JEPI - What Does Bank Stress Mean For REIT's With Brad Thomas (IREIT On Alpha)
2023-03-17 12:30:00 ET
Summary
- Brad Thomas, from iREIT on Alpha, joins us to discuss what the stress in the banking sector means for real estate.
- He shares his thoughts on the JEPI ETF or SCHD ETF for investors looking for dividend yield.
Editor's Note: This is the transcript version of the previously recorded show. Due to time and audio constraints, the transcription may not be perfect.
We encourage you to listen to the podcast embedded above or on the go via Apple Podcasts or Spotify .
Read More Of Brad's Research Here
This episode was recorded on March 16th, 2023.
Transcript
Daniel Snyder: Welcome back. I'm Daniel Snyder. And today, we're joined by Brad Thomas to discuss the stress in the banking sector and what it means for the real estate industry, as well as REITs. We get his take on if someone should pick the (JEPI) ETF or Schwab's (SCHD) ETF, if they're looking for dividend yield and you're not going to want to miss what he said about that. And if you're enjoying the show, please leave a rating or review on your platform of choice. It helps us keep making these episodes for you.
Now, let's get to the interview. All right. So this is a real joy to have the man with over a 108,000 followers on Seeking Alpha joining the podcast today. Brad, how's it going?
Brad Thomas: No problem, Daniel. It's great to be on. And, yeah, 108,000. It's hard to believe, but I appreciate every one of them.
Daniel Snyder: So Brad, can I ask you to just maybe give a one to two-minute intro for the people that don't know who you are? How did you get into investing? And what do you do now?
Brad Thomas: Sure. So I started really early, early age. My mother was in real estate, so I kind of watched her sell houses for – through middle school and high school. And decided, I guess, when I was in college, I wanted to get into real estate. It's always been an interesting asset class. And so I got my real estate license at a very young age. I was 17 and just my freshman year in in college.
And so I'll give you the reader's digest version as I spent 20 years or over 20 years, maybe 25 years as a real estate developer. I started small and built – I actually bought some townhouses and some duplexes and then convinced a banker to lend me money to build my first advanced all in part store. That time, they were privately held company in less than a 100 locations in the Carolinas up to Roanoke, Virginia, where they were based.
And so I started to build stores across the Southeast for them. It was really a good way for me to learn about how to acquire real estate and hire architects and engineers, negotiate leases, which is a very critical part of the value creation process. And so – and also to sell these properties, and create that full liquidity event, which is what I was doing.
So did that for a number of years. Built over 50 stores for Advance Auto Parts (AAP), and then I went to O'Reilly Auto Parts (ORLY) and moved up to Dollar General (DG) and Family Dollar and Blockbuster Video at the time. Some of you may not remember Blockbuster, but I certainly do. And I watched the evolution in that industry. It was really interesting to watch.
And I built a number of restaurants: Outback, Applebee's, Apple House, IHOP, and then I moved into shopping centers. And I learned that you can, much like cell towers, by the way, where you can take a core tenant and add more revenue to that existing to the property and create higher returns and higher profit margin.
So I went into grocery stores, started building grocery anchored centers And then Walmart was kind of the peak of it all where I put together a mixed use master plan community. Took me a couple of years to build it all out, but – anyway, so that was the extent of it. But I learned a lot of different property sectors, Daniel, and that gave me exposure to a lot of different things.
Industrial, I built for some of the BMW suppliers in my hometown of Spartanburg, South Carolina. And my business partner actually built golf courses and hotels And so it was really fascinating just to see all the different property sectors and how you could create value.
And so when the great recession hit, which now has been almost a distant memory, but that wasn't really a tough time for me because I was actually unwinding my partnership, which was kind of very difficult, very straining to my relationship and to my family as well. But then the great recession. And that's when basically everything shutdown.
All the banks, most of them closed, which is really interesting now that we're seeing some elevated bank closures today, but I was right there on the ground floor of all of that and watching all these banks fail. And then, of course, I landed on Seeking Alpha.
And I wish I knew exactly how I landed on Seeking Alpha, but it really doesn't matter. I did. It's probably one of the best things, Daniel, that I ever did. And here I’m today, 108,000 followers. And I don't know, 13 years, my kids have grown up on Seeking Alpha. So it's definitely been a really a fun time to do – to be in this business and to build a such a unique platform.
Of course, our team, we have two products at Seeking Alpha. I read on – Alpha is our REIT coverage business then we have our Dividend Kings business, which covers really the entire dividend growth universe. So it's really exciting that we've been able to assemble that and I've got some great friendships on Seeking Alpha. And again, I want to thank you again and your company for – Seeking Alpha for allowing me to be part of that community.
Daniel Snyder: So I've got to ask you, you went from all this real estate development. How did you get started with REIT investing and building out this product?
Brad Thomas: Yeah. So when I was a developer and, by the way, I'm still a real estate investor. I'm actually doing some pretty large projects now on the private side. But when I was private real estate developer, I would sell some of these properties to REITs. So I would attend at various conferences. There was a big one that was called The International Council of Shopping Center's Annual Recon Conference. It was based in Las Vegas, and I would go, walk through this conference. I was in my 20s at the time, even my early 20s right out of college.
And I was just amazed to see these huge booths with these big REITs, say, Kimco (KIM) and Simon Property Group (SPG) and Taubman, and I would just walk around and just be mesmerized by how much money they were spending on not only the booths, but just the whole conference. They would hire companies or people like Aretha Franklin and just some really big names to come in and put parties in all this.
And frankly, had I seen all that, I would have probably been able to predict the Great Recession because this was the wave of retail that I was right there in the ground floor. I built one of the first Home Depot (HD) shopping centers ever in South Carolina and kind of witnessed the evolution of the retail business.
And so that's how I knew about REITs. I was exposed to them. I ended up selling some of the properties, especially some of the shopping centers I had developed and the net lease properties to some REITs like Realty Income (O), which by the way is now my largest holding and just wrote an article on Seeking Alpha on Realty Income. That's where I got to know about these REITs.
And the fact that they had just dominating scale and they had dominant cost of capital. I mean, as a small town developer, there's no way that I could compete with a REIT. And in terms of the checks that they would write. And so anyway, so that's how I got exposed to the business. And now having kind of gone full circle and being on both sides, I would – I'll tell you REITs are just absolutely – I'm probably the biggest cheerleader on the planet with REITs.
But I will say, I mean, it's – they do have pretty good management teams, not all, and there are certainly times where we do call out management when they aren't doing things right. But for the large part, we've got some really good management teams. And of course, these, unlike when I was a developer, private owner, I would have to deal with all the headaches, the roof leaks and the toilet leaks are breakdowns and collecting rent and evicting tenants and all of those things, that's tough.
I mean, landlord is not an easy task. And so owning REITs is really a lot better vehicle, especially for the individual or average investor. So, yeah, I really think it's – I learned a lot. I know this business from the ground up. And now that I spend an awful lot of time with management teams, I interview CEOs almost every day, and you can see a lot of that content that I read on Alpha, where we publish a lot of video CEOs interviews.
And that's been a really valuable part of not only our platform that I read on Alpha, but just for me personally to be able to interact with management teams on a regular basis. Because all 10 times, I may not learn as much about that specific company. But I might learn something or find some clues about one of their competitors that may permit me from buying shares or from making me multiply shares.
So it's really good to have the kind of this big circle of people that we have sources that we can go to for different articles and different research reports.
Daniel Snyder: So being so intertwined with real estate and knowing how that that sector is in such a partnership with banking. Are you worried about the stress going on in the banking sector right now?
Brad Thomas: That's a great question. I was actually on the phone last night with a – one of my sources who actually used to work at Credit Suisse (CS). And he told me he said, “Brad, first of all, Credit Suisse has been bailed out at least three times already. They're not well run”. He mentioned UBS (UBS). He also had worked at UBS. He said, “That's a similar story there”.
Well, I found this interesting. He said that any bank who has the country name on it is not going to fail. Actually, posted this on Twitter last night with Credit Suisse. And Credit Suisse has the name, the country name. They're, guess what? They're getting billed out. I just saw that on Seeking Alpha this morning. And Bank of America (BAC), too, big to fail. America’s name is in that, it's not going to fail.
So I thought that was kind of a humorous way to put it. But I think Credit Suisse suffers from some really poor management they've had. They obviously haven't been build out, but they just haven't been a very solid bank. Of course, we cover the banking sector here as well on Dividend Kings. And we've recommended a number of banks.
But I think there'll definitely be some more fallout. I see fallout in terms of some buying opportunities, frankly. I don't think we're going to see as many – I know we're definitely not going to see the bank closures that I saw and you did two in 2008 and 2009. But it's been a wake-up call. And frankly, for me and for our team, we've decided, look, we need to stress test our portfolios. Let's be proactive here. Let's look at these lessons learned that we've seen with Silicon Valley (SIVB) and in Credit Suisse and Signature Bank (SBNY). And let's go ahead and be proactive and stress test our revenue model.
Let's look at our base. Let's look at those tenants that are in these REIT portfolios, are these BDC portfolios, are these midstream portfolios, And let's make sure that these – this income is stress tested because the large majority of our customers' annual are income investors. They're coming to us because they want a very steady and growing stream of dividend income because we all know the secret to sleeping well at night. And that is to have a very reliable, predictable income stream. So that’s one of the things that we're looking at here very closely in stress testing our picks.
Daniel Snyder: Brad, let me ask you, what has been your biggest takeaway so far this year within listening to re-earning calls and talking to the CEOs at your interview?
Brad Thomas: Yeah. I think, look, the biggest big takeaway is that the – when we enter January, I mean, everybody's feeling pretty good about market and reach in general. And of course, with the accelerated rate increases that we're seeing, it's been a record – we're seeing record increases in rates. And that is impactful, not only to REITs, but any company is going to see their debt increase.
So there's been half – we're having to adjust to that, and we've had to reprice a lot of the companies. We just recently went through our entire coverage spectrum here at Irene [ph] and Alpha to look at all of our target prices, our trim prices. What we found in the first quarter now that that's over which is actually the – I guess, the fourth quarter results and year-end results. But we found out is that most of these companies are having to very closely at their earnings in ‘23 and make these adjustments because their debt levels have gone up.
Now what's really interesting here, Daniel, and this is really the big takeaway that I've seen is that while debt has increased for almost all REITs, it's really putting more strain on those higher leveraged REITs. And not so much on the REITs that are investment-grade rated, and cap rates are beginning to adjust very quickly to this paradigm. And so I think certainly like in the net lease sector, you're not seeing the same investment spreads that you would see, say, six months ago or 12 months ago. But we're still seeing pretty wide spreads.
For example, Realty Income, again, I just wrote on that company and VICI Properties (VICI), another one I just wrote on. They have adapted to cap rates. They're not buying, for example, Realty Income is not buying at cap rates of around 6% today. They're now moving up to that, say, 7% range. Obviously, their cost of capital is going up as well, but they're still able to generate investment spreads in the roughly 125 basis point to 150 basis point range. And that allows the company to continue to grow externally and then not forgetting the internal growth drivers.
I know they're modest, but Realty Income does have rent bumps and these other net lease REITs do have these rent bumps. And so those levered returns are somewhere closer to 2% a year. So even with no acquisitions, these companies continue to grow. And so, yeah, I think that's the big thing. It's just really – we've had to adjust to that, but the sell-off has been excessive, and that's obviously created some buying opportunities.
But again, I think, as I've always said here on Seeking Alpha, I just – it's not the time to be too cute to try to go in and buy these companies that yield 12%, 13%, 14%, I think there's a lot more pain ahead, especially for these companies that have pretty highly levered balance sheets.
Daniel Snyder: I feel like we already know the answer, but I got to ask you anyways, what is your favorite REIT for the next quarter or for the rest of this year?
Brad Thomas: Yeah. So again, I like Realty Income, but, again, they have the size advantage and the cost of capital advantage. But that doesn't mean they're the best companies to own. They still got to go out and acquire properties. They did guide for $5 billion this year. I think that's ultra conservative. I think they'll end up doing probably closer to $10 billion. They did $9 billion in ‘22.
But Realty Income is not my – what I would call my best pick right now. It would be VICI Properties. VICI has been – had an incredible run. Of course, they came out of Caesars and Caesars went bankrupt. VICI was formed basically as a holding company or a REIT for those assets. So these were master leased to Caesars, and by the way, Caesars credit has approved immensely over the years.
And VICI has been the fastest-growing REIT that I've ever seen, frankly. And not – this goes all the way back to 20 years or longer. VICI came out and they became an S&P 500 company faster than any REIT that I've ever seen grow. And of course, a large part of that was the MGM Growth Properties (MGM) but they have continued to produce and scale this business and grow their adjusted funds from operations. And so – and improve their cost of capital, their investment-grade rating now – rated.
And moving into other markets. They announced recently they're going into – they're in Canada and they're potentially going into Europe. So I think it's open – it opens up for VICI a lot more opportunity not only in the gaming sector, but just other different experiential sectors. Daniel, I think one of the big things that I think is really interesting though is and this is something that I think investors are really missing. It's not only the REITs that are having to deal with this higher debt cost, it's just corporate America.
I mean, a lot of these companies are seeing their debt increase. In the recent article, I mentioned VICI in Six Flags (SIX). I've been talking about Six Flags now since 2018, 2019. And last year, there was an activist building on a – Jonathan Litt, building in land company, who also got pretty vocal with Six Flags recognizing that there is considerable real estate underneath these amusement parks that could be monetized in terms of a sale leaseback.
And the point here I want to make is Six Flags have some debt coming due in ‘24, ‘25, ‘26, is fairly significant debt. And when that has to be repriced, that's certainly going to put more strain on their earnings. And so, I’ll tell you, now is the time for companies like Six Flags and many, many others, Daniel.
I think this is going to really create this high interest rate market, where a lot of people fear could hurt some of these dominant REITs, especially the net lease REITs. The companies like VICI and Realty Income are in a great position because they can capitalize on those – on that real estate that these corporations own because their debt cost is now much higher and it's easier to transact more a 7% cap rate on their real estate.
So they can reinvest in their core businesses like Six flags. They can invest in their amusement parks or pay down debt or buy back shares, a number of levers that they can pull. So I do think that that's one of the missing things I'm seeing out there is it's not only the REITs, it's these companies and it's going to create more demand. In fact, I would even call a catalyst for these net lease REITs to be able to conduct more sale leasebacks. So I think you're going to see more and more of that going forward.
Daniel Snyder: Let's transition a bit because you also mentioned earlier in the episode that you cover a lot of the dividend income space. Wanted to see if you had a thought or opinion on the JEPI ETF versus the Schwab SCHD, another a lot of conversation right now. Any thoughts?
Brad Thomas: Yeah. So we have been moving into more ETF coverage. Now there's a reason to that reign is or reign to that reason is that I’m getting ready to announce my own REIT ETF index. Again, I'm not distributing the ETF. I'm not a licensed securities broker. But hopefully, there'll be somebody who will distribute that. But we're decided, frankly, a lot of this is due to Seeking Alpha in just the followers and they've all come to – many of them have come to us and ask us to put together Bear's indexes.
So we are launching our first REIT index within days. And so we felt like we want to cover that sector, not only just the REITs, but also just all of the dividend ETFs. So that's one of the reasons that we've enhanced our coverage. We want to see what these companies look like and how they differ – how they're differentiated.
The levered ETFs, I mean, JEPI is obviously pretty high yielding and pretty appealing for investors. I bought a few shares in JEPI after we published that initial article. I like Schwab a lot. I think Schwab is the not only the company, but also the, I guess, the bellwether ETF. That company is definitely more of a sleep well at night kind of all in dividend – dividend-focused ETF platform. I own that company because, again, I focus mostly on REITs. That's my core of competence. I can't cover all the dividend companies on the planet.
So I think for certain investors who don't have the time or perhaps the expertise, or perhaps the money, I think the Schwab ETF really makes a lot of sense. The JEPI ETF is certainly interesting. But again, I think that's certainly got more risk that has to be taken in consideration. But – and I really like ETFs. And we also look very closely at the fees. There are – most of the ones that I like are passive ETFs.
The active funds get fairly expensive. And so those have to – certainly have more strategy that goes into place. But I think that's definitely evolving. And, frankly, Daniel, this kind of goes back to kind of back to Seeking Alpha. I think there are really two types of investors in the world today. They’re the do-it-yourself investors. And that's largely I think the Seeking Alpha audience that's listening to this and many others that they like going into the Seeking Alpha platform, which is a terrific platform to aggregate research and compare analysts and the notes. There's just so much valuable information and data is – that's available. So that's the do-it-yourself an investor, DIY.
The other universe or the other, I guess, bucket, if you will, are the do-it-for-you investors. And those are people that just wanted somebody else to do it for them. And that's where ETFs come in. It makes it really easy for those types of investors who just don't have, like I said, that maybe the time, the money, the expertise to build their own portfolio. So these ETFs come in really handy. So I'm really excited to be involved in this ETF world, and we're definitely going to be ramping up our coverage. So stay tuned for more.
Daniel Snyder: So to put you on the hot seat real quick, if an investor came to you right now and was like, I want to invest in one ETF, either JEPI or SCHD, which one would you pick for somebody new?
Brad Thomas: Yeah. That is a tough question. I love these tough questions, Daniel. You're very good. I can tell, you've done this before. So it's hard. I mean, it's – it really depends on the risk profile of that investor. As I said, I do own both. I'm just personally, I've over weighted SCHD because I’m more risk averse. I just don't like a whole lot of leverage. And I think it really comes down to a conversation there.
But again, it really depends on the risk profile of the individual investor. Look, a lot of investors and I see them every day on Seeking Alpha. They really are attracted to yield. And that's – there's nothing wrong with that. But I guess our mantra at Wide Moat Research and our entire company is focusing on fundamentals and having higher leverage is really something that we try to advise to stay away from.
Look, anything that's yielding 10% or higher, you've got to look really closely at that revenue stream. And I just published an article today on Seeking Alpha, hopefully, it'll be trending. But it is on dividend cuts. Why – I think the title of this article is why I avoid dividend cuts at all costs? And it really gets into the some of the picks that we made where we recommended to stay away from a number of these 10%, 11%, 12%, 13% dividend yields. And not that we've – we're able to bat 400, but we've been pretty successful there.
So I think in terms of your answer, I would just warn investors when you get to those 10%. 11%, 12% yields or higher, just make sure that that's a sustainable business model. Because that's – at the end of the day, that's really what we're recommending are companies that are going to continue to sustain those dividends. And so, I like – again, I like Schwab. It's for a more conservative investor. I think that's the way I would go.
Daniel Snyder: Amazing. Thank you so much for giving us so much of your time today, Brad, in answering these questions. If people want to stay in touch with you, find you, where can they reach out?
Brad Thomas: Sure. Well, we're on Seeking Alpha for almost every single day, so that would be a great place to find me, and I'm also on Twitter. We've been fairly – I've been fairly active there. That's @rbradthomas, and look forward to seeing anybody. And again, Daniel, I want to thank you for your – for all the time you put into this and Seeking Alpha as well. We really appreciate the collaboration and the partnership we have and look forward to many, many years ahead.
Daniel Snyder: Yeah. We wish your continued success as well. And I'm just looking here 427 5-star reviews on – iREIT on Alpha. I mean, you guys are definitely going something right. So happy to have you on the podcast. Thank you so much. We'll have you back on again, and we'll talk to you next time.
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What Does Bank Stress Mean For REIT's With Brad Thomas (IREIT On Alpha)