Money Rehab with Nicole Lapin - Real Estate $$$ Without the Headache

Episode Date: July 19, 2022

Now could be an excellent time to get into real estate investing. But if you don't want to spackle a wall, you will want to invest in REITs (Real Estate Investment Trusts). Today, Nicole tells you everything you need to know about REITs with Tim Seymour, CNBC’s Fast Money Five & Founder and Chief Investment Office of Seymour Asset Management.

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Find a co-host at Airbnb.com slash host. Hey guys, are you ready for some money rehab? Wall Street has been completely upended by an unlikely player, GameStop. Are you ready for some money rehab? Wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. In episode 348, How to Make Money in a Recession, I told you that one investment to consider now is REITs,

Real Estate Investment Trusts. In that conversation, I told you that one investment to consider now is REITs, Real Estate Investment Trusts. In that conversation, I told you another episode was coming with everything you need to know about how to invest in REITs. Well, you can stop holding your breath because today is the day. And coming along with me on this deep dive into REITs is Tim Seymour, founder and chief investment officer of Seymour Asset Management, and he's also part of CNBC's Fast Money 5. Tim, I'm so excited to say welcome to Money Rehab. Hey, Nicole. Look, we all need rehab now and again, and this is the best place to do it.

This is the kind of rehab we all need. That's for sure. You don't need money rehab, though. We need to learn from you as we are getting our rehab on. The market is crazy, but I feel like the market is always crazy. So if you're looking at this and you're like, oh, my God, the the first half of the year has been what the worst market in 50 years since 1970. So where do I put my money? Do I start looking at more dividend paying stocks? And if so, what are those? I've seen sort of pro and con REIT investment too. You talk about, you know, this big housing market. If somebody couldn't get in and buy a house or didn't want to deal with tenants and get investment properties and stop listening to rich dad, poor dad guy who's like all about investment properties all the time. I can't deal with tenants. For me personally, I'm not into it. Then REITs is a good example because you're

getting real estate exposure without having to deal with somebody's plumbing or your own plumbing. Right. What's your take on the REIT market right now? There is nothing glamorous about being a landlord. You've asked really what's worth looking at here in a market that's undergone this kind of dislocation. And do you want to have a dividend approach? And do you want to be looking at things like REITs? So let's talk a little bit about that. My first philosophy on dividend investing is be careful with that because you shouldn't be investing in a company purely based upon the dividend. AT&T is a great example. This is a company that has destroyed capital. You've had capital losses in the last two years, probably north of 50%, especially as they unwound this time water

disaster experiment. And yet, at different times, these companies paid a dividend of anywhere from 6% to 11%. Pretty healthy, especially in a low-rate environment, but you're still really underwater if you've owned AT&T for the last two years, even though you got excited by their dividend, especially maybe in the bottom of COVID. So be careful about dividend investing. Own companies that certainly have predictable and consistent dividend payout ratios and a history. Wait, wait, wait. Why are we wary of dividend paying companies? I mean, hasn't the third of the S&P 500 growth been dividends? I mean, if we think about that for a second, you know, boring quarterly payments are kind of not boring after all, when it comes to long-term performance. So look, let's not, don't take this personally,

Nicole. I think we're getting at the fabric of investing. Which means take it personally. It's like all due respect. With all due respect, God bless your soul. But if we were from the South, we'd see something like that. Are you from the South? Where are you from? No, I'm from LA. Bless your heart. Southern LA. Southern LA, maybe, I don't know. So I'm saying if you if you're investing in a company that yields 7 percent and it goes down 5 percent because they're you know, they they've had a terrible release or because if they're if they're trending down because they've made a bad acquisition and it's actually going to compromise their balance sheet, you've given up that dividend. You've effectively, you know, that 7% dividend yield is now a 2% dividend yield. I mean, it can fluctuate. The point is that over the long term, dividends do compound, and it's wonderful to see. If you reinvest them. You reinvest them. I agree with that. It's great to see a portfolio yield. And I do that with my

money, my Constellation brands, my Disney's, my JP Morgan's. So my Pfizer's, my Merck's, my Ford GM, these companies pay great dividends. I love investing in these names. By the way, every name I just invested in, I just talked about. So I'm waiting for the insult. So I love dividends too. All right. So can't we just get along? I mean, I just want to point out that buying a company just for their dividend, I believe, can be dangerous. Buy a company because it's a great company that pays a dividend and pays a decent dividend. And it doesn't have to be the highest dividend. I mean, look at look at look at G. But what about just funds if we're not buying individual stocks?

Again, we're not looking at Bloomberg terminals all day long. we're not looking at Bloomberg terminals all day long. And if we want to buy ETFs that are dividend paying ETFs, or, you know, back to where we started this conversation with REITs, where it actually gets, you know, good tax love if they're dividend paying. We all we all love good love, and especially good tax love. And so, you know, when I think about REITs, first of all, great diversification, great opportunity to own companies that I think it really is about a yield investment. I think in many cases, as you pointed out, the dividends that are paid by a REIT on some level are not actually as efficient as, you have to be careful, they're not often as efficient as the divs that are paid. You know, the capital gains tax that you can have tax that you might have to pay on a Disney dividend. But they are typically subject to at least the 20% pass-through designation. So sometimes they're

not as tax efficient, but generally, I'd say they're very efficient. And I'd say in many cases, REITs are ways to get exposure to everything from trends in both real estate, but also retail, shopping trends, things like that. If you think about the interest rate sensitivity that REITs might have because of the mortgage dynamics attached to the underlying tenants or the business dynamics of the underlying tenants in a retail property REIT, for example. Simon Property, so SPG, I think they've underperformed the S&P this year. Everything's down, but Simon Property has underperformed.

Now, this is a case where I would be less concerned about that underperformance, and I would be very excited to be receiving that 6% to 7% yield on an annual basis. Because I think Simon Property has proven over time that they have high quality properties, that they have high quality tenants, and that they over time, especially, and you saw this through the lows of COVID, they actually were very resilient. And the last thing you wanted to be doing was running out during a time of interest rate sensitivity at SPG. And in fact, you had a huge recovery. And I think that showed that over time, REITs deliver. And I think REITs deliver because, again, the diversification that they have, not just to you own that product, but that in and of

itself typically is exposed to a major portfolio of underlying properties. I think in the case of Simon Property Group, I think it's 200 properties or so. So they, by the nature of what they do, that's what they do. Obviously, they're assessing the credit quality of every one of their tenants or their investments. So yeah, I'm a big fan of REITs. I think if you look at the REIT index, I think it's down more or less in line with the market this year. But you are getting paid a higher dip. Hold on to your wallets, boys and girls. Money Rehab will be right back.

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Co-hosts can do what you don't have time for, like managing your reservations, messaging your guests, giving support at the property, or even create your listing for you. I always want to line up a reservation for my house when I'm traveling for work, but sometimes I just don't get around to it because getting ready to travel always feels like a scramble, so I don't end up making time to make my house look guest-friendly. I guess that's the best way to put it. But I'm matching with a co-host, so I can still make that extra cash while also making it easy on myself. Find a co-host at Airbnb.com slash host.

Now for some more money rehab. Yeah, Simon, property, just so you know, like, if you go to those outlet malls, those are Simon properties. You're not going to outlet malls, Nicole. You're shopping on Rodeo Drive. Come on. I mean, you're going. It's okay. I love an outlet mall. I love a deal. I mean, I am all about a deal. I am all about a deal. Rich people stay rich by acting like they're poor and poor people stay poor by acting like they're rich. I couldn't agree more. But we've thrown down a lot of esoteric knowledge. So yeah, Simon Property Group, SPG, down 40%, performing worse than the market. Public storage, I think you mentioned,

down 17 percent, performing slightly better than the market. I would love to just step back for a second. And anyone who doesn't know what a REIT is, can you just describe what that is and how to buy them? Not all of them can be bought on a public exchange, but many of them can. buy them? Not all of them can be bought on a public exchange, but many of them can. Yeah. So in a REIT, which is a real estate investment trust, an investor basically has exposure to the income. And typically, I think by definition, it has to be 90% or more of the income that is paid out from the underlying properties by the Simon Property Group or the Kimco Realty or the Blackstones or these companies that really are at the center of some of these enormous portfolios of companies. And typically, they are investing in a particular

sector. So you might have exposure to office properties. You might have exposure to hospitals. You might have exposure to health care. You may have exposure to outlet malls. You may have exposure to arenas. You may have exposure to residential. You may have exposure to multifamily residential. So there are ways to kind of dig into the particular flavors of the underlying portfolios of properties, but that either way, again, there are rules that it kind of lets you, you know, the investor at home, you're a landlord. You are now, you know, you are now effectively an equity holder in the company that is providing in many cases, either the underlying real estate or in many cases, services. There's a REIT called Digital Realty Trust. I think the ticker is DLR. DLR is kind of in an exciting space. They are helping to develop data centers and cloud infrastructure and cell towers. And so to some extent, they've been right in the sweet spot of where there's been such an enormous build out in infrastructure in our country and

where if you've been watching CNBC or you've been listening to Nicole, you've been hearing all about these trends in cloud and where the biggest companies in the world are dominating. But this is, again, it's the picks and shovels of investing on some level, and it's consistent. So rather than taking a big swing at wanting to own the heavy growth that's coming with a crowd strike, who's effectively, they're operating in the cloud, they're operating in a digital environment where some of the things that Digital Realty Trust is supporting and some of the companies that it's investing in, or leases property to, some of the most exciting high growth tech companies in the world are reliant on. So it's a diversified way to get exposure

to typically, again, rental or income that comes back to the structure. A REIT is a legal structure. But I think over time, if you look at reinvesting, it actually has had periods where it significantly outperformed the S&P. And again, what you're talking about, Nicole, a compounded yield over time, where I think for a 15-year period, kind of going into the end of 2020, maybe 20, early 2021 was the last stat I think I saw on this. But I think there was about an 11% or 12% yield on the REIT index. And I think it outperformed the S&P by 200 or 300 basis points. Now, we have these periods in the market where all it takes is a couple of big drawdowns, and you can pick data points, and you could say something's outperformed something from here to there. You're here to talk to investors about the long term, and you're here to talk to them about

methodical, predictable, safe, and consistent steps to investing. And you're here to talk to them about methodical, predictable, safe and consistent steps to investing. And I think REITs belong into that basket. And in general terms, how do REITs do in bull versus bear markets? And how do interest rates affect the ROI on REITs? I think REITs can have cyclicality to them, and they can have some risk to exposure through moments of cyclicality, especially again, let's go back to the last couple of years. In fact, even in the last six months, what we've seen with something like a Boston Properties Group or a Kimco Realty is that these REITs were kind of defensive in the first leg down of the market. They were absolutely outperforming the NASDAQ. They were outperforming the tech sector. They were certainly outperforming

a high multiple tech sector. And it was a case where I think where they've suffered in the last six months is really as a function of the correlation to rising rates. So the minute that the Fed started raising rates, you started to see some of this underperformance. And I think that's ultimately something that over time, again, is worked through. I think from an investor's perspective, this is probably a particularly interesting time to be investing in REITs because I think you will get a combination of capital appreciation and yield over the next couple of years. And again, you're not looking to trade this. You're looking at dividends. I know you don't love my love for dividends. We've got to have a kumbaya on this. We're here. I'm kumbaya.

Yeah. Yeah. Kumbaya all day long. But all REITs, just to be clear, all REITs pay dividends. Yes. Yes. In fact, they are obligated to pay. Well, they're incentivized to pay. Yes. As long as the REIT pays out 90% of its taxable income as dividends, it avoids corporate taxation. So they're not just doing it for funsies and out of the goodness of their heart. So there's a big incentive. The issue is that there are times that it could be 90% or more of nothing, or it could be 90% more.

I mean, again, that's typically, that's a devastation scenario. I'm just saying, but go look at the chart of Simon Properties Group from pre-COVID to the lows of COVID. Like everything, by the way, those are some pretty astounding charts. But malls were closed. Gap was going out of business, or so we thought, right? Macy's was going out of business, or so we thought. And notice the dramatic use of, or so we thought, because obviously, those are opportunities typically. But the sensitivity of the Simon Properties Group REIT to the retail experience was a beta probably two times. In other words, it was under more pressure in some cases than even the underlying retailers, because the presumption is you had tenants who were not

going to pay the rent. Over the long term, that's just not how it goes. For today's tip, you can take straight to the bank. Again, REITs are an excellent way to get into the real estate game without having to spackle a wall. But for newbie investors, I suggest starting with index funds before REITs so that you can start your portfolio with simple diversification before layering in investments focused on one industry. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson.

Our mascots are Penny and Minzy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.