Four Ways to Invest in Real Estate

09/18/2013 10:00 am EST

Focus: REAL ESTATE

Jim Powell

Principal Analyst, Global Changes & Opportunities

Jim Powell looks at four different ways to invest in the real estate and housing sectors: a luxury homebuilder, a private equity firm actively involved in purchasing houses, an apartment REIT, and a lumber and forest products company.

Steve Halpern: We're here today with Jim Powell, editor of Global Changes & Opportunities Report. Hi, Jim. How are you today?

Jim Powell: Fine.

Steve Halpern: Could you tell our listeners a little about your newsletter and your long-term investing approach?

Jim Powell: Yes, we've never lived in a time in which we've had as much change as we're seeing today, and the changes tend to be monumental, they're structural, governments being overturned, economic systems not working, political systems breaking down, and a lot of technological change as well.

And whenever you have big changes, you have big opportunities, and they're also big chances for problems for people, so what I do with my newsletter is follow these changes, and I stay ahead of them if I can, and we figure out ways to prevent them from hurting us, and also find ways to make money off of all of them.

Steve Halpern: Yes, in fact, even with a sort of bearish outlook on the geopolitical and the political situation, you've still been remarkably bullish on individual sectors and your portfolios have done exceptionally well.

Jim Powell: Yes, that's true. It's all a matter of knowing which way the directions are going on all these changes, and if you know which way they're going, you can put something in the middle of the stream that'll make money from it.

Steve Halpern: In fact, one sector that you've been bullish on for at least the last year, or so, that's done very well is housing. What's your current outlook on that market?

Jim Powell: Well, the great boom part of the recovery, I think, is probably tapering off, and I'm actually glad to see it because booms never last and the last thing we want to see is another repeat of the collapse that occurred a couple of years ago, or three years ago.

What we have now is interest rates creeping up a little bit and that's taking a little of the ardor off, but I believe we're going into a system of long, slow recovery that tends to be very profitable for the builders and the REITs that manage properties.

Interest rates are about 4.4% now on 30-year notes, and in the past 30 years, there has only been four years in which interest rates were that low. We can make a great deal of money on the recovery of the housing market.

Steve Halpern: You mentioned home builders and one that you've been bullish on is Toll Brothers (TOL). Do you still like that stock?

Jim Powell: I certainly do. It's in there for the long haul. They've made some really good strategic decisions. One of the trends that I've been following is the millennial generation and what their habits are and what their preferences are.

They're not buying homes. The middle class is being decimated. They're not making any money. In fact, salaries and their household income are far lower than they've been in many, many periods in the past and that squeeze is continuing.

Toll Brothers saw that coming, and they said, alright we're going for the high-end, and so they make luxury homes in luxury plan communities, frequently with golf courses and country clubs, and they're doing very, very well with that, and I think they will continue to do well.

Steve Halpern: Among your recent recommendations is a housing related play called the Blackstone Group (BX), a private equity firm. Could you explain how that's related to the housing sector?

Jim Powell: Yes, Blackstone is doing something that is surprising. I never expected this particular development, and I don't think anyone else did, because big companies don't tend to like to be landlords, but Blackstone has purchased 32,000 homes that they've been fixing up and renting out.

They spent about $5 billion on it, and it's got 64 additional billion available, if it wishes to pursue this venture and so far they're making it work very, very well. That part's not surprising, because Blackstone is a very successful company.

They're into everything. They have everything from power plants in Uganda to high-end office buildings in Australia. It's very difficult to keep track of all of the enterprises that Blackstone is into, and it makes money on all of them. Blackstone is also investing in homes in Europe using the same strategy that's paying off here.

Now at some point, they'll have these homes that they bought at deep discounts, in a recovery market, these things that they'll want to sell, and I think that they'll make a great deal of money at that and there'll be capital gains of course, and I think the company will come out swimmingly.

Meanwhile, the renters will pay back the $5 billion that they spent, or, at least, a substantial portion of it.

Basically, what an individual can do, and I've been recommending that individuals do in my newsletter, is that they can buy a home that pencils out, go ahead and buy it, let your renter pay for it, and then sell it and reap a very large profit, and Blackstone's just multiplied that by 32,000.

Steve Halpern: Another real estate position that you own is Equity Residential (EQR), which is a real estate investment trust. What's your outlook for that?

Jim Powell: Once again, this is a company that has taken a look at what's happening with the middle class and what the preferences are for your young professionals in the millennial group and they're saying, okay, we're going to go into high-end apartments for affluent professionals, and we're doing it in markets in which the economy is doing fairly well.

And so they have invested in some, about 420 properties, they've got over 120,000 apartments, and they're continuing to buy them and rent them out, and they're going quite well at it. I like Equity Residential's numbers.

The profits have been flat because they have been investing so much money, but that's always a layup shot for bigger profits down the road. Meantime, it's got a PE of only 9.3, which I find very attractive.

Steve Halpern: Finally, as an indirect play on housing, you've been bullish on Weyerhaeuser (WY), a lumber and forest product stock. What's the story behind that?

Jim Powell: Well, Weyerhaeuser, of course, is a big timber company. They've got 6.4 million acres and about 13 million additional acres they have the rights to, and they also build homes, which is not very well known about them, and also planned residential communities. Not anywhere near the scale of the peer plays like Toll Brothers, but they're in there.

The one thing I like about suppliers, Steve, is they sell to whoever the winners are in the industry that they're serving, and so, if by chance, one of the home builders should leap ahead, then they're the ones that are going to be buying most of the lumber and Weyerhaeuser is there to make sure they get what they need.

And they also make insulation and composite materials, a whole lot of different things for the building industry, so I think Weyerhaeuser's in the catbird seat really. They stand to win if the housing industry continues to appreciate.

Steve Halpern: Well, we appreciate you joining us today and sharing your insights.

Jim Powell: Thank you, very much.

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