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Taper Tantrum Won't Last

09/12/2013 6:00 am EST

Focus: REITS

Brad Thomas

Editor, Forbes Real Estate Investor

The Intelligent REIT Investor's Brad Thomas discusses his outlook for real estate and the new class of data REITs.

SPEAKER ONE:  Hello and thanks for joining us.  My guest today is Brad Thomas.  Hi Brad, and thank you so much for being here.

BRAD THOMAS:  Glad to be here.  Thank you.

SPEAKER ONE:  The rates have had sort of a tough second quarter.  Most of the returns were down, other than I think in Self-Storage and in the Apartment REITs, but since then they’ve come back a little bit.  I think people have been afraid of interest rates; that oh my gosh, the taperings going to end and interest rates are going to go from basically zero to 15% overnight.  Probably not going to happen.

BRAD THOMAS:  Well, you know, we talk about the market and I like to refer to what Ben Graham referred to as Mr. Market, and I’m not going to tell you to ignore Mr. Market.  We obviously have seen the sell-off.  I like to call that the taper tantrum and, obviously, we’re seeing Mr. Market has really got a taper tantrum today with REITs.  Now the good thing – the silver living, I like to call it, is that REITs today have incredible opportunities in terms of pricing that we’re seeing.  I’m not going to argue with the fact that, prior to May 22, when Bernanke first spoke REITs were a pretty big run-up.  We’re seeing record highs, all-time highs with a lot of the REIT stocks, and we’re starting to see some pretty high valuations in REITs.  So the good thing is today, we’re seeing the REIT market today is almost fairly valued.  Most REITs are down to a level that the investor can buy.  In fact, now we’ve seen several sell-offs, or several tantrums, as we say, and so, we’re seeing some really good opportunities.  I would even argue that there are a number of blue chip REITs that are on sale, and what Ben Graham would say, “bargains.”  That’s what we call a margin of safety today in investing so, certainly, I think there’s a great opportunity for investors today to buy very high quality real estate.

SPEAKER ONE:  Oh and REITs have always sort of had their own cycles too, where most of the time you get dividends, you get the yield, and then, every once in awhile, you get like what we’ve had recently where you get some great appreciation along with the yield, but I know that you’re a fan, obviously, of REITs and you really feel that most people should always have some REITs in their portfolio, but not all kinds of REITs.

BRAD THOMAS:  Well, that’s true, and if we’re referring to the mortgage REIT, yes, you’re probably right.  Mortgage REITs, in my opinion, most mortgage REITs, do not belong in a retirement portfolio.  They’re very volatile.  They have a lot more leverage and we’re seeing today in the equity REITs, going back to the great recession how a lot of the REITs, in fact most of the REITs, have deleveraged their balance sheets.  They’ve made them much more sustainable and durable for the long term.  So, in terms of rising interest rates, most of these companies are prepared for that.  They’ve fixed their debt for long periods.  They deleveraged the company so they’ve got less debt exposure, so absolute I think REITs should be in an investment portfolio, especially now.  You’re seeing some really attractive dividends today.  Again, you can buy blue chip stock s that have very high risk-adjusted dividend yields today, so I definitely believe that REITs….I like to say that anywhere from 10% to 15%, even up to 20% is a fair number to have in terms of real estate or REIT exposure in a portfolio today.

SPEAKER ONE:  Sounds good.  Thank you.

BRAD THOMAS:  Thank you.

SPEAKER ONE:  And thanks for joining us at the video network.

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