REIT Portfolio 201: How To Position


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The transcript found below is for readers who would like to follow along. Please note that the transcription may not be 100% accurate.

Female Speaker: Please welcome to the stage, Hoya Capital’s Chief Investment Officer, David Auerbach, and our host, Seeking Alpha’s Director of Audio Content, Rena Sherbill.

Rena Sherbill: Hi everybody. Great to see everybody. Great to be here. Really excited to be here with David talking REITs and real estate. We’re getting to the end of the slide, because if you want to download the full deck, feel free to click on the QR code before we get started, if you want to get involved. So, we’re talking real estate and REITs, and I think, all right, we didn’t leave it up long enough, we’ll get there at the end, though. I think a good place to start is, what are REITs? Does everybody here know what a REIT is? Raise of hands? All right. If you would break it down for us a bit further, what are the different lanes that the REITs stand in?

David Auerbach: What are the different lanes? Holy cow, how are we going to even begin to unpack that one. So, REITs, Real Estate Investment Trust, from where I sit, is just basically an income producing property. It’s an income vehicle. The dividend income is passed through to shareholders, and we use REITs every single day of our lives. No matter how you spin it or shape it, we’re using REIT-owned properties 24/7. So, the question is, what is the best REIT for you? I obviously manage a couple of REIT real estate funds. There are mutual funds, ETFs, closed end funds, UITs, 180 publicly traded stocks. It’s my job and our job at Hoya Capital to help investors find the best REITs or REIT portfolios for that story.

So, to tee it up, to start it out, I like to play a game [Technical Difficulty] that many folks in the audience because of the bright light, but like, how many people have Amazon on their cell phones? Okay. How many people actually order packages off of the Amazon app off of your phones? So, for every single time that you place that buy it now order, you’re using three different REIT sectors to get that order to your doorstep. Your cell tower to process the order, the data center basically transacts the order, and the industrial REIT warehouse delivers that order to your doorstep. How many packages are being ordered off of Amazon every single day? Tens of millions, more. And so as a result, you can sit back, place that buy it now button, and earn passive income from a guy like Prologis or First Industrial.

Rena Sherbill: Do you want to go to the slide to show the…

David Auerbach: Sorry.

Rena Sherbill: That’s okay.

David Auerbach: So, here’s a quick overview of REITs. We talked about Hoya Capital. And again, you will have access to all of this. But if you look at the left side there, this is all the different sectors that make up the REIT industry. And so as a result, I was talking about industrials, I was talking about the cell towers and the data centers, obviously some of the largest best performing sectors that are out there, but your mall, your apartment, and you guys, you don’t need to take pictures of this. Like I said, we will be able to give you all of this presentation. Hi, Lindsay. So, as a result, whether you live in an apartment property, you rent a self-storage unit, you go to the grocery store and buy groceries, we’re using REIT owned properties every single day.

Now there’s a variety of REITs that are out there. You hear stories on the headlines of a Blackstone or Starwood, what’s going on in the world of private REITs or non-traded REITs. And we look at, honestly, kind of all of the world, private, public, mortgage, preferreds, you name it, we cover it. And really, when you look at the benefits of REITs, it’s on the top right there, whether you look at the National Association of Real Estate Investment Trust, it’s called Nareit. By the way, Nareit hosted their annual conference here in this hotel, it was two weeks ago, so it’s nice to be back home, but Nareit talks about these five bullet points in pretty much every single conversation. The liquidity angle because of the fact that they’re publicly traded on the New York Stock Exchange or the NASDAQ. There’s a bid-ask spread, they’re liquid. The diversification angle looking at all the properties. The transparency angle because of the fact these are publicly traded companies. They publish a ton of press releases. They tell you pricing transactions.

Management hosts quarterly earnings calls when they publish their earnings statements. And so, they’re really providing you a lot of high level detailed information as to what’s going on under the hood. We’ve talked about the dividend angle, because again, it’s a dividend pass-through vehicle. I’ll talk about our funds. And then the performance side of things. Basically, over the long-term period, REITs tend to outperform.

The lower right shows some bullet points, basically talking about the whys of REITs, how prevalent REITs are, the fact that there’s 29 REITs in the S&P 500, and so we hear these comments every single day, whether it’s a Jim Cramer, CNBC talking to Prologis or Realty Income, or you see a headline in the local newspaper, we’re seeing REITs into our lives 24/7.

Rena Sherbill: So what’s the best way for investors to evaluate REIT stocks? What are the metrics? And you can show some of the slides. What are some of the metrics that you use in order to gauge REITs?

David Auerbach: So, this is a very detailed — simplified/detailed breakdown of how a REIT calculates what they call NAV, net asset value. NOI would basically be the profits side of thing, and you work your way from profits to the net asset value. So, typical companies report earnings per share. REITs report their earnings per share metric in terms of funds from operations, FFO. FFO leads to the calculation indirectly of net asset value. And by and large, most REITs, because of the volatile state that we’ve been in the past couple of years, most of the REITs are trading at what they call discounts to NAV.

You obviously want to buy something at a discount versus a premium. And the simplified version of that that I like to use is the sum of the assets that a REIT owns is more than where the stock price is trading. So, obviously if you can buy the Empire State Building at $7 a share for the publicly traded company, not that I know how much the Empire State Building is worth on a per share basis, but you would assume it’s worth more than, let’s say, $7 a share. So, this is a really good breakdown that gets into the weeds of how a company calculates NAV.

Now, here’s the fun stuff. You have 27 Wall Street analysts that cover all the various REITs that are out there, which means if you have covered Prologis, you have 27 analysts with 27 different ratings with 27 different price targets that are all driven based off of NAV. At the end of the day, I think what matters to you, the end investor, is what makes Prologis a buy to me, makes it a sell to my friend Lindsay, because we’re two different investors. We don’t think alike. And so, it’s important really to, again, peel back the layers of the onion to understand what’s relevant to you. And we’ll talk about some more of those talking points here shortly.

Rena Sherbill: In terms of looking at the space and navigating the macro economy, there’s a lot of talk about the Fed cut and whether it’s coming — whether one more is coming this year, whether it’s not coming, and interest rates and what’s happening there, how does that affect the REIT space?

David Auerbach: The answer is REITs are “interest rate sensitive.” So anytime we see chatter about interest rates, the REIT sector is the first sector to respond, both to the good and to the bad. And as I mentioned on Bloomberg this morning, as I like to say, when the Fed makes that rate cut announcement in September or in December or they kick the can down to 2025, whenever it happens, at 2 o’clock Eastern when the Fed announces that federal interest rate cut, at 2 o’clock and one second, the REITs are going to rally. No question about it. We can’t use the word guarantee in our business. I guarantee the REIT sector as a whole is going to rally on that news.

At 2 o’clock and two seconds, the advisor is going to call his client and say, hey, the Fed’s cut interest rates, it’s time to buy REITs. Guess what? That ship has already sailed, has been priced in. So, now the key is trying to price in today for eventually what’s coming tomorrow. And as I like to say, REITs are boring. Boring is good. REIT are the tortoise in the tortoise and the hare of your portfolio. Slow and steady wins the race.

I had somebody correct me and say that REITs are the ballast of the ship. They’re what keeps your ship afloat. And as I like to say, REITs are what let you play, cannabis, NVIDIA, single stock future ETFs, whatever you are on the high risk spectrum. And from where we sit in the world of REITs, the risk spectrum is so low compared to some of these other assets that are out there. And I’d really boil it down to a very simple reason.

Let’s use this hotel as an example. At one time this hotel was owned by a REIT, I believe it was owned by Sunstone Properties, SHO. Sunstone can observe this property 365 days a year, look, see, smell, touch, feel, taste, observe. You can watch your real estate investment in real time. How do you track an NVIDIA data center in real time? Unless you guys have access to management team, you can’t get your foot in the door. You don’t see the data, you don’t see the stuff, but go to your local grocery store, your local strip center, and you could see the number of cars in the parking lot. Are the letters falling off the sign? Is it well lit? What’s the driver to the shopping center?

You can observe real estate investments in real time. And so, as I like to say, there’s a Brixmor shopping center that’s right down the street from me. Brixmor grocery anchored shopping center, a REIT that was spun out by Blackstone many years ago, the ticker is BRX. I’m not making a recommendation, but if you use Brickstone shopping center that’s down the street from me as an example, there’s a central market which is an upscale H-E-B, if anybody who knows Texas H-E-B grocery stores. There’s several retailers, but everybody goes to the central market. That parking lot is jam-packed basically 24/7, especially on the weekends.

Well, if I know that this shopping center is doing well, I wonder what the Brixmor shopping center five miles down the road is? Drive over there, check it out. And so you could watch this investment in real time and see how things are going versus how do you track Microsoft, how do you track Apple every single day? How do you track Amazon? Frankly, you don’t know until they report their quarterly earnings. And so, I think it’s trying to get ahead because we use these REIT-owned properties every single day, not even thinking about where the federal fund’s interest rate is at or where the 10-year treasury is at.

So, I like to say, like, have you been to Dunkin’ Donuts recently? Have you gone to Starbucks and had a cup of coffee? Have you gone and picked up a prescription at the pharmacy? You’re using REIT-owned properties. You didn’t say to yourself, gosh, the 10-year treasury is at 4.4%. I can’t go to Starbucks today. You don’t even think about that stuff. And so, we use these properties not thinking about really what’s going on in the broader economy. Let’s take it a step further back, and if I’m jumping the gun, I apologize.

Rena Sherbill: No, no, jump that gun.

David Auerbach: We see doom and gloom headlines every single day. The commercial real estate wall of debt that’s coming due, don’t buy REITs. Blackstone and Starwood gaining redemption to other private REITs. Don’t buy publicly traded REITs. That’s baloney. Because if you go and actually talk to the actual REITs themselves, and I’m joined by one of my buddies here today, and they’ll tell you, fundamentals are strong. Operations are good. Earnings are going up. Dividends are going up. We don’t have any debt that’s coming due this year or next year. We’ve already addressed the upcoming debt maturity.

So at the constituent level, the actual fund company itself, they’re going to tell you that REITs are just a small, really a small blip of the entire commercial real estate spectrum, but everything gets lumped in as a whole. Let’s look at Blackstone and Starwood. Like the REITs, Blackstone and Starwood own the best properties in the best markets at the intersection of like, I’d say, Main & Main. And the publicly traded REITs, I feel, are getting excited because they have the balance sheet strength and the capacity and they’ve raised a bunch of debt at market prices here.

They’re very well fortified that they’re going to be able to get the chance to acquire some of these assets that they’ve been sought for so long, because Starwood is in a situation that in order to raise capital for investor redemptions, now a publicly traded REIT can buy that most desirable asset that they’ve been targeting, whether it’s California Industrial, or whether it’s that shopping center that’s at Main & Main, they’re going to be able to get some great assets at great prices.

So again, I hate to use the peel back the onion analogy again, but it’s so important to really go under the surface and look at these companies on an individual basis because, again, what’s happening at one company doesn’t necessarily represent the industry as a whole. As I like to say, it’s kind of a bell curve. You got some amazing stocks, you got some not so amazing stocks, and then there’s everything in the middle. Us as fund managers, we skew towards the small and mid-cap stocks.

As I mentioned, there’s 29 REITs in the S&P 500, but there’s 180 publicly traded REITs that are out there, including mortgage REITs and all of these other vehicles that are out there, and it’s our job to basically educate advisors and investors on all the other stuff that’s out there that don’t get the time of attention because they’re not Prologis or Realty Income or Public Storage or Simon Property Group or fill in the blank.

Rena Sherbill: What’s the best way for investors to think about the wall of debt?

David Auerbach: Okay. So, that’s a great question because I think it plays into what’s your interest rate expectation. Look at the company level. Again, going back to that transparency angle, these companies, not only when they report their quarterly earnings, but they also publish deep supplemental packages. Basically it’s the add-on to the earnings report that they disclose their debt stack. They will tell you how much debt we have coming due this year, next year, 10 years, 20 years, and so you could really get a good picture about how much is coming due.

One other angle to approach is basically the fixed versus variable rate debt side of things. The non trade-ins, the Blackstones, the Starwoods that I mentioned, do own a lot of variable rate debt. Well, when interest rates are at zero and it’s free money that’s out there, it’s a free-for-all, everybody is loving it, but when rates are going up, it’s that variable rate that’s really at play, but for the publicly traded REIT guys, by and large, most of their debt is fixed.

So should, one of my favorite REITs, Easterly Government Properties, happy to talk about that, but should Easterly go out and acquire 10-year debt at 6% or whatever the number is, it’s really only 150 basis points above where the 10-year treasury is trading at, but why people are making such a big deal about this wall of debt that’s coming due is that again, when the 10-year treasury was below 1%, when the fed fund’s interest rate was at zero, the REITs and Microsoft, everybody else, were taking down debt with two and three handles.

Well guess what? We’re in a 5, 6 environment right now, and so there’s one headline that’s grabbing, but what the CNBCs and Bloombergs aren’t saying to you is that just like REITs were at the borrowing window taking down tens of billions of dollars of debt at free money prices, so were your Apples, your Microsofts, your NVIDIAs, your Intels, all your names that you see every single day. Now granted, the balance sheet of Microsoft is basically larger than the market cap of the entire REIT industry by itself, and they can weather that storm, but I don’t care what company you are.

When you go from 2% to 6%, that incremental 4%, think about the interest expense that you’re looking at on the bottom line of a $500 million 10-year debt deal. Or in the case of some of these large cap guys that are taking down billions of dollars of debt, you’re talking to the tune of tens of millions of dollars of incremental interest. Okay, let’s take it one step further. The regional bank crisis, oh my gosh, Signature Bank, regional banks. Guys, the REITs that are in the S&P 500 are the guys that we’re talking about, aren’t doing deals with the regional banks. They’re working with the Goldman Sachs of the world, the J.P. Morgans of the world.

Now, I got to be fair and balanced. When we start hearing the bad headlines from the J.P. Morgans and the Goldman Sachs and some of these loans being turned back, then, and I’m fully transparent, then I will be a little bit concerned. As I like to say, if Walmart starts closing stores, and we’ve seen them closing stores across the country for different reasons, but as I say, if Walmart starts closing stores, we’ve got much bigger issues going on than Walmart closing stores.

If Coca-Cola or Budweiser starts closing bottlers and canneries, can’t even speak, we’ve got much bigger issues going on than Coca-Cola and Budweiser closing these properties. And so, I think it’s really important to really dig down, and again, some of these REITs will tell you at the property level, this is what we’re doing, this is how we’re growing, this is our vision to take it from here to here in the next 10 years.

Rena Sherbill: And where would you say dividends figure into this? In terms of specifically retail investors looking at the REIT space, how do dividends factor into their thought process?

David Auerbach: Sure. So, again, bias up here talking REITs, talking the REIT book, don’t shoot me. Pretty much every advisor allocates, again, if you think about your typical 60-40 model, blah, blah, blah, anywhere from 5% to 15% of the portfolio should be allocated to REITs. I’ve talked to advisors that allocate to 25% and more, I talk to advisors that say you’re high as a kite, I’m not giving you $0.01. Fine, but you have to have a balanced diversified portfolio. Why? Because of that income dividend stream. And the closer you are to retirement, the more that you could potentially set aside.

So, to answer the question, because I know where you’re going with this, there’s great studies that are done by Nareit, by Morningstar, by some of these great data providers that are out there that talk to you about the sooner you start investing in REITs, the more income potential that you can generate. So, here’s a softball example. You just had a new grandchild. Your grandchild’s literally a day old. Go out and buy a share of realty income. Go out and buy a share of Agree Realty. DRIP, you guys know what drips are? Dividend reinvestment plans.

DRIP the dividends of a Disney, a Realty Income, an Agree Realty, an Apple Hospitality, some of these monthly dividend payers. And over the course of the next, before the kid turns 18, versus to the time that that kid turns 65 in retirement, you could be talking to the tune of, again, not my words, there’s other proof behind this, but multiple seven figures of income potential just by owning REITs versus not owning REITs, and it’s because of that dividend income stream.

Now, again, fair and balanced, not everything goes up. Yes, we see hiccups that happen again from time to time, guys that do cut their dividends, and it’s going to happen. It’s our job as fund managers to try to avoid those pitfalls, to try to see the highly levered names in advance. So, not to jump the gun, but with one of our ETFs, RIET, the high dividend yield ETF, we take a focus of which rich REITs pay the highest dividends with the lowest leverage ratios. And so, I don’t care about, I care, but I don’t care about this wall of debt that’s coming due because our constituents have low leverage ratios.

They’re able to basically deal with debt over the next year, two years, five years, 10 years that’s coming down the road. And you want that dividend income stream to come up. Really as I like to use in examples, don’t say it out loud, but in the back of your head pick your favorite stock. Don’t even use a REIT. Let’s use NVIDIA, let’s use NVIDIA, whatever, Apple, but you as the end investor want that company to do four things, literally four things every single year. It’s very simple.

Grow revenues. That’s the start one. Grow the revenues. Grow the profits. Let’s grow the top line and the bottom line. As a result, that means the dividend should keep going up. So grow dividends. And lastly, grow your annual guidance. We’re going to do $2.00 to $2.25 this year. We’re going to do $2.25 to $2.50 next year. We’re growing. Well, grow, grow, grow, grow. If you’re able to do those four things, you don’t care about what’s happening in the world of interest rates or the 10-year treasury.

Every single one of these companies, myself with our ETFs included, I have no control over stock prices. Believe me, if I did, no offense, I wouldn’t be here, I’d be in Fiji on my jet on the way there today. But because I can’t afford the jet and I don’t have anybody’s offering their jets to me, all I can do is focus on the fundamentals. Which companies are doing what they say they’re going to do, which companies continue to grow the way that they say they’re going to grow, and more importantly, which companies help me sleep well at night knowing that they’re stewards of my capital, which means they’re stewards of your capital. And if I know that I have a relationship with the CEO, my favorite example, at my previous gig I went to interview the CEO’s name is Eric Bolton. He’s the CEO of Mid-America, or MAA is now it’s known. They’re based in Memphis.

The largest Sunbelt department REIT during the S&P 500. Eric has, to put it bluntly, a lot of money. He does very well. He’s been an S&P 500 CEO for 30 plus years, you do the math. And I asked him on screen, point blank, what keeps you up at night? And I’m not exaggerating, it took him less than a half a second staring at me directly in the eye and he goes, finding ways to keep growing my dividend. But why? Why is the dividend so important to the CEO? Well, it leads to another reason about why REITs? I can’t think of any other sector that’s out there where management teams and C-suite executives are as fully entrenched in the trenches with the shareholders than the REITs are. Why?

Let’s say Eric owns a million shares hypothetically and they raise their dividend — their quarterly dividend $0.10. Guess what? He just got an extra $100,000 bonus for doing nothing, for doing his job, for the company doing his job. Well, that’s a million share example versus the regular investors that own a couple of hundred shares. You want to see that dividend income stream growing up. Obviously the ideal goal for any of us is build a portfolio and live off through the interest and dividends that your portfolio generates so that you never tap into the principle base. And so, for a lot of these portfolios, that’s why they always recommend a big, excuse me, my word, allocation towards REITs because it is that safety net to build that income base to look 25, 50 years down the road.

Rena Sherbill: So, in terms of talking to, let’s say, your average retail investor, of which many of us are, how do you synthesize the best way to set up a portfolio in terms of allocating part of it to REITs? What would you say is the average wise allocation? And then if you want to get into the best stewards of capital?

David Auerbach: I mean really it’s 5% to 10% of the portfolio should be…

Rena Sherbill: Thank you for the Oscar, I’d like to thank the Academy.

David Auerbach: I mean I knew I was doing a good job. It was a little soon to award me this. Thank you. I’d say about 5% to 10% is a good safe allocation. Key is diversification. If you look, this chart here talks about the start of the 2024 performance. And you look at the delta between the top and bottom performers, and frankly, there’s a wide gap there, but over that diversification of a portfolio, and for us in RIET we’re running 100 different stocks, combining preferreds and mortgage REITs and small and mid and large cap, there’s a lot of different ways to approach this game.

And again, I can’t speak for you guys because I look at the stuff that we use every single day, but there’s great stories that are out there and like cannabis REITs, Innovative Industrial, NewLake Capital Partners, there’s great stories that are out, I mean, has anybody been to Las Vegas recently? People you want to talk about a problem, oh, we’re in this recession, oh my god things are so bad. Go out to Las Vegas and tell me how bad things are out there. Minimum at the tables at the worst hotel, $25. My Dunkin’ Donuts, it’s down the street from me, I spend $4 on a cup of coffee. At that same property in Las Vegas, $8.25. Nothing has changed, and yet people are lined out the door.

So, there’s great stories inside of every single one of these sectors and though industrial might be the worst performing sector to start the year, there are some phenomenal stories inside the world of industrial, I think, like a Terreno Realty Trust, TRNO, or a Plymouth Industrial, PLYM, or a name that I guarantee nobody’s ever heard of before, Modiv Industrial. Modiv Industrial does net lease industrial focusing on manufacturing properties. Pays a monthly dividend that’s annualized over 7% right now, but it’s a small cap, it’s under the radar, nobody’s ever heard of it or a healthcare REIT that I do some stuff for called Strawberry Fields.

Again, another monthly dividend payer that owns healthcare properties across multiple states, but people, when they hear of healthcare REITs, the first thing they think of are Ventas and Welltower, which rightfully so you should, but again, they’re in the S&P 500 and there’s so many other stories that are under beneath the surface. That’s our job.

And as you’ll see from our QR code, come up to me afterwards, we want to talk to you. My cell phone number is on our business card, because it’s my job to have these conversations. I don’t know what makes Simon a buy to you versus a sell to me, but let’s talk it out. So, there’s good stories that are out there. And I think who are the best stewards, you’ve got guys out there like Cohen & Steers. Cohen & Steers is like the largest REIT manager in the world and they run ETFs, closed end funds, UITs, you name it, they have it.

They have a preferred book as well, but they’ve got also fidelity and Morgan Stanley. There’s so many shops that are out there. Here’s one thing I will say though. We’re dominating the world by ETFs. I’m sorry if you’re a mutual fund investor, your mutual fund is eventually going to convert to ETF. It’s going away. And Vanguard, BlackRock, State Street, they’re the largest ETF issuers that are out there.

If you can get Vanguard’s real estate REIT portfolio manager on the phone, can you conference me in on that call because I’ve got some questions. If you can get State Street’s re-portfolio manager on the phone, I’d love to talk to you. Meaning, you can’t talk to those people. They frankly don’t exist. Because a typical Vanguard fund, a computer spits out a model, boss says to grunt, go run this fund, and it’s set in and forget it. We’re active managers, though we’re passively held on our ETF, we’re active managers.

We want to educate you on the 180 stocks that are out there to find the best story for you. If our ETFs are a great fit, awesome, let’s talk. If our ETFs aren’t a fit, awesome, let’s talk. Let’s find that good story for you. Because again, as I keep emphasizing, the REITs are the safety net of your portfolio to let you go and play a lot of the other sectors that we’ve been talking about here today.

Rena Sherbill: Which investors should play with ETFs? Is it a notion? I know that you just said you’re actively managed, but is it for an investor who’s like, I like this space. I’d like somebody else to figure it out for me. I’m going to put my money in this ETF. Is it that simple or is it a little bit more nuanced than that?

David Auerbach: It’s actually a little bit of both. You want to play an S&P 500 fund, there’s a million options, but you want to play the REITs in the S&P 500, that story doesn’t exist. Because again, it’s nothing sexy about it. I will say in the world of ETFs, you’ve got over 3,500 funds to choose from. I was chatting with somebody earlier who was talking about launching an ETF, and I said, what makes your idea different than any of the 3,500 funds that are out there? Because really, when it comes to the world of ETFs, as I told him, you could have the best name, the best ticker, the best performance, the best, the best, the best, none of it matters.

In the world of ETFs, it comes down to two things. How much do you charge with your expense ratio? How much AUM do you have? How much money do you have under the wrapper? So, I could put up 100% return year-over-year and unless I’m drawing in assets, nobody could give two you know what’s about it. So, I think the key again is peeling back that onion, what’s under the hood of this ETF, what’s driving this car down the street, and why does it matter as part of my bigger portfolio?

So, obviously I’d love for you to buy a REIT and homes and that covers your real estate allocation, but VNQ, IYR, the largest REIT and real estate ETFs that are out there, our fund is a good complement to those bigger funds. And the same breath that we talk about SPYs and QQQs and some of these other funds that are out there, but eventually what’s going to happen is your mutual funds that you do own are going to convert to ETFs.

Those ETFs that you do own are going to continue to grow in size because they are just going to amplify. And I’ll leave it with a trick question. If anybody owns VNQ, the Vanguard REIT ETF here, do you know what the top holding is of VNQ and I’ll give you a hint. It’s not American Tower. It’s not Prologis. It’s not the largest cap REITs. The largest holding in VNQ is the Vanguard Real Estate Mutual Fund. They double dip on the holdings, on the fees side of it.

So again, the average investor doesn’t understand that really, what are you buying? And then we got some really complicated, difficult products that are out there. I run a levered inverse buffered 2x ETF with a single stock NVIDIA focus. What the hell does that mean? All I know is that this is the type of product that, A, is selling, don’t get me wrong, they’re drawing incredible assets, but the volatility on that thing is like going on a roller coaster every single day versus pull up our quote and we’re going to be in a tight band. It takes a lot to move the needle for a good ETF issuer because of that full diversification angle.

Rena Sherbill: You want to go to the download slide and if anybody has questions, we’ll leave room for questions. Can you just step up to the mic up there?

David Auerbach: And by the way, all these slides that you see are part of this deck. And again, if people want to talk about our ETFs, happy to answer questions about that as well, but yeah, click here and again, like I said, you guys can get all this stuff and you don’t have to worry about taking notes. Come on down.

David Auerbach: Sorry?

Male Speaker: Easterly?

David Auerbach: Easterly, yeah. Easterly, great company. So the way I sum up Easterly is very simple. You buy a government bond, T-bill, T-bond, whatever, who pays you the interest on that bond? Trick question, anybody? Nope.

Male Speaker: Uncle Sam.

David Auerbach: Uncle Sam. Good answer. What if I could tell you there’s the exact same thing, but in the world of REITs? So Easterly Government Properties owns and manages government owned facilities, TSA, FBI field offices, Department of Veterans Affairs hospitals, just a small sampling of that. Who’s paying the rent on those properties? The government. Who’s Easterly’s lease dividend coming from? The government.

So, it’s a very easy way to play the government in a stock market wrapper because I don’t know if you guys have been flying anytime soon, but I don’t think we’re closing any TSA offices anytime soon. I don’t think we’re turning our backs on our veterans and not providing the services that they need coming back every single day. This is a sector and a company that’s going to continue to evolve. Federal courthouses, immigration custom facilities, and immigration, this is a sector that’s responding to mission critical services that the government is providing to us every single day. And it pays a great dividend, but I don’t think it’s monthly. No. We’re going to change that.

Male Speaker: Thank you.

David Auerbach: Yes. Yes, sir.

Male Speaker: I own a lot of REITs.

David Auerbach: I like you even more.

Male Speaker: However, from where I am, I am very happy with the dividends, but the share prices keep going down and they are volatile – to manage the two. I look at the income that I’ve generated over five, six years, and then I look at the share price, it’s almost breakeven in some of the cases.

David Auerbach: Sure, and that’s a great question, and I get asked that a lot. You may have earned a bunch of income and you see that your stock price is flat, but here’s how I respond to that. Realty Income’s trading at $25 a share, but Realty Income has paid you $10 of income over the five years that you’ve owned that stock, let’s say. So, really that $25 stock is really worth $35, but the dividend is taken out of the stock price. REITs are not day traded vehicles. You don’t buy, in my opinion, you don’t buy REITs for hoping, I mean obviously everybody hopes the stock goes from 20 to 40, 50 to 100, whatever, but you buy REITs for the income stream.

So, that’s how I would approach that, is how much have you earned cumulative and dividend income from that company and add that up. Basically, companies report total return, and total returns two components. Stock price appreciation, dividend income. Obviously, the bogey, the target, is hopefully double digits. And again, I have no control over where stock prices are headed, but if I can focus on the dividend champions, the guys that continue to grow our dividend, and I believe there is a slide in there that talks about all the REITs that have been raising their dividends, year-to-date over 50 REITs have raised their dividends so far this year.

From a very high level, 180 REITs, the average dividend yield right now is about 6.9%. That’s all in from everything. The 10-year treasury is around 4.3%, let’s say. So, you’ve got about a 260 basis point cushion between REITs versus the fixed income proxy, because the REITs are benchmarked to the 10-year treasury. And obviously, again, me being biased, I’d love to see that number go back to, let’s say, 4 and higher, what we historically have seen, but COVID threw a wrench in all that. And what’s happening on the other side is the dividends are going back up, the earnings are going back up, and these REITs are basically, they’re not paying as much out in dividends as they could be because they’re trying to load up on the balance sheet to have the capacity and the firepower to take advantage of a rainy day situation.

Male Speaker: A question.

David Auerbach: Sure.

Male Speaker: Is there a REIT of REIT funds?

David Auerbach: Is there a REIT of REIT funds? No, but our ETF is probably as close to it as it gets.

Rena Sherbill: That’s the best place to end that I’ve ever heard. Thank you very much. Thank you, David. Appreciate all of you.

David Auerbach: Thank you.

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