Timothy Lutts — a leading growth stock expert — is the chief analyst and editor of the s...
What's Next For The Economy & REITs?
10/09/2013 6:00 am EST
The Capitalist Times' Roger Conrad shares his outlook on REITs and what advice he is giving investors after the recent declines in these stocks.
SPEAKER 1: My guest today is Roger Conrad. Hi Roger and thanks for coming by.
ROGER: Thanks for having me.
SPEAKER 1: Sure, always good to see you. So, the economy is still sort of stumbling along, you know, people are still looking for yield, and they’ve done really well with returns lately up until this last week, but some of the REITs have been falling on their face lately. They’ve really pulled back; although, they’ve come back again since June I understand. Are you looking at any REITs right now? Are you kind of fearful because of the dividend cuts that come through?
ROGER: I think that’s an excellent point because we are in the same economy that we’ve been in since middle part of 2009 anyway, and that is a couple steps forward, a couple steps backward. Maybe we’re making a little bit of progress, maybe the unemployment rate is coming down, but if you look at where are those jobs being filled, we’re not where we were back in the middle of the past decade, and that’s good for some parts of the economy, it’s certainly good for corporate barring rates. I mean, a lot has been made out of the big spike in treasury yields. We could go over 3% in the 10-year treasury yield, and that’s a dramatic increase in rates in a short period of time. Corporation barring rates, though, haven’t been there at all. That’s part in parcel of the slow economy, that’s part in parcel of company’s trying to pare their debt back, and also investors trying to look at things – find things that are very safe, so buying bonds, so it’s been really beneficial for some outfits.
I think in real estate it’s quite a mixed bag. I have been pretty bullish on Canadian REITs in particular over the years, because they’re everything that US REITs have not been. They’re run very conservatively and if you look back at almost any crisis or a real estate crisis in Canada, the companies have not been called out. The 2008, 2009 crash, for example, there were a couple of REITs in Canada that did very poorly, a couple that went pretty close to bankruptcy, but the bulk of them, the biggest ones in particular, did very, very well. They used, in fact, the environment to raise capital very cheaply and to ramp up their growth, and now we’re starting to see them raise distributions because they were able to make those acquisitions of properties at very, very low prices with very, very cheap capitals, very nice.
SPEAKER 1: Did they enjoy the same types of returns that the US REITs did?
ROGER: Well, they actually yield a couple of percentage points higher. As it’s been pointed out to me, if you hold these things within an IRA, there is withholding. We withhold from foreigners, foreign governors withhold Americans dividends as well, so there’s 15% withholding there, but even if you take that away, you’re still well above typical yields on most of the US REITs, so that’s one big difference. Higher yields very, very conservative; so what’s going on with US REITs. I mean, it’s definitely a mixed bag and property with the three rules; location, location, location, so some of the company’s are actually in pretty good shape.
SPEAKER 1: are you buying any of them?
ROGER: Well, W.P. Carey I think is a tremendous one and my only problem with it, it’s expensive, but there are also a number – so that’s problem number one with a lot of the US REITs. I don’t think that they’re trading at the prices they should after such a big shakeout that we’ve already seen. In fact, W.P. Carey didn’t cut its dividend during the crisis, it’s only recently converted to a REIT, but most of the US REITs did cut dividends during the economic crisis, so even some of the more conservative ones. I don’t think that that’s fully reflected in the prices of some of these, of most of them, so I think even the really good ones I think are expensive, but there’s a lot of low quality ones that I think are also maybe cruising for a bruising at some point. I don’t think they’ve worked out their leverage problems and that could be a big problem at some point.
SPEAKER 1: sure, time to be selective then. Super, thank you.
SPEAKER 1: thank you for being with us at the MoneyShow.com Video Network.
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