Introduction to Alternative Investments Atlantic Real Estate - PowerPoint PPT Presentation

Introduction to Alternative Investments Atlantic Real Estate Forum, 2019

Introduction to Alternative Investments Presentation Outline:  Introduction to Alternative Assets  Asset Types & Returns  Guest Conversation + Q&A

Introduction to Alternative Investments $45 Trillion Investable Universe in USA

Introduction to Alternative Investments

Introduction to Alternative Investments Alternative Investments Consists of 4 Asset Types: Real assets (including natural resources, commodities,  real estate, infrastructure, and intellectual property) Hedge funds (including managed futures)  Private equity (including mezzanine and distressed  debt) Structured products (including credit derivatives)  Source: CAIA

Introduction to Alternative Investments Brief Backgrounder on Alternative Investment Market  $98 trillion invested in stocks, bonds & cash (traditional inv.) globally  $14.7 trillion in alt. investments by 2023 [57% incr. vs. 2017]  Alternative are a safe haven for institutional capital  Infrastructure is replacing Real Estate as the most popular Alt. Asset Investment  Overall IRRs have exceeded 10% for most asset managers  Pensions Need Alternatives = Huge Funding Gaps (Billions behind)

Introduction to Alternative Investments Comparative of Alternatives vs Mainstream Assets Gov’t Backed Bundled Debt Oper. Ag. Agri/ Timber Infra Resources

Alternative Investments, The Future is Now… Alternative Asset Returns

Introduction to Alternative Investments 5 Yr./ 10 Yr./ 20 Yr. Returns – Alt. Assets vs. Equities/ Bonds/ Commodities/ Gold

Introduction to Alternative Investments Definitions: ❖ Our definition of Alternative Assets within a Real Assets or underlying or Core Real Estate – ‘ Core Real Estate’ is ❖ defined by the reliability of the cash flow the “functional” Real Estate mindset is underlying real estate is generating (Cap as follows: Rates). Core investments are considered to be the least risky because they often target  3 F’s (Food, Fuel & Fibre) which stabilized, fully leased, secure investments in bundles most of infrastructure, major core markets agribusiness, farmland and timberland Non-Core Real Estate is defined by the ❖ need for a business plan to extract value  + Non-Core Real Estate (Define from the asset purchased. The other defining characteristic of ‘non-core real- non-core simply as not “core”) estate’, and also another source of its returns, is leverage.  + Operating investment (also Non-Core) businesses with R.E. Value Add – ‘Value-add commercial real ❖ focus (business/hedgefunds, estate’ investments typically target etc.) properties that have in-place cash flow, but seek to increase that cash flow over time by  Therefore: making improvements to or repositioning the property 3F + NC-RE + Op-RE = • Opportunistic - Opportunistic real estate ❖ Alt-RA [Alternative Real Assets] investments follow the ‘value-add approach’ but take it a step further on the risk spectrum.

Introduction to Alternative Investments ❖ Why is so much investment flowing to Real Estate/ Real Assets?

Introduction to Alternative Investments ❖ CBRE’s Research Group only defines Alternative Investments under the following broad segments for Real Estate: ❖ Hotels ❖ Seniors Housing & Student Housing ❖ Self Storage ❖ Health & Fitness ❖ Data Centres ❖ Medical Offices ❖ MISSING = Agriculture, Farmland, Timberland, Resources, Real Estate Focused Infrastructure, Business with Real Estate Focus, Other, etc.

Introduction to Alternative Investments ❖ CBRE Estimates, N.A. Alt Real Estate Investment Volume (bln)

Farmland + Timberland

Introduction to Alternative Investments ❖ Farmland/ Timber A growing population + economic prosperity in emerging markets driving ❖ investment The sector’s stability due to people’s need for food that is mandatory and non- ❖ cyclical 2005-2017, the # of investment funds within F&A assets jumped from 38 to 446, with ❖ AuM $75++ Billion globally – most funds are North American based Farmland - annual & permanent crops, Avg. total return of over 10% over last ❖ 20+yrs Operating Farms and Permanent Crop operations higher IRRs - $$ going into Farms ❖ Forestry still a small asset class at $150 Billion invested by institutions today, higher ❖ than the $75 Billion invested in food & agriculture (worldwide inst. investment)

Introduction to Alternative Investments ❖ Farms are owned by Farmers on a Global Scale

Introduction to Alternative Investments ❖ Returns – Timber & Ag vs. Core Real Estate/ Financials ❖ Farmland, as measured by the NCREIF Farmland Index, asset has outperformed both domestic stocks and bonds on an annualized basis over the last 40 years ❖ Chart, below show Avg. Returns – 1992-2017 per NCREIF

Seniors Housing

Introduction to Alternative Investments ❖ Seniors Housing ❖ Three main uses 1) Primary Care 2) Acute 3) Long-Term Care ❖ Demand based on need; older populations need more ❖ Biggest Risks are Operational Risks, Labour, Regulation, Construction Costs, etc. ❖ Largest Opportunity = Long Term Care – Residential, Nursing & Dementia Care

Seniors Housing ❖ North American Seniors Housing Capitalization Rate Trends (2018)

Student Housing

Introduction to Alternative Investments ❖ Student Housing ❖ Demand based on internationalism of students, increased wealth of middle classes, growing int’l student age group, etc. ❖ Biggest Risks are: Operational Risks vs. Returns  Vacancy  Increased Costs  ❖ Largest Opportunity Multi-national platforms  Unique affordable student housing 

Hotels

Hotel Statistics ❖ # of Rooms Occupied vs. Rooms Available (CBRE Hotels)

Hotels Hotel demand dictated by leisure & tourism spending  Projected Annual Growth Rate of 3.9% CAGR until 2027  Risks include higher construction costs and alternative  highest and best uses Demand has driven construction craze in many cities,  Avg. Occ. is 66% in North America (lags other Continents) Largest Opportunities:  Large Capital/Gateway Cities – Downtown Locations  AirBnB has tended to increase spending vs. opposite  Supply lags Demand in most locations 

Data Centres

Introduction to Alternative Investments  Data Centres Tremendous Expansion by “Hyperscale Cloud Providers”  The roll out of turnkey leases in 2008-2009 along with a  shorter-term leases signed in 2013-2014 led to significant increase in leases expiring in 2019 and 2020 Largest Opportunities:  Most opportunities in large urban centres or close to locations 1. with cheap operating costs Multi-Tenant Data Center (MTDC) leasing more than doubled 2. in 2018 compared to 2017 Montreal is major international hub for data centres/ TO is also 3. strong

Data Centre Statistics Largest Wholesale Leases in 2018 Leasing activity:  Tenant Market Provider (MW) Microsoft Toronto DLR 10 MW Montreal/ Amazon Unknown 6 MW QC Oracle Toronto DLR 3 MW Blockchain Montreal Estruxture 2 MW DLR had some recent success with U.S. cloud operators in  Toronto Acceleration of blockchain throughout the U.S. and Canada in  2018 met with pushback on utility pricing & has made deals difficult due to cost recoveries Recent Transactions from 4.5% to 8.9% Capitalization Rates in  2018 (major transactions in North America) A significant uptick in construction costs are expected as a result  of a decrease in the supply chain brought on by hyperscale data center user

Self Storage

Introduction to Alternative Investments ❖ Self Storage One of the fastest-growing sectors in the CDN comm’l real estate  market Fractionalized industry - 80.0% to 85.0% of industry operators are  independent w/1-2 facilities/ Mostly owner-occupied market in Canada Capitalization rate range from sub 5% for Class A product in large  urban centres to 7%+ for Class B and Class C product in smaller rural communities. Est. 5-10% Portfolios premium (Overall Avg. = 4.5%-7.0%) 80% - 90% CDN Occupancy Rate  Overall industry growth 3.7% CAGR (2014-19)/ Est. 2.0% 2019-24)  Over the five years to 2019, demand for units and decreasing ❖ vacancy rates helped profit margins, measured as earnings before interest and taxes, reach 10.5% in 2019, up from 9.1% in 2014

Self Storage Statistics

Other Assets

Introduction to Alternative Investments  Other Assets Other alternative assets seeing increased investment include:  Cannabis Industry – land & building  Cemeteries/ Funeral Homes (# of REITs)  Telecom site REITs/ Fund Investments (leases)  Car dealership REITs/ Fund Investments  Investment in long term development lands  Gas station/ truck stops/ Ethanol Plants/ Quarries/ Greenhouses  Ice Rinks/ Golf Courses/ Amusement Parks/ Gyms  Landfill/ Transfer Stations  Cold storage/ Aquaculture, Water Rights, etc 

Introduction to Alternative Investments  QUESTIONS/ DISCUSSION