody might see the same thing at the same time. And you may not have the ability to effectively reposition your strategy and sell your asset. Clearly it's an asset class that can prudently use leverage. So having access to capital, both equity and debt capital is key. Again in the public markets as we touched on, you know, you can use unsecured debt. If you have an investment grade rating, you have more flexibility. So access to capital, mortgage money, the cost of that money changing. Look what's happened in the last year in terms of the interest rates moving quickly. And you know, if you combine those first two Themes. If you're in a property type where supply and demand fundamentals are changing, you may be forced to refinance at a time when it's not a particularly attractive time to do that. Tax changes things that can impact you from a taxation, property tax surprises for example, or you know, sometimes draconian tax changes that, you know, depreciation, expense changes, policies, regulatory policy, rent controls, changes in rent controls. You know, you saw in California, the huge issue today is moratoriums on evictions. So you have a lot of deadbeats and aren't paying the rent and you're not allowed to do anything about it. So these are some of the risks you have to be cognizant of.

Okay, well that's exhaustive. Try not to, I won't lie awake at night or I won't call you at night. But there's certainly like any investing risks you have to be aware of. You mentioned interest rates. So Maybe the last two questions in Real Estate 101, but tying it back to what's going on in the world today. So two things have happened recently. Number one, inflation has started to go, go up very dramatically. And as a result governments have increased interest rates dramatically, relatively speaking, I guess over the last number of months. So how does real estate investing or real estate asset class fare in periods of high inflation and in periods of high or rising interest rates?

Firstly, real estate typically does well in an inflationary environment. It's a hard asset and the replacement cost value will go up. So it's an effective and natural hedge to inflation for really two reasons. The first I touched on higher replacement cost and secondly from growing cash flows as you can mark your mark rents to market. So real estate has demonstrated, you know, you look at a 20 year period between 2001 and 2020 when US CPI measures above 2 1/2%. US and global real estate have outperformed in high growth, in low grains. Inflationary environments, REITs typically do well. Now you need to be sensitive to the fact that certain types of real estate can do relatively better than others. Short term leases where you have the ability to pass through inflation. If you've got a lease that's fixed rent for 10 years, an inflationary environment and you don't have annual inflation bumps built into your lease, you're not going to be able to adjust that. But if you own apartments where you can mark the market every year, or less or shorter term leases, self storage, you can mark the market every hour if you want, you have the benefit to pass through Inflation net rents versus gross rents. Gross rents, you get your rent. That's what they pay. Net rents. You get to also charge the tenant operating expenses, their proportionate share of operating expenses and proportionate share of the realty taxes. So if your operating expenses go up, if your property taxes go up because of inflationary environment, you can pass those through to tenants if you have a net rent structure as opposed to great gross rent. So real estate typically does well in periods of high inflation. Interest rates the elephant in the room. This is the biggest myth impacting REIT prices. And the myth harkens back to what we discussed already. The simplified value equation for real estate value equals that net operating income divided by a cap rate. All the rhetoric in the Wall Street Journal and the Globe and Mail and Variance is about interest rates. Cap rates. Interest rates go up, cap rates go up, interest rates go up, cap rates go up. If the cap rate goes up, that's the denominator of that equation. That means that in isolation your value is going down.

Right.

People forget there's a numerator to that equation. Net operating income in our experience is that a hundred percent of the time with a lag. Supply and demand fundamentals trump interest rates. I don't care if rates are going up or down. If you have too many office buildings and being built and existing at Calgary, when the energy markets are taking a fall and the vacancy rate is 35% and interest rates are going down, the value of Calgary office buildings are not going up. And same thing when rates go up. You must ask yourself why are interest rates going up? If it is a credit crisis, it's brutal for real estate. It means inflation. We touched on that. That's why the interest rates are going up. That's typically for real estate. And if you look at A study from 1993 to 4Qof hasn't been updated this last year but 2021 REITs posted positive total returns in 85% of the months when treasury yields were rising. That's interesting. The other thing you have to talk what interest rates. Right now we're talking about the fed funds rates going to five, five and a quarter, maybe higher percent. That's what the market's underwriting funds. Fed funds raised five and a quarter. We believe there's a serious risk of recession. You combine those two things, recession and five and a quarter. Maybe because of five and a quarter percent interest rates, we're going to have a recession.

Hmm.

Is very unlikely that the US 10 year bond yield is going to pierce the 2022 high of 4.34%. In that context, we've never had a recession in history where the yield on the 10 year bond didn't go down. That is what's important to real estate is not the fed funds rate unless you're a REIT with 90% short term variable rate debt, which is not the case Reese. Today it's the opposite. In fact they're pretty stable balance sheets. So it's intellectually inconsistent and economically inconsistent to think that we'll have a recession and that the 10 year US yield will be anything near its recent peaks. And by the way, this is consensus. If you look at the six major money center bank forecast, the consensus view, the end of 2023, the 10 year US bond yield is going to be 3.2%.

Okay, so what? Everyone seems to be scared about inflation rising, interest rates rising. From your perspective, or at least what you've explained, real estate historically seems to do fine if not very well in these types of environments. Okay, so there, look, let's call that Real Estate 101, maybe a little 201 as well. Your strategy and your, your funds focus on, as you've already described, public real estate investing. You've touched on it already. But maybe let's dive a little bit deep or a little bit deeper into a few questions on about what you're doing there. But as you said, most of the real estate market is private. I don't want to make you repeat what you've already said, but maybe just a little bit of history of vision. How did it get set up and why in publicly traded real estate across North America primarily, I guess versus doing something different in real estate.

Yeah, I mean it was really by that basic framework that you know the, the co founders of Vision, myself and my partner Frank Merritt. Frank was a top right real estate research house for 35 years. And there was never a period of time in our 35 year experience where we couldn't buying real estate trading more cheaply in the stock market at a discount than that asset value that it was worth in the private market. And that was the real driving force, number one. Number two, there are hundreds of real estate mutual funds, there are thousands of real estate, property private equity funds. There are millions and millions and millions of property owners, buyers. But we do, you can count them on one hand, long, short, active, vesting pair trading, you count them on one hand globally. And so the opportunity was compelling. We happen to have that unique combination of direct property and capital markets along with some M and A and securities laws, expertise, et cetera, in our active investing campaign. But we had a unique skill set that was a rarity and a much, much, much smaller universe of people doing that we do than are buying real estate directly through bricks and mortar. And the opportunity, as we touched on earlier in terms of advantages we thought was compelling.

Okay. And so, you know, we're going to continue talking about publicly traded real estate in a minute. But you know, one of the benefits I think of private investing, including private real estate investing, is that, you know, one might I guess have the, the view that prices seem to be more stable, you know, every day in the equity markets, Every second from 9:30 until 4pm Prices are flying all over the place. So you know, some investors think maybe, maybe they don't realize that, but they think that's better. My, my real estate holdings haven't fluctuated. They're much more stable than what's going on in the public markets. Any commentary on on that? Again, it's another question of public versus private. But.

Connect the last question in this question, add to it. I mean, what you find is that in short periods of time, six months, there's a significant positive correlation between REIT prices and the S&P 500, the REIT index in the S&P 500. But over periods of time, REITs are correlated to real estate private market, as they should be. And while that's the case, over periods of time you see spikes in REIT prices above and below the trend lines of private properties. There's about a 14 month lag in the private market to where REIT indices react. Public market reacts more quickly. And so for example, last year, the end of the year we talked about Blockstone reit. But if you look at the index of the private REITs, not publicly trade private REITs, the Blackstones, et cetera, they had an average increase in value of 13%. At the same time REITs were down 28%. There was a 41% difference between private REITs and public REITs. And so this made no sense. One of those two had to be wrong, or perhaps both of them wrong, but they both couldn't be right. And so when you have this disconnect, that is exactly what you're talking about. So it's more stable. Does it make any sense, have a premium for illiquidity? That makes no sense.

Right.

The lag private real estate they have, they're based on appraisals, appraisals, whether markets are going up or down, appraisals are lagging indicators. So if you feel good about putting your head in the sand and thinking that you're doing fine because you don't have current values, that's better. But you've got your head in your. So maybe you're going to keep your job for an extra six, nine months till people figure out your values are nonsensical. But this has made no sense at all. Any structure that embeds a mismatch between the underlying liquidity of what you're investing in and the liquidity you promise investors are accidents waiting to happen. And we ask you conceptually, if one is willing to forgo liquidity in the property market as a long term investor, why would intermittent volatility matter to them along the way, particularly when it's a more accurate reflection of what the value is? And so, yeah, if you want to sleep at night by thinking you're sleeping at night forever, that's pretty good. But if you want to have some of those advantages we talked about and take advantage of those opportunities and see mark to market, you know, you have a better reflection of what is happening in the marketplace than you have in some of these perceptions of more stability.

Right. And so I assume you have the data or you've created the charts or seen the charts. So a question for you. So if I plotted publicly traded reap, you know, pricing in a line graph and then, you know, followed with private real estate pricing, do you actually see that correlation that the public leads the private and they sort of follow, you know, just maybe with a little bit of a lag, as you've described?

Yes, there are studies. That's where the 14 months came from. And you know, if you look over the last couple of decades, there was a study, it was an academic study published in the Journal of Portfolio Management just over a year ago, and it compared the performance of private equity funds focused on real estate through the REIT index. And at a high level, they concluded that the annual return differential was 165 basis points in favor of the REIT index. So private equity funds returned on average an IRR of 8.69% and the REIT index had a return of 10.34% at a high level. But then the study was astute enough to say, you know what, that's not apples to apples. You must consider that private equity funds were operating at 68% average loan to value leverage, whereas the REIS operated average 32% leverage. You must consider there's zero liquidity in a private equity fund focused on real estate. This even the REIT index. And they went through a series of adjustments and concluded that only 27% of private equity funds focused on real estate outperformed the REIT index. And that is the index. You can look at this same 20 year period and compare the performance of the best performing REIT quartile and the worst performing REIT quartile. The average differential between the best and the worst was 49%. So if there was ever a sector that seemed to benefit from a more active approach, real estate would be amongst it.

Yeah. Okay, amazing. So, so then let's talk about the public markets and investing in publicly traded real estate, or REITs. You know, there is a view that public markets are efficient, which basically means prices should generally reflect the information that's out there in the market. But I think your entire philosophy and fund exists because you may believe that that's not the case or in particular that real estate exhibits a whole bunch of inefficiencies. Can you give us like some examples of these inefficiencies that you, that you are striving to take advantage of?

Sure. I don't believe public markets are efficient, but I know that publicly traded real estate markets are not efficient. So why? Your key question is why? So you know, we can spend a whole podcast on this, so we won't. But let me give you some examples. Let's start up here in Canada. You know, firstly, sell side research focus. Canadian research analysts focus on REITs and real estate operating companies that generate fees for the corporate finance department. That's it. If you don't generate revenues for Canadian investment dealers, you receive limited or no coverage whatsoever. And so there's a fair bit of insight on those that generate fees. If you don't, there's less insight. So that's an advantage for us because some people call us old, others experienced. We know every one of these entities, we know most of their properties. And as real estate supply demand, fundamentals change, or plumbing growth, conditions change, we can move quickly and effectively. Whether it's one of the animals cover one of the things they do, not another difference. There's a difference. In Canada, United states, United States, 80% of REITs are owned by institutional investors. In Canada, 70% of REITs are owned BY retail investors. And so there is a significant focus on yield. So brokers sell yield because yield sells. I encourage your audience not to make any investment ever in any other, in any asset class for yield. I don't know anybody that's ever made a proper valuation based on how much dividend somebody was going to pay them this year as opposed to how much cash flow they were going to earn this year, next year and the year thereafter. And those people that buy REITs for yield, there's at least one month every year where the stock price goes down and destroys their yield for the year. Last year was probably nine or 10 months. And so distortions are created because of the yield component. And so for example, you could have two publicly traded real estate entities that are identical in every respect. Same property, same cash flow, same management, same lease, everything the same. Except one pays a big dividend, the other pays no dividend. Which one's going to trade at a higher price in the stock market today, we all know the one with the dividend. Which one should? Well, those of us that endured business goalie would have theories about higher growth, less B leakage to bankers. It should be the higher price one. Nonsense. We've already been through this. The difference between real estate and any other asset class is that arbitrage between public markets and private markets and everything about them is the same. They should be the same accounting standards, ifrs. This was supposed to be a panacea. It was in Europe and Asia 2011 we brought this to Canada.

And just just for our listeners, what's ifrs?

I'm going to explain it. International reporting standards. So unlike gaap, which still exists in the United States, where means your accounting, your financial statements show the value of the real estate at the historical acquisition cost, less depreciation. Under ifrs, you have to mark the market the value of your real estate every quarter. So what is the market value of your real estate net of all liabilities? It's supposed to be market as opposed to historical cost accounting. But it's flawed, it doesn't work. And the reasons for this are several. Number one, the process. It starts with appraisals. We are east divers. Appraisals or lagging indicators whether markets are going up or down. So managing teams do appraisals. They have an incentive to keep IFRS values low because they want to grow by issuing equity. If the value is too high, they're going to get guys like us criticizing for issuing equity too cheaply. Then they get auditors involved. Auditors are conservative, so they have an incentive to keep the value low. And then they get the audit committee involved and the audit committee wants to be conservative. And so they keep it low and it ultimately goes to the board of directors. And so frankly, if you read the accounting policy, they're breaching the policy. There's nothing in the policy that says conservative, in fact it says the opposite. You have to do it based on observable market transactions. And the facts are if you look at every acquisition of a REIT that took place in Canada since I counting came into the fruition in 2011, they've taken an average 20% premium to the I net asset value as of the end of the prior quarter. Look at the most recent one which closed today. The acquisition by government of Singapore of Summit REIT happened to take place in a 33% premium to the stock price, but a 20% premium to the IFRS valuation. The REIT published itself. So it's flawed us some different reasons. As I said, 80% of ownership is institutions and most of these are what we affectionately refer to as the REIT mafia. These are institutions that have their performance benchmarked relative to a REIT index. So they might be overweight, they might be underweight, but if it's not in the index they can't own it or won't own it. And so they have distortions in value based and what makes up the decision whether index it's not whether it's good real estate or bad real estate, whether it's appropriately valued or inappropriately valued it's scale big volume, large cap that what makes it whether it's a good read or a battery. And so things the largest weights in the index tend to be over owned while other smaller cap or attractive investments are often neglected. And so some of these they don't care that that REIT is trading at a 40% discount to the value of the real estate. If it's not in the index they ain't going to buy it. And so you have distortions because of that. They like pure play. They don't want REITs to be diversified. They don't like Coleman R REITs and artist REITs and H&R REITs and Brookfield Properties and Howard Hugh Corp. They want to make the decision to invest in office, retail, industrial they don't care it is trading at 40% discount. They want to make the decision. So there's a number of factors in both sides of the border that give rise to these inefficiencies.

Okay, that's great, thanks for explaining that. So maybe can you give our listeners just an example from your portfolio. You know what's a holding that you have maybe your top holding, maybe you know something top of mind that sort of hits your criteria and why and what might be a holding if you disclose this that you might be shorting or not Liking or it could be a sector. If you don't go into shorts, that's totally fine too. But just to all the stuff that we've talked about, put it together with a few examples.

You know, one of the reasons we like these kinds of market environments is we haven't talked that much about vision. But you know, we long short and we don't use long side leverage. We don't buy stocks on margin. So when a rising china is lifting all boats, it's harder for guys like us to differentiate ourselves. But now when there's volatility, stock picking matters more. And when we find in terms of distress, like we've been through recently, it gives us opportunities to make investments in real estate sectors where the fundamentals may have been wonderful, but the valuations reflected it. So, specific to your question, one of the sectors we like a lot, we've liked the fundamentals for years, were manufactured housing communities. So this is a sector where you go and you spend $200,000 of your money to buy a prefabricated manufactured house and you put it on their land. They charge you land rent, you, the homeowner pay the realty taxes. You, the homeowner pay the operating expenses. So it's the most pure form of cash flow in the real estate space. We talked about AFFO and affo. The difference between AFFO and AFFO in this sector is very narrow. It's very pure cash flow. And institutions didn't get this for 25 years. They got it the last 15 years. And as a result, it's a sector that typically trades at a big premium than a net asset value of the real estate. So we love the fundamentals, but we didn't own it because that's not what vision does. We like to buy it at discount, not a premium. Well, in this big sell off that we had, we were able to buy Sun Communities specifically at a discounted net asset value. This is a sector we talk about where vision is positioning for a recession that's never had 12 months of declining net operating income ever, including 2008. There's limited new supply. These are beautiful, actually, communities, they look like single family subdivisions, but they have baggage from people thinking they're trailer parks. And so municipalities don't want them. And so it's hard to get zoned for new ones. So there's limited new supply. So it's a very, very safe way to get offensive defense in terms of growth. We like to sector a lot. The current environment, on the negative side, office for sure, is the sector We've been negative on forever. I've never seen anybody in history make money. I grew up in office with a buy and hold strategy. In office you can't do it. You can buy 80% occupied, do a good job managing it, get at least up to 95% and sell it, make a reasonable return. But to sit there year after year at 95% occupancy and think you can get a reasonable return, you cannot. And the reason is the capital expenditures. And it's not the renovation of the lobby or the mechanical room, it's the tenants. Every time you lease that space, you've got to give tenant improvement dollars and free rent to get the space leased. And so we were in a 20 year sector decline for demand from 2000, the Internet age to 2020. The lawyers don't have law libraries anymore. Deloitte built new buildings in Toronto, Montreal. They went from 300 square feet per employee to 160 square feet per employee, no office or partners. That was already going on before March 2020. Now since March 2020 when the CEOs of HSBC, bank of Montreal, meta Target stores, on and on, you read the newspapers have said their workforce has worked really well. In a remote work from home environment, their long term demand for office space is going to be lower. We believe them. So we see a 50% reduction in long term demand for office space and we trace. So that's a couple of themes that are, I think instructive for your audience.

Okay. I mean, you know, our office is just north of downtown. We didn't, we didn't want to be in a big downtown tower and we have free parking for our clients, which is the most important thing. No, no one likes to pay $35. No one wants to pay $35 to come see me, I can tell you that. But I must say, when I do go downtown, I was downtown yesterday. It is busy. There are a lot of people and certainly people, you know, two years ago it was a ghost town and now it is quite busy. You know, the coffee shop lineups are long, the food courts are full, the restaurants are busy. So you know, there are people coming back. And I wonder if over time those buildings really get, you know, full.

Yeah, I mean what you're seeing in terms of the office market is you're seeing a bifurcation. Buildings built 2015 or newer have solid demand. New York City one Vanderbilt ISL green, over $200 a square foot next to Grand Central Station. Hudson Yards, big demand, over $200 a square foot. If you're going to have office space. You want highly amenitized, modern, environmentally friendly, well located to transit office buildings. But buildings built 2015 and before. The sucking sound in New York City from tenants leaving those buildings is very loud. Those Park Avenue buildings. Some of those buildings, if they don't, they're not conducive to being converted to residential. Our dodo birds. Certainly the occupancy of office is not, you know, you're looking at maybe 50% what it was before the pandemic. And most of that is concentrated on Tuesday, Wednesday, Thursday. So come on a Monday and Friday and see what the God look like.

Right. Okay. So maybe just to wrap up a little bit on, on your fund, your outlook, you've talked a little bit about what you don't like so much office space. You talked about the manufactured housing is one thing you like. But overall what are a few of the more positive real estate areas that you're focused on? Maybe the negative ones you've covered already but just from a fund positioning, where are you concentrated?

Thank you. We're pretty focused at all times, particularly at this juncture. So we talked about manufacturing, housing communities. We like North American industrial real estate. Everybody gets this now. But it's three powerful secular demand forces on the demand side weren't there last time we had a recession. So the first is E Commerce. Everybody understands this now. E Commerce spiked to 25% of total retail sales in March 2020. It's come off 16, 17% but we think five years from now you're going to see that back through 25% you're going to say Jeff, you, you told us you're underwriting, expecting a recession. Okay, recession. So Walmart sales are going to come up but Walmart will still need that distribution space. The services sales they have and an increasing amount because of E Commerce. Number two, reshoring the return of manufacturing to North America powerhouse. We've already seen several to couple multi billion dollar chip manufacturing plants in Austin, Texas. One under construction in Phoenix, Arizona. Intel investing over $100 billion outside Columbus, Ohio. These are major decisions. They're 50 year decisions. They don't get made lightly. Hey, Canada couldn't rely on the United States when Donald Trump walked their masks from 3M corporate April 2020. Remember that if you lived in New York City in August 2020 you walked into Walgreens or Duane Reade, there was a shortage of Tylenol. Do any of us want to rely on China for pharmaceuticals? I don't think so. At the three Amigos Conference a month ago there was a policy statement of the three leaders of Canada, Mexico and the United States asserting the goal of 25% of all imports from Asia to be manufactured onshore North America. That's a big number. And thirdly, you know, when I was a business school in Chicago in the 1980s, the major operations class focused on the Japanese concept of just in time supply chain. Just in time supply chain is done, it's over, it's finished. Now it's just in case inventory management. You know, Nike will still make shoes in China or Vietnam or Cambodia, but Nike will carry additional inventories in western economies. So demand drivers we watch supply. Easy to build this stuff. Still easy to build it. Not so easy to get the land in the locations and markets where these users want to be. Toronto, Montreal, New Jersey, Los Angeles, Vancouver. Vacancy rates 1%. There's a what drove this government of Singapore buying summit REIT at this premium a gap 50% between its in place rents and market rents. So supply is in check. We see a pickup in supply in South Dallas, Phoenix, Indianapolis, Central Pennsylvania. Pretty much all the rest of the markets are quite balanced. And I think the third one that I haven't mentioned, in addition to manufacturing housing communities is Canadian grocery store and pharmacy anchored shopping centers in particular and specifically the units of First Capital reit. We've stated publicly that we think this is the best grocery store, pharmacy and shopping center portfolio globally. And yet the share price significantly underperformed. We called for corporate action. We're right in the middle of some activists that have come out on this name and I think this is a situation. They had a nice 5% dividend while you wait. We think this is a situation that's going to unfold constructively in the next 30 to 60 days. And that's the core of the long side. Apartments. We're cautious because goes back to gross rent to net rents. Apartments in North America are primarily gross rents. You pay what you pay and in many markets here in Toronto you have rent control so your rents are capped, but your expenses are not in an inflationary environment. So you got to be cautious. Our Investments are in two names. Boardwalk REIT and BSR REIT. Boardwalk is 61% province Alberta. BSR REIT is 90% state of Texas. Those are the two last places that are planted. You're going to see rent controls. So that gives you a bit of a flavor of our positioning.

Okay, perfect. Well look, you've given us some of the stuff, some of the sectors you like, some of the areas you don't Any final thoughts for real estate investors? Maybe it's been covered already, but any sort of parting words for folks that are thinking about or are investing in real estate right now? What's the outlook for the next 12 months? 24 months? Whatever you think is important.

Yeah, I mean, general advice, don't invest for yield. We like yield, but yields should be part of total return. Don't be fooled into private equity funds that misrepresent the opportunities and liquidity and stock picking matters. That 49% differential between the best performing and the worst performing REIT quartile is real and everything is not created equal. And so when REITs get all crushed because of the S&P 500 and Apple getting crushed equally, pick the better REITs, you're going to do very well.

Okay, amazing. So, last question, which is not related to real estate or investing, we ask everybody this question. You know, our, our theme over here, our, our word is unlimited. We help clients with, you know, whatever they need across the financial world. Unlimited is very important for us to think about when we take care of clients. If you weren't doing what you've been doing for the past 35 years, not engrossed in real estate, or, or maybe you will say you'd still be, you have unlimited options. You can do anything you want in the universe. What would Jeff Olin be doing right now? And you definitely wouldn't want to be talking to me if you had many other things you could be doing. So what, what, what's your interest? Or what would life look like for you if you weren't doing what you're doing now?

I think it would be given away by my name, my name. The preferred name I'd like to have is Bruce Springsteen. So, so that's probably what I like to be doing.

Okay. Rocking and rolling.

There you go.

Okay, Jeff, look amazing. Thanks so much for your time. Full disclosure, we do have clients that invest or we allocate to your fund. It's important to say that on the podcast so people know, but appreciate everything you do for us. Appreciate your time today and wish you a continued success because your success will have success for some of our clients as well, where appropriate, of course. So thank you very much and enjoy, enjoy the weekend. Long weekend coming up here.

Thank you for your interest in support. If we can be helpful to you, your clients in any way, don't hesitate to show.

Okay, thanks.

Bye. Bye. The unlimited podcast is hosted and produced by Brian Ginsler and is edited and mixed by myself, David McMillan. This podcast is not to be taken as investment advice. If you like what you heard, don't forget to rate the podcast and follow us on social medianslerwealth. Thanks for listening and see you next time. Sat.