Betting Big on Beaten-Down REITs

Bloomberg

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00:00One would like to think so. I like to say that the REITs are like your graduating class in high

00:04school. You have the top 10%, the valedictorian, the REITs, and the S&P 500. You have the bottom

00:0910%, the bullies, the troublemakers, the REITs that have cut dividends or over-levered. But what's

00:17really to focus on is that middle part of the curve, the students that go under the radar,

00:21the small and mid-cap REITs that are putting up solid results, raising dividends. There's really

00:26good stories that are out there. From a very high level, of the 100-plus REITs that announced

00:31full-year earnings guidance, just in this past quarter, more than two-thirds raised their

00:36guidance. More than 60% of the REITs raised their net operating income guidance. Year-to-date,

00:42over 30 REITs have raised their dividends. It's a slow and steady race. When people think about

00:47REITs, they're like, oh, REITs are interest rate sensitive. Well, the end consumer that uses these

00:52properties and products doesn't think about interest rates when they're interacting with

00:55these properties. And so as a result, we're using REITs every single day. We are sitting in a REIT-owned

01:01property right now, as an example. To watch this video on YouTube later today, you're using a REIT.

01:08So we interact with REITs so much that I feel like the overall sector gets lost in the negative

01:14headlines where there's some really good stories that are out there. But you write about this idea

01:18that there are fewer public REITs right now. And something Matt and I have talked a lot about,

01:22about the overall equity market, how it's been shrinking and the amount of public companies that

01:26are listed has been less and less. How acute is that problem in REITs? And what does it mean about

01:31the opportunity set that you see? Boy, it's been a crazy quarter. If you go back to 2022,

01:37coming out of this COVID cycle, 36 REITs have either explored options, merged or gone away.

01:44In the past couple of months alone, more than 10 REITs are in play. So it presents opportunities

01:52for management teams to unlock value for their shareholders, whether it's accessing the debt

01:58market and the debt markets are wide open for REITs right now, issuing preferred stocks. We just saw

02:03the second REIT launch, the second equity preferred offering in years just this morning, but also less

02:10properties that are out there more in private hands. So there is some give and take that comes

02:15with that. In terms of the property types that look healthiest, I mean, it's always been

02:20student housing, right? Medical offices, I guess, senior living. And but now you add data centers to

02:29it. Is that the full list? So for sure, senior housing, that is probably the top of the list of

02:34all of those better than university. There is no more student housing publicly traded REITs. Blackstone

02:39bought the last one just a couple years ago. But when you think about senior housing, look,

02:43we're a couple of minutes older than when we started this conversation. There's a lack of supply

02:47for the amount of baby boomers and Gen X and folks that are going to be living in these properties

02:52down the road. So that is the number one. Gen X isn't there yet, dude. Chill out. But you got,

02:56but they're thinking ahead. Data centers, obviously AI, every single sector has AI implications for sure,

03:03data centers. But then there's other great sectors, billboards, a great example, Warren Buffett,

03:08last quarterly earnings release. Everybody talked about how he evolved investing. I believe it was

03:12in D.R. Horton. But what they didn't focus on was that they established a stake in Lamar

03:16advertising outdoor, a billboard REIT, LAMR. So that's another good example. Retail. You guys

03:22have Steven Yaloff from Tanger on his guests on your channel very frequently. And he's talking about

03:27experiential offerings, double digit rent growth that they're seeing. The high end consumer and those

03:33properties, whether it's luxury hotel, retail, et cetera, they are kicking butt and taking names.

03:38It's the other end of the spectrum that are seeing some of those issues with weakness.

03:41When it comes to residential housing, it's been a really big focus of this administration in trying

03:45to promote affordability, considering how big of a theme it is. In recent days, we've had the idea

03:49of a 50-year mortgage floated or a portable mortgage being floated as well. How much of that would

03:55alter the housing space? And would it make it more or less attractive to you as an investor?

03:59I would say to the, on the surface, it might be a positive with an asterisk and a but. Because

04:06the key issue here is housing affordability. Put it simply, homes are unaffordable to the average

04:13consumer. Mortgage rates are still highly elevated. We still see the opportunity, frankly, in the

04:20apartment REITs, in the single family rental REITs. Single family is a good example because you look at

04:26all of the institutional capital that's chasing that sector right now. If we can start producing

04:31product that makes it more affordable for the end consumer to live in these properties,

04:36then we could finally start tapping into this housing demand that's out there.

04:40I think the 50-year mortgage or the portable mortgage is just, frankly, one little arrow in

04:45the entire quiver of things that they can do to make it more affordable for consumers.

04:49But, I mean, if you continue to make it a 50-year mortgage, you know, then a 100-year mortgage,

04:55then a 1,000-year, like, past your death, we're just putting a Band-Aid on this economic problem

05:01that we have, right? What do you think of the broader economy? Everyone's talking about the

05:05K-shaped economy. The lower half is not able to afford food anymore. What does that mean for your

05:11business?

05:12It definitely has severe implications. There's no question about it. But, again,

05:15you have to peel back the layers of the onion to look at it from the REIT fundamental perspective.

05:21And so, as a result, you're right, there are some issues. I think for a lot of these management

05:25teams, the job, though, is to keep the blinders on, figure out ways how do we maximize revenue

05:29growth, minimize our expense growth, and push out as much of our net income or dividends as

05:34possible to shareholders. Look, REITs have long-term leases in place. You want a short lease,

05:39go rent a hotel room for one night. But when you take down an office lease at one Vanderbilt down

05:44the street or the Empire State Building, which you can buy, by the way, for $7 a share right

05:48now, the Empire State Building. You know, these leases are 10, 25, 50 years safe hold, ground

05:54lease, 99-year lease term is an example. So I think when you look at the embedded rent growth

05:59that's in place with a lot of these leases, this provides that income stream that investors

06:03are looking for.

06:04Why do you, like, retail with all of this? That's an interesting one, especially K-shaped

06:09economy. People are spending less. And you have the longer-term trend of people just not

06:12going in person to stores as much. Why is that an attractive industry?

06:16I think when you look at, so a great example is Simon Property Group, the 800-pound gorilla

06:20in the mall space. They just raised their dividend for the 14th time coming out of 2022. These

06:26guys are trying to figure out what tenants can we put in place that we can't replicate

06:30online. We're not going to showroom the product necessarily. But also, meat needs to our consumers

06:35is a good example. Netflix. You know, Netflix is launching this entertainment concept at a

06:39handful of malls across the country. And there's other examples of some of these experiential

06:44retailer properties that are trying to draw in families. You know, how can I draw in a family

06:50to come hang out at my property for 10 hours in a given day? So a Netflix opportunity, you have

06:56Build-A-Bear or, you know, American Dollars, some of these other things that are trying to draw

07:01the family to the store.

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