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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 (FRESX), 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 (WELL) and Ventas (VTR), 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.

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Steve Buller
Steve Buller
Portfolio Manager

Steve Buller is a portfolio manager in the Equity division at Fidelity Investments.

In this role, Mr. Buller manages Fidelity Real Estate Investment Portfolio, Fidelity Real Estate Investment ETF, Fidelity Advisor Global Real Estate Fund, and Fidelity Flex Real Estate Fund.

Prior to assuming his current responsibilities, Mr. Buller managed Fidelity and Fidelity Advisor International Real Estate Funds and VIP Real Estate Portfolio. Previously, he worked as an analyst covering real estate investment trusts (REITs) and the environmental industry in Fidelity’s Equity group, and as a fixed income analyst at Fidelity International Limited’s (FIL) London office. Mr. Buller also served as a distressed securities analyst and as a high yield analyst in Fidelity’s High Income group. He has been in the financial industry since joining Fidelity in 1992.

Mr. Buller earned his bachelor of arts degree in finance and German literature, as well as his master of science degree in finance from the University of Wisconsin-Madison. He is also a CFA® charterholder.

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