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As with any investment, you should take into account your own financial situation, consult your financial adviser, and perform thorough research before making any investment decisions concerning REITs. You can review a REIT’s disclosure filings, including annual and quarterly reports and any offering prospectus at sec.gov. For more information see https://www.sec.gov/files/reits.pdf
Meet the Masters – REIT Analysts Brad Thomas discuss the time value of money and how he came to REIT’s after a career in private real estate.
Publicly Traded Real Estate and Private Real Estate – Both are great but only one comes with Toilets, Trash and Taxes.
Hey everybody. This is Trevor Chambers from Olde Raleigh Financial Group. Today we continue our Meet the Masters series. Very excited today, we got a very — we got two people actually, I’m excited about. I have my — I have my first co-host, Mr. Alex Mihajlov who co-founded Olde Raleigh Financial Group from the burbs of Rochester. It’s really good to have you.
CHAMBERS: Yeah. So, um, and then I’m going to — we have Brad Thomas. I’ll talk about Brad in just one second, but Alex, you said we gotta (sic) talk to Brad because you — throughout your career you’ve always had people talk to you about real estate investment and you’re a big fan of REITs investing in the public markets. So that segwayed (sic) into — he’s been fowling you Brad, um, I’ll just give you a brief little intro, Brad. Brad Thomas currently writes for Forbes.com and Seeking Alpha where he maintains a real time researched and publicly listed REITs. You’re a number one analyst on Seeking Alpha in the area and you’ve authored — authored now, I guess, sounds like going on three books, which is awesome. And then most importantly you have a wife and five kids. Did I hear that right? And you live in South Carolina.
THOMAS: That’s correct. Yeah —
CHAMBER: All right.
THOMAS: I have five kids and —
CHAMBERS: That’s awesome.
THOMAS: The oldest one — I’ll give a shout out since you’re sitting in Raleigh is — she finished Chapel Hill, so go Heels.
CHAMBERS: Nice. So that’s that. So, um, when you’re not being a husband and a father to all these children, you appear to be a Greek Super Hero. So — but before we get into that, Alex, tell us kind of — lead us into this some. Real estate as an asset class.
MIHAJLOV: It’s funny, Brad. One of the reasons I wanted to do this. I want — I’d love to hear your take on it. Because one of the things I talk to clients about all the time is — especially people that are not very sophisticated. They go, or they own rental property. So, we have the conversation about what is your real return on rental housing. What is your real return on that beach house that you’re going to flip, et cetera, et cetera? So, we have that discussion and it’s really funny people’s eyes glaze over when I say, you know it’s really much easier to buy this on a publicly traded market like the New York Stock Exchange. Let somebody else do all the dirty work and send you the difference every quarter. But it’s — do you get into that — do you know where I’m coming from? It’s very frustrating to have people like — I had a conversation this morning with a guy that’s, you know, cleaning up his financial picture. And he says well, I’m not — I don’t really have anything to do so I’m going to buy five or six houses and flip them over time. Tell me what you run into on that and being a developer, you got a lot more say on that than I do.
THOMAS: Yeah, you’re right and thank you, Alex, for that introduction — and Trevor. I, you know, definitely was on that side of the fence for a long time. For twenty years I was a developer and invested privately and I’ve got a saying, you know, I always — one of the big frustrations I had on the private side was, you know, you always have to deal with the tree T’s. The toilets, the trash, and the taxes. And —
MIHAJLOV: Good quote.
THOMAS: It’s very time consuming and so you’ve got to always consider what is the — what’s your time value of money? You know, and so, you know, I spent — you’re right, I mean you can make some pretty nice wealth, you know, in the private side. I’m sure you can, you know, you can’t click on any TV station and see a, you know, some channel they’re house flipping or renting a house and there’s all types of — of — of ways to get rich quick in real estate on the private side. But you’ve got to consider that time value of money and how much time are you, you know, going to invest in this property or in this portfolio. And, so the great thing about REITs, and again, now that I’ve that I’ve kind of, you know, left the dark side, I’ll call it, which is the private side and really gone over to the good side, you know, there’s really three elements in the public sector that are really compelling and offer really tremendous value proposition. The most obvious one is liquidity, you know, it’s a public stock so, you now, if I needed to pay for my sons braces and fortunately, he just got his braces off, so I don’t have to worry about that. But, if I needed some cash, you know, so I either have to go take out a second mortgage on a rental house, go sell a rental house to get that liquidity or I can just sell some shares of stock. So, you know, kind of — having that instant liquidity is I think one of the — one of the most obvious reasons to invest in REIT, publicly traded real estate. The second advantage I would say, and this goes back to my days as a developer. You know, I had a fairly diversified portfolio but not diversified enough. And so — but having a — investing in REIT you get instant diversification. Most every REIT has a diversified portfolio that’s maybe diversified by operator or by geography and that’s really — or industry, and that’s really important to have that diversification because we all know it only takes one torpedo to sink the ship. And I think the other more obvious reason as well is management and you know, compliance. As you all know, as Registered Investment advisors, I mean, it’s — you know, you — as a public company you must provide — you know, these companies have to provide, you know, quarterly reporting and full transparency. I think that’s really the word. There’s transparency. And my previous partnership, you know, I didn’t have that transparency. I was not the managing member, so, you know, I literally had to beg for information in K1’s when I, you know, we need to file tax returns. And, so obviously with the public company you don’t have to worry about any of that stuff. So, I think it really boils down to really the time value of money and if you’ve got significant time and have maintenance people on staff and can help, you know, fix the toilets, you know, collect the taxes and the rent and all of that. All that stuff that goes along on the private side. Well, you know, maybe that’s for you but, you know, but really the power of dividends is the key here. I think that is probably the — the — the most important aspect of a real estate investment trust. Because by law, the company must pay out at least 90 percent of taxable income which simply means, you know, you have a very predictable dividend paying enterprise that has been around a long time. Since 1960. So, they’re battle tested, time tested. Now they’re pandemic tested, we can say. So certainly, survived a long time, you know, more than five decades and we — we have a very strong history. And we can prove now, by the way on the private side that public REITs have outperformed private investments over — over many decades. Not every year. But certainly, over decades. So that very predictable income or revenue is really what — what really has been the primary catalyst for the success of REITs over the last — as I said five decades.
MIHAJLOV: So how — what made you go from being a developer to being an author? What — what prompted that change?
THOMAS: Well, you know, it’s funny, I mean when I was — I knew about REIT when I got out of college. I never took, you know, REIT courses. We didn’t — they didn’t offer those at the college I attended here in South Carolina, Presbyterian College. But I was familiar with REIT and I worked with a number of REITs and actually sold several properties to REITs. One of the companies that I was always — always attracted to is a company called Realty Income. Because I predominately built net lease free standing properties. I was one of the first developers for Advance Auto Parts, before they even had over 100 stores. And I’ve built close to 100 stores through them and Blockbuster Video and a number of free standing, you know, companies. Econo Lube & Tune, a lot of restaurants, Waffle House, IHOP, so I was always attracted to net lease because of that — that very long term leases that provide very durable predictable income. So, I sold some of those properties to Realty Income when I was a developer and was familiar with the company and then really when — as we moved kind of closer into the — how to, you know, partnership issue as I eluded to earlier. It was kind of very difficult relationship to unwind. And then right when I was kind of landing on my feet, say 2006 and 2007, then all of a sudden 2008 rolled around and this nasty storm called the Great Recession showed up as it did at everybody’s door step. And so, it — it really allowed me to decide what I wanted to do. I’d always had a passion for writing and I’ve always had an interest in helping individual investors, especially after I went through a pretty tough time, you know, financially and I said you know what, I don’t want to see investors lose the type of money that I’ve lost over — over — over really two decades. And so, I really wanted to become a voice for, you know, average Joe and average Jane and help them create wealth in real estate investment trust. Which again are much more aligned for individual investors who don’t need to be, you know, swinging from the fences and, you now, they need to sleep well at night. So, that’s why I really created this business about ten years ago and it’s grown substantially and it’s really continuing to grow and I’m excited about, you know, the growth prospects. Not only for my business but really by just the REIT industry. You’ve got now, you know, not even ten years ago, you know, you didn’t have a lot of the property sectors. We had data centers just really starting to, you know, enter the public space. But, now we have data centers, cell towers, obviously the 5G growth. All of the growth in logistics and ecommerce. So that actually has led me to a new book I’m writing now. A second edition of The Intelligent REIT Investor, which is, by the way, is utilized at many of the leading colleges that I never attended like Cornell and Morton and NYU and Georgetown.
MIHAJLOV: Good for you. Well congratulations on that. That’s great.
CHAMBERS: Yeah, that is.
MIHAJLOV: Let’s talk about what’s going on today. What do you think about this COVID and if you — I know you write about it because I read a lot of your writing. If you could sum it up, what do you think this is going to do to the REIT market and the Real Estate market in general?
THOMAS: Yeah, it’s — it’s definitely been disruptive and especially in those sectors that I eluded to. Retail is — retail and lodging are obviously the most challenged in terms of getting back to any kind of normalization. And I — frankly, I question whether or not we’ll see — there’ll be a new norm, I believe in the retail sector. More specifically the mall space. I’m glad to see, you know, more normalization in outdoor shopping, primarily shopping centers and outlet centers. Where people are obviously getting back and going to the stores but still, you know, I still question whether or not we’ll get to full capacity, especially in the mall space and the theatre space, as well. And so, you know, to me, I mean, that’s still going to be a higher risk property sector. I’ve always said, at least for the last four years that the mall sector was already fairly drastically overbuilt. It cost about 100 million dollars to build a mall. And there are just a lot of those malls built really starting from the 70’s onto the 2000’s and so there’s around 1400 malls in the US and we think that number’s going to be critically impacted. We’re seeing it, you know, in the — across the country. Malls closing down, department stores closing down and that’s really what, you know, as you know malls are built with — anchored by department stores. Typically, three to four department stores within inline shops. And so now there’s just not as many department stores. I think, you know, COVID has really accelerated the impact of store closures and bankruptcies in retail. Lodging, who knows. I mean it’s really going to come down to, you know, I think a vaccine’s going to be really — a vaccines critical for all the sectors, I’ll say. But for lodging, until we get, you know, tourism back and, you know, international travel. Lodging sector’s going to be challenged. So, we’re completely staying out of that space for now. Staying out of really the mall space with the exception of a couple outliers there, maybe. But, they’re more speculative in nature. But I think in terms of the, you know, the REITs we are — we do like for COVID that actually have, believe it or not been catalyst are the — I call the technology names. So that would be the cell towers and data centers, and logistics. Another way to put it, we call it the trifecta world of technology and real estate. So, you — you know, you order a — use your cell phone to order data, to order something, you know, for your kids or yourself and that data’s transmitted to a — to a data center. The — and then — it’s — it’s — that — that — that order is then transmitted to logistics warehouse which is shipped out the same day. That last mile. So, all of those three elements, cell tower, data centers, and logistics have really — that’s where you’re seeing the higher growth in terms of earnings and dividends. And COVID is really not hurt them at all. In fact, we’ve seen a surge in a lot of this, you know, online orders and data and the whole data industry. So, I like those sectors a lot. I mean healthcare is a mixed bag. Obviously the COVD 19 being a — started out as a healthcare crisis which turned into an economic crisis, there’s still tremendous risk with investing in healthcare but, you know, we still like the very stable pieces of that business model which will include medical office buildings, which are essential. I mean, obviously telemedicine has come out, been a little more impactful but still people are going to have to go to the doctor. You can’t, you know, do all the medical stuff you need to do on a telephone, or cell phone. So, I think, you know, the medical office space – we actually like skilled nursing because skilled nursing has seen really strong benefits with the CARES act. Kept a lot of these operators in business and senior housing is also — even though the sectors been overbuilt that silver tsunami is really the catalyst driving, you know, that whole industry. So, you know, healthcare is a good sector but again you got to be careful, you know, what you’re investing in. Hospitals are doing really well. There’s one pure play hospital we like, you know. So, looking there, probably the most stable kind going back to what I elude — my previous career as a net lease developer. You know, I think that’s where you’re going to find the most predictability and we’ve been overweight in the net lease REIT sector. Given these are long term leases, typically they’re yielding around, you know, five, six percent a year. A little higher now because of the, you know, COVID and the sale off but an investor can — can — if you really look back at the net lease sector over the last, say twenty years, it’s a pretty simple formula. It’s five — usually four to five percent yield and four to five percent growth, which constitutes a ten percent total return thesis and that’s really how we’ve — how we’ve always felt like net lease was going to be a very predictable, you know, sub sector or property sector. So, we’ve overweighted that and that’s a really good place for retirees as well because you get the very stable, you know, income. Some of these companies, like Realty Income pay monthly dividends so, you know, that’s a good sector. Another sub sector of net lease that I like, which has gotten a little bit expensive lately has been the gaming sector. Now, gaming got really beat up, as you can imaging at the, you know, in March because gaming is tied — is correlated so closely to lodging but a lot of that lodging sector has — excuse me, the gaming sector has really come back because these are long term contractual leases. And so, they’ve had very high rent collection. And rent collection’s a number that we never really even thought about analyzing prior to COVID but now it’s a — it’s definitely a critical number for us in terms of assessing a company stability and sustainability is making sure that, you know, they’re able to collect the rent through COVID. But it’s definitely been, I would say the key word is disruptive. I mean, it’s been disruptive but there’s certainly opportunities, you know, in the space. Mispricing is still there. Obviously if you look at the REAT market in general compared to say the S&P 500, REATs are still relatively inexpensive. Again, there are certain sectors I’ve just mentioned that the technology names that are a little pricy now but there are certainly some really attractive places to invest capital right now. And as long as interest rates remain low and I think they will, at least that’s what the Feds telling us. That, you know, I think the REIT markets going to continually — continue to do well and again, it’s encouraging to see, really over the last several months, April, May June July, August, you know, how a lot of these companies have really been able to increase their rent collections. Office is an interesting category. You’re sitting in one right now and I’m sitting in one right now, so obviously some of us have come back to work. The big question in the office sector is in the gateway market. So, New York, San Francisco, San Diego, some of the bigger towns. You know, are these companies — are these people going to go back to work and what’s the — what is the new norm going to be, you know, in the office sector. But again similar to the net lease REITs, office REITs have long duration leases so we’re actually fairly bullish in that space but recognizing there’s going to be significant changes, you know, as people start getting back to work and going back into offices and what it’s going to look like, you know, in the new office environment. But like you guys obviously are in your office and I’m in my office so we obviously see the value of having an office and not working from home.
CHAMBERS: Yeah, maybe the open floor (inaudible). Maybe that goes away. The one that they just put into like a bunch of buildings. We’re going to put up walls.
CHAMBERS: Yeah. Hey, this hit on a — you started to hit on this a little bit. You just wrote an article not too long ago about ultimate winners might be secondary markets. And we’re sitting in a secondary – certain secondary, if not a tertiary market, great market. But we’re just seeing an onslaught of people move here from particularly from the Northeast so that’s an interesting thesis. Can you talk about that a little bit?
THOMAS: Yeah. So, you know, I think you’re starting to see that trend happening and, you know, I don’t think you’re seeing a mass exodus from New York to say Raleigh or West Palm Beach.
MIHAJLOV: I don’t know about that.
CHAMBERS: Well, I mean let’s (inaudible).
MIHAJLOV: Pretty big. It’s pretty big.
CHAMBERS: People are definitely reconsidering and they’re certainly moving, you know, I ‘m not saying that, believe me, New York City’s not going anywhere. We all know that, okay.
CHAMBERS: But you wrote this article on and you obviously you’re seeing some, you know, where are some opportunities that you’ve seen particularly?
THOMAS: Yeah. No, I agree. I mean, I think you’re going to see the corporate offices remain in the gateway markets but you’re — I think you’re going to see a — a — a wave of those satellite offices opening up. We have an apartment down in West Palm Beach and an office down there and one of the big companies, Related, is building a new office and I can see it, you know, when I’m there. And they filled this up. I mean, the hedge funds and now all the companies are coming down and — but they’re setting up satellite offices. And I think that’s really — what I see is that shift of companies, not only leaving completely but maybe reducing that footprint say in New York to 100,00 square feet to say to 20,000 square feet and then maybe putting 20,000 square feet in Raleigh and 20,000 square feet in another market and some people working from home. You know, so I think it’s going to be more of that type of situation, you know, going forward. And I think, you know, housings the same thing. I mean, I think, you know, we’ve — we’ve been looking at this multi family sector very closely and there’s some really good stocks on sale — or REITs on sale right now like Equity Residential and Avalon Bay and — and — and Essex, which is a west coast-based REIT. But the real question is are those people going to be moving now, you know, away from these urban markets into the secondary towns like — like Raleigh. So, I think you’re still going to see that shift and I think that’s — that’s an area that we really focused on because I think there’s value. And we — we just upgraded, I guess one of the hometown favorites there, recently. Highwoods, which is a great office operation primarily focused on the South East US. And, you know, that’s why we felt like, you know, there’s a lot of value in companies like that, that have, you know, assets in those markets. And the same would apply, by the way, to industrial. I mean, I’m right down the street from you in Greenville/Spartanburg which is a great market. We have, you know, BMW here, you know, Fenton Cars, and we have Michelin Tire based at their North American headquarters here. And a number of suppliers related to — to the automotive industry so, it’s just a great market and a lot of REITs are finally caught on to that and started to make investments in markets like Greenville/Spartanburg and Raleigh/Durham.
CHAMBERS: Well, do you — I say we open the box. Do you want to talk about a particular stock? I mean I’d like to — I’d like to open up the mind of Alex Mihajlov —
MIHAJLOV: Let’s find out a little bit more about Brad.
MIHAJLOV: When you’re not geeking out on REITs like I geek out on stocks, what are you reading, or podcasting, or listening to or netflixing or what are you doing for fun, Brad?
THOMAS: Well if my wife’s listening right now, she’s going to be — she would be screaming in the background saying, you know, I’m a workaholic, you know, because I do — my passion is real estate, you know, but — look I played a little college basketball but I gave that up a long time ago. I, you know, I’ll tell you an interesting story. I, um, you know, I’ve been down to West Palm quite a bit and we — we were going to be, you know, setting up an office down there. And back in June, I decided to go down there and I drove my son. He had just graduated from high school and, you know, this was in June. And we get down there and it was just, you know, that’s when I guess there was this, you know, spike starting to happen so we stayed like three days and came back. And drove back home and I thought, you know, that drive is not that bad. And then I started thinking, you know, I normally spend a couple thousand dollars a month on travel, going to New York or wherever, speaking at a conference, or investor event or whatever, and so I decided to buy a new car. So, I got a — I got a convertible about a month ago and so I’ve enjoyed that. That’s been kind of I guess you want to call it a vice or whatever, a midlife crisis, you can, you know call it. Whatever you want to call it. But I do enjoy the fact that I’ve got a new car and so now as I told my wife, instead of, you know, spending thousands of dollars on airline tickets to Florida, I’ll just be taking the top down and driving down to Florida. So that’s what I’m looking forward to doing one of these days, you know. It’s still — but I think we’re getting closer and closer to that and, you know, again I think, you know, we’re seeing that reflected in some of the stocks. But my kids, that’s kind of my next passion would be. My oldest daughter, again, she’s in New York. She’s in the journalism business — business of journalism I should say. My second oldest daughter finished the same college that I graduated from, Presbyterian College in Clinton, South Carolina. And then my son just finished high school and I got two younger kids. One in high school and one in middle school who has a volleyball game this afternoon in about an hour that I’m supposed to be at. So that’s kind of it. And you know, between the kids and writing about REITs. We also launched a — a — a larger publishing platform in January called Wide Mote Publishing and we have a number of — obviously I’m the REIT kind of guru, but we have a number of other partners on the team from Seeking Alpha that includes people like Dividend Sensei. He’s a — writes on Seeking Alpha. Nicholas Ward, Chuck Carnevalel, Justin Ward, you know, two or three others, so we’ve got — we basically cover now all of the dividend paying sectors from MLP mid streams to BDCs to ordinary C-corps. If it’s got a dividend, you know, we’ll cover it and we cover the banking sector. Insurance, utilities, and so forth so we basically have created a whole sweat of products now geared to dividend investors. Which we know is really important these days, and as you know as well.
MIHAJLOV: Any local restaurants down in South Carolina you’d like to tell us about next time we’re traveling down there?
THOMAS: Well, I — many of them haven’t opened back up yet still. I mean, some of but actually I built a — it’s funny I built an IHOP about 20 years ago right near my house and, you know, still hasn’t opened back up. I’m just amazed, I mean it’s had — it was just printing money. So, you know, I’m still doing drive thrus. I haven’t gone in. There’s an Outback — actually I built it too right across the street. I’ll go do pick up there but I’m, you know, I’m in Spartanburg South Carolina and not Raleigh and of course one of the things I loved about when I would go to Chapel Hill to visit my daughter was all the restaurants downtown on Franklin Street so.
THOMAS: We don’t have too many options in Spartanburg in terms of really nice, you know, homestyle restaurants but anyway. My wife cooked some pretty good meals, so I guess I ‘m taken care of.
CHAMBERS: Perfect. We’ll stop by when we’re in your area.
THOMAS: Anytime — anytime.
CHAMBERS: Well, Brad Thomas it’s awesome to have you here on Meet the Masters of Olde Raleigh Financial Group. We really appreciate it and maybe we’ll roll the tape back in six months and have another discussion about all of this. It’s certainly going to be an interesting six months, that’s for sure.
THOMAS: Well, it is and of course, you know, we have an election coming up. You know, it’s going to — it’s definitely going to be interesting to see but again I think overall the real estate economy has opened back up and you know it’s a great – REATs are a great place to invest capital and, you know, I wrote about it in my first book, you know REATs are now considered a core, you know, asset class under the jix (sic).
THOMAS: And real estate has it’s own category now, so I think it’s real important for your audience to recognize that you shouldn’t own just one REIT. You should own a portfolio of REITs and constitute at least ten percent, in my opinion of your investment portfolio, if not higher.
CHAMBERS: All right well we heard it from the boss there on that. All right well thanks, we appreciate it and we will talk to you again in the future, I’m sure.
THOMAS: Look forward to it. Thank you.
CHAMBERS: All right, thank you.
Brad Thomas has more than 25 years’ experience in commercial real estate, where he’s formulated a deep understanding of development, finance, and securities analysis. His experience is rooted in value investing thanks to his background as a developer and his continuing career as an investor and advisor.
As CEO and Senior Analyst for iREIT, and host of The Ground Up podcast, Thomas researches and writes on a variety of real estate-based income alternatives, with a primary focus on publicly-traded REITs. His broad understanding of capital markets in general has given him a particularly strong track record when it comes to evaluating the most intelligent companies out there – with a keen eye on distinguishing between solid investment operations and speculative ones.
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The arch of his career has now landed his firm, Olde Raleigh Financial, to become a fee-based, Independent Advisory firm. Prior to that Mr. Mihajlov was a branch manager at A.G. Edwards, Wells Fargo and Raymond James. His career has been an evolution and, in turn, his perspective on service has evolved. “My team and I have experienced the large brokerage houses and banks. While they have carved out their spot in the marketplace, I can say it is not for us. We have evolved and we tend to attract those who have evolved away from cookie cutter to a world of customization. They want collaboration. They wanted to be listened too. They want a relationship and we want them to be excited about our relationship.”
Trevor joined Olde Raleigh Financial Services in January of 2015 and his primary role is new business development and marketing. Prior to joining the firm, Trevor spent 12 years working at his family’s restaurant, Raleigh’s Bella Monica Cucina & Vino. “Exceptional service, no matter the industry, is paramount and we attract clients who value and take comfort in being taken care of.”