Grading REIT Sectors from A to C with David Auerbach

0:00Welcome back to Investing. I'm Diane King-Hall. Joining me now to do a health check on the real estate sector specifically reads we want to welcome David Auerbach, chief investment officer of Hoya Capital Real Estate. David thank you so much for joining us. I know one of the ways you're looking across the sector is kind of like it feels like a report card theme right. So let's set the stage for reads you looking at it you know grading it on an A to an F let's say. So before we get into individual sectors when you think broadly speaking about the health of real estate and reads what's the overall theme that stands out that we should pay attention to? Well Diane first of all great to be here thanks for having me. We are coming out of earning season for the reach sector and we did see more than 60% beat their full year guidance estimates. You know we use read-owned properties every single day regardless of what's happening in the macro picture whether it's an overseas conflict tariffs you name the headline the reads continue to hum along as an example of sectors like senior housing. Senior housing is on fire you

1:05can also point to a company called health peak which is spinning off a senior housing portfolio called Janice Living later this week they did file their IPO paperwork this morning as far as the pricing range. So senior housing is a sector that's really still in major demand with not enough supply out there looking at the next generations that are ahead. Other sectors that perform well include something like data centers as an example we're using a data center to have this conversation right now or to watch this video at the end of the segment. So people are using data center own properties every single day and obviously we're having talks upon AI and AI is used for data centers. You know other sectors such as net lease and retail and properties that we use every single day reported very strong earnings. A good example is a company like Tanger SKT you know they own outlet malls but they're more of an experiential focus and they talk about there's not a new lot of development in retail sector right now which means our existing real estate

2:06becomes that much more valuable with every single day that passes. It's the same thing like farmland we're not building any more land that's out there so existing land that's out there becomes more valuable by the day and that's just a couple of sectors that are performing very very well right now. David let me jump in so it's the takeaway that I'm getting is that's the honor roll the senior housing the data center the net lease reads what is it about them is there a commonality about them I mean I understand for senior housing there's something to be said about the demographic shift that we're seeing in the country the aging of the population in America is there a common thread? I would just say that's properties that are being used are rented every single day there's just massive demand for retail we go to the grocery store to buy groceries every single week we're using data centers through AI every single day you use your cell phone for conversations all the time we use read-own properties all the time and so as a result

3:07the revenue machine continues to grow as I like to say if you want risk in the world of reads you go out and buy yourself a hotel read because that's a one-night contract but for office sectors that haven't released term of five to ten years up to a company like Saple that has a 99-year ground lease term you know we feel that the headlines kind of overweight the sector when really fundamentals are pretty solid across the board and the stock prices are not being recognized for that performance let's talk about the problem sectors you know when you have grades there's often a you know a problem child or in this case a problem sector we're listing we're going through some of the way that you grade reads and we have offices getting a C grade not surprised to see that especially you know given the patterns that we've seen over the past you know a few years in office tell me a little bit about more why they received the lowest grade you know first of all there are some green shoots that we are seeing in office is an example

4:08an office read in your backyard as so green just announced a hundred percent occupancy last week at one Madison after signing a big AI lease you know it seems like this is a sector that's really still trying to come out of COVID in some markets in some areas the earnings have not caught up to where they were pre-earnings the leverage and interest costs are impacting some of these guys but we are starting to see some signs that like I said there are some good stories that are coming out there in the world of office you know another good sector that kind of all plays together would be like apartment single-family rentals and storage for apartments last year it seemed that to be the mantra was eds and beds let's just lease the space because the new lease rates were going down but we all the renewal rates they were able to improve the pricing there same thing we're seeing the headlines with single-family rentals and we can go into that but we feel that you know single-family rental reeds the AMHs of the world the invitation homes they should be able to weather the storm that we're talking about in Washington right now as we've been saying that

5:10the single-family rental reeds are not institutional investors and we think that the reeds are going to be isolated from any potential legislation that could be out there medical office is another good example a sector that was dramatically overdeveloped not a lot of new leasing that's going to place there you're seeing some troubles from companies like Alexandria or real estate cold storage a couple of the mortgage-reached sectors there are a few sectors that are seeing some tougher times but I feel like again across every single one of these sectors that's out there you've got the cream of the crop the guys that rise at the top and then you've got some guys that are kind of going through some struggles and issues that are working themselves out but for those that think the world of reeds are dead I want to point to one thing we had a massive self-storage reed merger announced this morning with public storage acquiring national storage affiliates NSA I mentioned this REIT IPO that's on the horizon we've seen Blackstone taking out a couple of reeds of which one just closed last week Alexander and Baldwin so M&A activity is alive and

6:13well one more point to hammer on real quick if you take out the conflict that's happening overseas right now prior to the conflict the REITs were able to raise tens of billions of dollars of new debt the lending window was wide open so for a lot of these REITs it's blinders on focus on the business how do we maximize our revenue growth minimize our expense growth to push out as much of our profits as possible to shareholders in the form of dividends David you said if you take out the conflict so I have to jump in on that because you know there are worries about inflation arrest now and obviously REITs anything in real estate is highly interest rate sensitive we got the Fed meeting finishing this week we're obviously not expecting to move this week but now the views are being pushed down the road because of the inflation risk right if this is short live this may not matter if it's not that's a challenge how do you think about that in the context of how REITs are performing yeah this is not the first rodeo we've been down this road before

7:14I think a lot of the management teams I mentioned they put blinders on and focus on the fundamentals you know for landlord their job is to lease the space and I don't necessarily think inflation plays into them leasing the space their tenants might be impacted by some facets of this but I do think for those that are concerned about inflation remember you buy REITs for dividend income stream so the question you should ask is is my dividend safe stock price performance is kind of the extra cherry on top of the Sunday but as long as that dividend income stream remains safe and stable the REIT industry should weather this volatility storm that we're witnessing all right David we'll leave it there for time thank you so much that's David our back chief investment officer of FOIA capital real estate