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

Agri/ Timber

• Oper. Ag.

Gov’t Backed Infra Resources Bundled Debt

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

Our definition of Alternative Assets within a Real Assets or underlying or “functional” Real Estate mindset is as follows:

 3 F’s (Food, Fuel & Fibre) which

bundles most of infrastructure, agribusiness, farmland and timberland

 + Non-Core Real Estate (Define

non-core simply as not “core”)

 + Operating investment (also

Non-Core) businesses with R.E. focus (business/hedgefunds, etc.)

 Therefore:

• 3F + NC-RE + Op-RE =

Alt-RA [Alternative Real Assets]

❖

Definitions:

❖

Core Real Estate – ‘Core Real Estate’ is defined by the reliability of the cash flow the underlying real estate is generating (Cap Rates). Core investments are considered to be the least risky because they often target stabilized, fully leased, secure investments in major core markets

❖

Non-Core Real Estate is defined by the need for a business plan to extract value from the asset purchased. The other defining characteristic of ‘non-core real- estate’, and also another source of its returns, is leverage.

❖

Value Add – ‘Value-add commercial real estate’ investments typically target properties that have in-place cash flow, but seek to increase that cash flow over time by making improvements to or repositioning the property

❖

Opportunistic - Opportunistic real estate 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:

1.

Most opportunities in large urban centres or close to locations with cheap operating costs

2.

Multi-Tenant Data Center (MTDC) leasing more than doubled in 2018 compared to 2017

3.

Montreal is major international hub for data centres/ TO is also strong

Data Centre Statistics

• Leasing activity:
• 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
• f a decrease in the supply chain brought on by hyperscale

data center user

Tenant Market Provider (MW) Microsoft Toronto DLR 10 MW Amazon Montreal/ QC Unknown 6 MW Oracle Toronto DLR 3 MW Blockchain Montreal Estruxture 2 MW Largest Wholesale Leases in 2018

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