Looking on the bright side of expenses: reductions!

  • As inflation soared in 2022, many labor-intensive real estate providers—assisted-living and hotel property owners, in particular—found it much more expensive to attract and keep workers, according to Fidelity's Steve Buller.
  • More recently, however, as the rapid growth in the cost of labor eases, Buller, who manages Fidelity® Real Estate Investment Portfolio, is finding opportunity in REITs poised to benefit from this shift, especially those whose valuations are not yet reflecting this slowdown.
  • "As a REIT investor, I usually focus on the revenue side of the income statement, that is, the rental income that property owners generate," says Buller. "More recently, however, after a period of high inflation, I'm now looking at the expense side of the equation."
  • From an investment standpoint, Buller believes that, in general, REITs represent a balance between real estate and stocks, and that recognizing attributes of both is key to identifying opportunities for outperformance.
  • The assisted-living segment of the real estate market is one of the more fruitful areas to invest in, claims Buller.
  • For example, he points to Welltower and Ventas, both among the fund's largest holdings on July 31, as companies that saw a sharp rise in their cost of labor during the depths of the COVID-19 pandemic as they struggled to find employees willing to risk exposure to the coronavirus.
  • Since then, though, the assisted-living labor market has largely opened up, reflecting reduced concern about infection from the coronavirus, as well as the end of pandemic financial-support programs that often appeared to dissuade potential employees from seeking employment, says Buller.
  • "These days, assisted-living operators are more readily finding the employees they need, and this has helped slow the rise in the companies' labor costs," Buller maintains.
  • Hotels is another category of the REIT market that he feels is well-positioned to benefit from slowing expense growth.
  • Exemplifying this point, Buller notes, is the fact that the pandemic led many hotel owners to develop new labor-saving practices, including conducting less-frequent room cleanings and allowing guests to check in online.
  • Moreover, these types of cost-saving efficiencies may well outlast the health emergency and help keep a lid on hotel REITs' labor costs well into the future, claims Buller.
  • In support of this view, Buller maintained outsized exposure to the hotel group, owning several stocks that he believes could benefit from a more favorable expense environment, as well as from a continued recovery in business travel.
  • For specific fund information such as standard performance and holdings, please go to the "Funds Managed" link on this page.

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