Show Transcript
Economies have started to reopen, and markets have largely recovered. But with much uncertainty ahead, Ted Welter, Chief Investment Officer for Alternative Investments at TD Asset Management, discusses how alternative investments could provide long term stability in your portfolio.
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Hello, and welcome to the MoneyTalk COVID-19 Daily Bulletin for Tuesday, June 9. I'm Anthony Okolie. In a few minutes, Kim Parlee will be speaking with Ted Welter, Chief Investment Officer for Alternative Investments at TD Asset Management, about how alternative investments can provide long-term stability in your portfolio. But first, a quick wrap of today's headlines.
The World Bank says this year, the global economy will suffer its deepest recession in 80 years. It expects the global economy to contract by 5.2%. And the effects are already being felt in the US. The National Bureau of Economic Research says the US economy officially entered recession in February as a result of the pandemic.
The shale industry is taking another hit. There are reports Chesapeake Energy, one of the pioneers of the US shale revolution, is preparing a potential bankruptcy filing that could hand control to senior lenders.
Finally, IBM has told the US Congress it is ending its facial recognition business over concerns about basic human rights and freedoms.
And that's a wrap of today's headlines. Next, Kim Parlee's conversation with Ted Welter.
- Ted, I want to start off by talking about the role of alternatives in economic situations like we're in right now. And, you know, not to be too glib about this, but I'm going to say this is probably not your first rodeo in terms of having gone through various crises in the alternative markets.
- Kim, thanks for having me. I'm very proud on behalf of TD and our team to talk about the alternative asset classes. But to your point, where are we right now, what are we dealing with, we always look at history as observational points of where we can provide perspective to what we're dealing with today and how we're going to navigate moving forward.
So be it the, you know, the obvious one, maybe the financial crisis. But in the real assets and in the real estate sector, we've had oversupply shocks. We're a service provider to the broader economy. We've had energy shocks that have affected markets. We've had policy shocks by governments.
So there are a number of different situations that my role as a Chief Investment Officer, together with Connie Ashton, our Chief Operating Officer, Zahorski, our Head of Acquisitions, the three of us have been together for over a quarter of a century. And this is not the first time we've seen a shock.
This is very different. We would say foundationally, the role of alternatives is to provide additional diversification in the long-term return expectations that are fundamentally driven from income first so that it would support the thesis that over 80% of these returns come from income.
We're in a very different situation right now. Because unlike 2008 in the financial crisis, now we have an income disruption. We have a massive shutdown of the global economy. And we are aware of that. We are managing risk through that.
And I'm happy to talk to you about how we think the portfolio is responding to that today and how we're preparing for, not to sound too optimistic, but we believe in our future and we believe we'll get through this and the industry will change and this asset class will continue to add value in a diversified portfolio.
- Let me unpack some of that, because there's some great points in there. And part of it is that we can talk about the role of alternatives. And I will get to that in terms of when you're looking at the bond returns and everything else right now. You know, people need to find returns. And alternatives are an interesting place to look.
But if we dissect the class, if you will, you've got infrastructure, you've got mortgages, you've got real estate. Let's dive into real estate a bit, if we could, because there's so much interest there. Maybe you could take us through your portfolio, but the different classes and how they're performing right now and what you're seeing.
- These are portfolio decisions. This is diversification and risk management and volatility. So our role is to sit somewhere between fixed income and equity, risk and return over long periods of time. And that's exactly what this asset class is doing and has done.
And as it relates to, contextually, or more specifically to the real estate and the Canadian real estate program, just to give you some metrics of what this is, this is an institutional real estate portfolio. Please consider that we're managing a portfolio strategy that is an aggregation of individual properties.
And contextually, over $19 billion of assets from St. John's, Newfoundland, to Victoria, BC, over 250 properties. The largest holding in the property is 3.1%. Why do I bring that up? When you look at the diversification risk manager, there isn't a property or a tenant or a customer that can shock this portfolio.
That largest holding at 3.1% is the TELUS tower in downtown Vancouver, which was the first LEED platinum office building in Canada. It's an irreplaceable and very strategic asset and will perform very well through this crisis and is very well positioned for the future.
Leverage, debt, that's when risk really is amplified in the downturn. We have very conservative leverage in this portfolio, with 26%. And then, finally, the portfolio was an actively built portfolio. Core value add and opportunistic. But we always tilt to the core part portfolio for stabilized assets, predictability of income. And over 72% of this portfolio is core. And almost 90% of the portfolio is core plus.
So going into COVID, the portfolio was extremely well positioned. And the Canadian and real estate fundamentals wer actually very well positioned in-- not really prepared for, but what has turned out to be a significant shock to the portfolio and our broader economy.
- And if we could back up a bit and maybe tell me a bit about what you see in those sectors, if you will. If we talk about, you know, you mentioned the TELUS building as an example. Let's start with office real estate. What are you seeing there?
- Well, as it relates to the office, which accounts for about 33% of the portfolio, our strategy on office was urban, transit-linked, some mixed-use strategies, but very strategic office assets in the largest centers in the country where we saw economic growth.
So what we're faced with in this COVID situation is a complete shutdown of that. When you look at the stability of the ownership in the broader market, not just our portfolio, we have a very strong Canadian institutional ownership body of the office portfolio that we believe not just our portfolio, but the market will sustain through that.
So what we're all preparing for is direction from our governments. But we are deep into-- the industry is deep into how do we function in a COVID world and what will come out of that. So the methods of sterilization, distancing, securities, protocols, all of those initiatives are well underway and policies and procedures have been developed for that.
But a post-COVID environment will have legacy changes to how we function, how much distancing in our office spaces, what open space looks like, and how we function. But we'll navigate through that and that will get recalibrated.
- Let me ask you about industrial in terms of your portfolio. And I just think about every single time someone's hitting Click To Buy on Amazon, there's some industrial fulfillment happening on the other end.
- Yeah. We look at industrial as foundational to our diversification. The industrial weighting in the portfolio is over 20%. We actually shadow the industrial asset class into almost a new hybrid of retail when you look at the buys to the logistics distribution, just in time deployment.
So I would say the industrial portfolio is functioning very well. I would just caution that the large bay logistics distribution Amazon-type retailers with covenant support, functioning with people able to pay the rent, has been very stable and very accretive. But we do have, in our industrial and the marketplace, a smaller bay where you've got businesses, private businesses, that have a retail component to it as well.
Generally speaking though, the industrial sector is doing very well. It was almost fully occupied going into COVID. Tremendous demand in the industrial sector. And we actually see that asset class sustaining itself relatively well through this situation. And we'll come out of it likely in a very strong position.
- How are things looking in the retail space?
- Well, retail would be obviously the most topical. You know, it's a long conversation. I think the highlights as it relates to how we're serving our client constituency is we have been defensive on retail for some time. Our retail weighting in the portfolio is now 21%.
We bifurcated the strategy into super regional shopping centers and then urban, transit-related, mixed-use, and service retail-- by way of example, grocery or drug. You know, you've had government-legislated shutdown of the super regionals. Significant impact there.
When we went into COVID and we started doing a risk analysis on what rents would be paid in the portfolio, some of the very conservative analysis was, you know, 10% to 20%. The retail rent payments on the portfolio have been almost 40%. And it's been less in the super regionals. But that is because of some of the shutdowns. But there's a lot of retail that is an open, paying. And those tenants are paying their rent.
We think what COVID does is escalates the transition of online shopping, escalates what the super regional shopping center environment will be, away from fashion shopping into mixed-use, urban, lifestyle, medical, health, education, residential densification.
And I would just pronounce that these significant land positions like Fairview Mall, Laval, Sherway Gardens, Eaton Centre, these are significant landholdings that have very valuable future densification considerations.
- Multi-unit residential. What are you seeing right there?
- There's a lot of hurt going on for a lot of people. On the residential portfolio, we went into COVID thinking that, you know, how much rent would be paid, how do we help our people in these 18,000 unit apartments that we have. I would say-- shock is too strong a word. But we're over 90% of rent paid since COVID has started in the residential portfolio.
Why is that? Well, there is government assistance. But let's not lose perspective that the quality of these institutional apartment buildings are homes for people. And the occupancy rates of residential apartments in Canada was through 95%. So foundationally for families, having a safe home is a critical decision and stress on their lives.
And we are cooperating with our customers, our tenants. They're getting cooperation from government. People are working. And, you know, the safety of people in their homes is a priority for them and for us as an institutional landlord.
- When you think about the next-- you know, we want to get out of the next maybe few months, but we're looking ahead one year, two year, three years. What do you think people need to keep in mind when it comes to the alternative class?
- My first request is for people to consider the alternative asset classes or private asset classes. You're introducing these for long periods of time hopefully. This isn't a market timing asset class. And you're recognizing the value it has today and into the future.
So we've had less volatility. We've had stability of income even through COVID. We will see some pricing declines. But if you hold through this cycle and if you believe in the recovery, the fundamentals of the real estate asset class are actually quite compelling.
- Ted, always a pleasure. Be well. We'll talk to you again soon.
- Thank you very much.
[MUSIC PLAYING]
The World Bank says this year, the global economy will suffer its deepest recession in 80 years. It expects the global economy to contract by 5.2%. And the effects are already being felt in the US. The National Bureau of Economic Research says the US economy officially entered recession in February as a result of the pandemic.
The shale industry is taking another hit. There are reports Chesapeake Energy, one of the pioneers of the US shale revolution, is preparing a potential bankruptcy filing that could hand control to senior lenders.
Finally, IBM has told the US Congress it is ending its facial recognition business over concerns about basic human rights and freedoms.
And that's a wrap of today's headlines. Next, Kim Parlee's conversation with Ted Welter.
- Ted, I want to start off by talking about the role of alternatives in economic situations like we're in right now. And, you know, not to be too glib about this, but I'm going to say this is probably not your first rodeo in terms of having gone through various crises in the alternative markets.
- Kim, thanks for having me. I'm very proud on behalf of TD and our team to talk about the alternative asset classes. But to your point, where are we right now, what are we dealing with, we always look at history as observational points of where we can provide perspective to what we're dealing with today and how we're going to navigate moving forward.
So be it the, you know, the obvious one, maybe the financial crisis. But in the real assets and in the real estate sector, we've had oversupply shocks. We're a service provider to the broader economy. We've had energy shocks that have affected markets. We've had policy shocks by governments.
So there are a number of different situations that my role as a Chief Investment Officer, together with Connie Ashton, our Chief Operating Officer, Zahorski, our Head of Acquisitions, the three of us have been together for over a quarter of a century. And this is not the first time we've seen a shock.
This is very different. We would say foundationally, the role of alternatives is to provide additional diversification in the long-term return expectations that are fundamentally driven from income first so that it would support the thesis that over 80% of these returns come from income.
We're in a very different situation right now. Because unlike 2008 in the financial crisis, now we have an income disruption. We have a massive shutdown of the global economy. And we are aware of that. We are managing risk through that.
And I'm happy to talk to you about how we think the portfolio is responding to that today and how we're preparing for, not to sound too optimistic, but we believe in our future and we believe we'll get through this and the industry will change and this asset class will continue to add value in a diversified portfolio.
- Let me unpack some of that, because there's some great points in there. And part of it is that we can talk about the role of alternatives. And I will get to that in terms of when you're looking at the bond returns and everything else right now. You know, people need to find returns. And alternatives are an interesting place to look.
But if we dissect the class, if you will, you've got infrastructure, you've got mortgages, you've got real estate. Let's dive into real estate a bit, if we could, because there's so much interest there. Maybe you could take us through your portfolio, but the different classes and how they're performing right now and what you're seeing.
- These are portfolio decisions. This is diversification and risk management and volatility. So our role is to sit somewhere between fixed income and equity, risk and return over long periods of time. And that's exactly what this asset class is doing and has done.
And as it relates to, contextually, or more specifically to the real estate and the Canadian real estate program, just to give you some metrics of what this is, this is an institutional real estate portfolio. Please consider that we're managing a portfolio strategy that is an aggregation of individual properties.
And contextually, over $19 billion of assets from St. John's, Newfoundland, to Victoria, BC, over 250 properties. The largest holding in the property is 3.1%. Why do I bring that up? When you look at the diversification risk manager, there isn't a property or a tenant or a customer that can shock this portfolio.
That largest holding at 3.1% is the TELUS tower in downtown Vancouver, which was the first LEED platinum office building in Canada. It's an irreplaceable and very strategic asset and will perform very well through this crisis and is very well positioned for the future.
Leverage, debt, that's when risk really is amplified in the downturn. We have very conservative leverage in this portfolio, with 26%. And then, finally, the portfolio was an actively built portfolio. Core value add and opportunistic. But we always tilt to the core part portfolio for stabilized assets, predictability of income. And over 72% of this portfolio is core. And almost 90% of the portfolio is core plus.
So going into COVID, the portfolio was extremely well positioned. And the Canadian and real estate fundamentals wer actually very well positioned in-- not really prepared for, but what has turned out to be a significant shock to the portfolio and our broader economy.
- And if we could back up a bit and maybe tell me a bit about what you see in those sectors, if you will. If we talk about, you know, you mentioned the TELUS building as an example. Let's start with office real estate. What are you seeing there?
- Well, as it relates to the office, which accounts for about 33% of the portfolio, our strategy on office was urban, transit-linked, some mixed-use strategies, but very strategic office assets in the largest centers in the country where we saw economic growth.
So what we're faced with in this COVID situation is a complete shutdown of that. When you look at the stability of the ownership in the broader market, not just our portfolio, we have a very strong Canadian institutional ownership body of the office portfolio that we believe not just our portfolio, but the market will sustain through that.
So what we're all preparing for is direction from our governments. But we are deep into-- the industry is deep into how do we function in a COVID world and what will come out of that. So the methods of sterilization, distancing, securities, protocols, all of those initiatives are well underway and policies and procedures have been developed for that.
But a post-COVID environment will have legacy changes to how we function, how much distancing in our office spaces, what open space looks like, and how we function. But we'll navigate through that and that will get recalibrated.
- Let me ask you about industrial in terms of your portfolio. And I just think about every single time someone's hitting Click To Buy on Amazon, there's some industrial fulfillment happening on the other end.
- Yeah. We look at industrial as foundational to our diversification. The industrial weighting in the portfolio is over 20%. We actually shadow the industrial asset class into almost a new hybrid of retail when you look at the buys to the logistics distribution, just in time deployment.
So I would say the industrial portfolio is functioning very well. I would just caution that the large bay logistics distribution Amazon-type retailers with covenant support, functioning with people able to pay the rent, has been very stable and very accretive. But we do have, in our industrial and the marketplace, a smaller bay where you've got businesses, private businesses, that have a retail component to it as well.
Generally speaking though, the industrial sector is doing very well. It was almost fully occupied going into COVID. Tremendous demand in the industrial sector. And we actually see that asset class sustaining itself relatively well through this situation. And we'll come out of it likely in a very strong position.
- How are things looking in the retail space?
- Well, retail would be obviously the most topical. You know, it's a long conversation. I think the highlights as it relates to how we're serving our client constituency is we have been defensive on retail for some time. Our retail weighting in the portfolio is now 21%.
We bifurcated the strategy into super regional shopping centers and then urban, transit-related, mixed-use, and service retail-- by way of example, grocery or drug. You know, you've had government-legislated shutdown of the super regionals. Significant impact there.
When we went into COVID and we started doing a risk analysis on what rents would be paid in the portfolio, some of the very conservative analysis was, you know, 10% to 20%. The retail rent payments on the portfolio have been almost 40%. And it's been less in the super regionals. But that is because of some of the shutdowns. But there's a lot of retail that is an open, paying. And those tenants are paying their rent.
We think what COVID does is escalates the transition of online shopping, escalates what the super regional shopping center environment will be, away from fashion shopping into mixed-use, urban, lifestyle, medical, health, education, residential densification.
And I would just pronounce that these significant land positions like Fairview Mall, Laval, Sherway Gardens, Eaton Centre, these are significant landholdings that have very valuable future densification considerations.
- Multi-unit residential. What are you seeing right there?
- There's a lot of hurt going on for a lot of people. On the residential portfolio, we went into COVID thinking that, you know, how much rent would be paid, how do we help our people in these 18,000 unit apartments that we have. I would say-- shock is too strong a word. But we're over 90% of rent paid since COVID has started in the residential portfolio.
Why is that? Well, there is government assistance. But let's not lose perspective that the quality of these institutional apartment buildings are homes for people. And the occupancy rates of residential apartments in Canada was through 95%. So foundationally for families, having a safe home is a critical decision and stress on their lives.
And we are cooperating with our customers, our tenants. They're getting cooperation from government. People are working. And, you know, the safety of people in their homes is a priority for them and for us as an institutional landlord.
- When you think about the next-- you know, we want to get out of the next maybe few months, but we're looking ahead one year, two year, three years. What do you think people need to keep in mind when it comes to the alternative class?
- My first request is for people to consider the alternative asset classes or private asset classes. You're introducing these for long periods of time hopefully. This isn't a market timing asset class. And you're recognizing the value it has today and into the future.
So we've had less volatility. We've had stability of income even through COVID. We will see some pricing declines. But if you hold through this cycle and if you believe in the recovery, the fundamentals of the real estate asset class are actually quite compelling.
- Ted, always a pleasure. Be well. We'll talk to you again soon.
- Thank you very much.
[MUSIC PLAYING]
