Listen to the podcast above or on the go via Apple Podcasts or Spotify.
- 6:00 – REITs for insulation and income generation during potential recession
- 12:50 – Are industrial REITs underappreciated?
- 22:10 – Concerns about the sun belt region, primarily Florida
- 37:00 – STAG Industrial’s (NYSE:STAG) consistent earnings and dividend growth
- 44:20 – (NYSE:VICI) and gaming REITs
Transcript
Kirk Spano: Hello, everybody. Kirk Spano with Seeking Alpha’s Investing Experts. And today, we will be interviewing Brad Thomas, who is a real estate expert that I’ve been following for, boy, quite a long time. His service on Seeking Alpha is iREIT on Alpha.
Hey, Brad, how are you doing today?
Brad Thomas: Kirk, it’s great to hear from you, and I’m really happy to be on this channel with you.
KS: Yes. I’ve done a few interviews now and I’ve been looking forward to talking to you, give you a couple of reasons why. One, I’ve been reading you a long time, and I’ve been involved in real estate investing about 20 years now. And I do a few things that are differently than most investors. I’m not the giant REIT guy that you are. Although, we have a basket of about a dozen REITs that we follow for various reasons, and I know that your universe is probably a little bit bigger than that.
So we want to get some of your ideas. I’ve been working with some real estate firms, development firms, private equity firms for a number of years now. And we have certain thesis about what we’re looking to invest in and why. But mainly, it’s for accredited investors. So that leaves a lot of people on the sideline. REITs are the alternative for them. And you have a lot of the experience that I do and probably way more. So I’d like to just hear from you what has, 30 years in real estate, taught you? I saw that in one of your articles.
BT: Well, I guess, Kirk, I’m going to try to provide the Reader’s Digest version of that. I think I could literally write a book on that. But – and by the way, I enjoy those types of articles on Seeking Alpha, especially the – what I call the lessons learned articles. And boy, there are a lot of lessons that I could fill up probably many, many books with.
But look, I think the main thing, it really pointed me to the REIT sector is all of these lessons and all of these really adverse times that I went through. So I had a business partnership that unraveled and it was very difficult to unwind all of the partnerships and all the LLCs that we owned together.
And so you can now see clearly my desire to have professional management and SEC reporting and liquidity, because when you go through those bad times in the real estate sector, I’m referring to the private sector, of course, you don’t have – there’s no button that you can hit that says, “Okay, I want to liquidate, I want to eject my business partner or the manager from this deal.”
So it took me about a decade of really tough, tough, tough times. And Kirk, that’s about the same time that I landed on Seeking Alpha was when I was going through kind of the end of this, we’re coming out of The Great Recession. I’d gone through a pretty tough time with this business partner of mine and unraveling all of this was not easy. It was – it took a long time to really get – to get back on my feet. I signed a lot of personal guarantees. That was very challenging.
And so I’m happy to have landed on Seeking Alpha and it was just one of the best things that I’ve ever done. And because now I can write about not only some of these tough times, but some of these losing deals, but also some of these good deals, and really helping readers to navigate through this world.
And so REITs are great because of that. I mean, you have the liquidity, you have the transparency, you have the diversification, you have most of the time solid management, although there are some that you know, that don’t have good management.
So anyway, that’s really the Reader’s Digest version, I would say. There’s a lot that I can unpack in 30 years, and I’ll definitely look forward to writing more articles like this, so I could provide some more of those details for our readers.
KS: One of the topics that’s been in a couple of your articles recently has been the idea that we may have a recession coming. And how do we use REITs as a bit of insulation and income generation during a potential recession? What are we looking for as far as characteristics go with those types of REITs? What are your thoughts on REITs that should stand up to a recession? Do you even think that we need to worry about that just from your experience with cycles?
BT: I wish I knew – if we were going into a recession or not, some argue we’re in a recession. From the – and I look at this, it’s a changing – every day is different. And so I’m of the belief now that maybe we may avoid a recession, but I’m preparing our readers and our base for a recession because having lived through the great one myself, I really think there’s so much an investor can utilize from looking at how real estate and REITs and specifically these property sectors have managed through these various recessions. And now, I’ve lived through quite a few.
So I’m preparing, and I’m preparing our team for recession. And so some of the sectors that we’re really avoiding completely are, of course, the hotel sector. The hotel sector typically does not do very well in recessions at all. And again, we can rely on history now to look at all the lodging REITs and how they’ve underperformed in those recessions.
If there’s one subsector of lodging that probably, I would say, I would not necessarily recommend it, but I’d probably say is probably the most defensive sector is the limited service sector. But overall, I mean, we’re staying clear of lodging right now.
Retail, I think, is just going to be fine, especially some of the categories that we really like more, like the necessity grocery chains, grocery anchored shopping centers would be kind of one category. But retail has actually held up pretty well. And so – but I would say limiting your exposure to retail as we potentially enter a recession is something I would definitely maintain a more moderate exposure to.
In terms of sectors that I think are more defensive, net lease has always been for me a more attractive property sector. Obviously, the long-term long duration leases certainly provide that predictable revenue. We look harder though at the companies that support that revenue or generate that revenue.
So right now, I like those investment-grade backed tenants like Realty Income and Agree. Realty ticker (NYSE:O), and ticker (NYSE:ADC). They both have a large number of investment-grade rated tenants. We think those are going to be extremely defensive in this cycle.
And, of course, if we go back to 2008, 2009, all three of these larger net lease REITs Realty Income and W. P. Carey (NYSE:WPC) and National Retail Properties (NYSE:NNN), all did very well before, during and after the recession. They both and all the – all three of those increased dividends on 2008, 2009.
Of course, Agree had some struggles. And I think it really, it’s more of a lessons learned for Agree. I know the CEO really, Joey, really well. And I’m glad to see Joey interacting on Seeking Alpha. He’s one of the few CEOs, but he does get into the chatroom, which is great.
And so – but Agree did have to make some necessary changes to their business model. They had a lot of borders exposure and Kmart exposure. And coming out of The Great Recession, they’ve really done a great job of recycling that entire portfolio, and it’s much more defensive. And it is definitely in line with a Realty Income business model today.
So I like those defensive spaces. Industrial has held up extremely well. And I think they will even in this potential recession. So we like those areas. One of the, I guess, the areas that I think is really interesting and I just covered this in detail in my new book, which is called REITs For Dummies, which is – should be published here this summer. And we talk about the technology trifecta. Meaning these sectors that are all correlated with their various technology.
So, for example, we have industrial, we have cell towers, and we have data centers, all three of those are combined and kind of create that three leg to the stool type of business. And what’s interesting is you look at those companies and the growth profile of all three of those sectors and they’ve all – they all have and will continue to generate above average growth, earnings growth and dividend growth.
So technology really is a great place to invest through real estate. We’re seeing all of this AI craze right now. And the automated vehicles and all of that – all the technology that we’re seeing today is really if it weren’t for the data centers, none of this would even occur. I mean, the whole infrastructure that supports AI or – is the data center business.
So we think that we’re extremely bullish with data centers right now. And, of course, there’s some really good, really attractive pricing right now in that sector. Same goes for the cell tower space. We think there’s some really good attractive names there. And, of course, the industrial sector as well, which is large – largely supported by e-commerce.
So those are areas that I think we’re really looking hard at. And again, this is a great opportunity to be buying REITs right now. Obviously, we’re still kind of in the middle of this rate increase. But I think at some point in the not near future, we will see a permanent pause, and I think that that will be the time where you’re going to start to see share prices really starting to revert towards the mean. So it’s a great time to be owning REITs today, but we’re very selective looking at and at quality focusing on the underlying earnings.
KS: Yes. A lot of the things that you just talked about are similar to what we have been talking about. So let’s talk about big secular trends and playing cycles and expectations from investors because I think that first of all, I think people ignore the big secular trends, which you just talked about a little bit.
I don’t think they understand in general that cycles are largely dependent on monetary conditions. And I don’t think people often set proper expectations on their investments. And all these things have led to why most investors get a low single-digit return over time is because they set it and forget it. And they don’t truly know the underlying story and fundamentals of what they’re investing in.
So either they invest in high expense funds or they invest in things that they don’t know well enough, which is one of the things that Warren Buffett talks about all the time. If you had that punch card with only 20 stocks that you could buy, you would get to know those stocks a whole lot better, those companies a whole lot better.
One of the themes that you talked about was technology. And I have been talking to people about this since way back in my MarketWatch days, how technology was going to change the world. Last interview I did with Ramy, talked about the singularity and the changes in technology and AI. I think, probably, the people who listen to that, they started to understand that the changes that we’re seeing in everything, including down to real estate, is accelerating.
So I mentioned earlier that I do some private equity investing, and we take a look at the trends and what’s coming. And I know that you’ve done things like this as well. I’ve seen some of the projects that you’ve been involved with historically and dating back to your partnership. What do you think is going to happen with the reshoring?
So let’s talk about the industrial space. You have reshoring going on. And there are parts of the country that are going to do very well from what we can tell and this is a private equity focus for us, it’s the Midwest. You have Intel (INTC) and Ford (F) expanding in Kentucky and Ohio. You have all sorts of growth happening in Wisconsin. Business is leaving Illinois. Minneapolis area is seeing some of these big upticks.
In fact, what we saw in the Milwaukee area is population go up for the first time in, like, 35 or 40 years recently. It wasn’t much, but the outflow from the Midwest to the coasts in Florida, Southwest, if it’s not extremely slowing down, it’s starting to slow down and it might even be reversing that. We don’t know if we’re in pre-game batting practice or if we’re already in the first inning, but definitely the game is afoot.
What parts of the country are you looking at as far as geography? Because I think geography is important. Which industries do you really like? We’re in Prologis (NYSE:PLD) and a couple of other ETFs in that space, I don’t really want to give the names. But maybe you can drop them if you want. What industrial REITs do you like? Because I think that that is something that people are underappreciating.
BT: Yes. Well, of course, I am – currently today, I’m – I live in South Carolina. So I will start with this little one liner, nothing could be finer than to live in Carolina. And I think that was a song, but at any rate, the Carolinas are just exploding. I mean, I live here in a little town called Spartanburg, South Carolina, which some of our people here call it Sparkle City.
And what’s really – I’ve been here now three decades. And I didn’t grow up here. I grew up in Greenville, South Carolina, which is our neighboring city. And the MSA, which includes Greenville and Spartanburg and Andersen, is around a million people. Right in the middle of this MSA, there’s an automobile plant that opened up around 25 years ago called BMW (OTCPK:BMWYY).
KS: A little company
BT: Yes, exactly. And before BMW, there was – we were essentially known as the textile town. I mean, we had a lot of textiles here. We have – there’s no labor influence whatsoever in South Carolina. That’s one of the reasons that many businesses are flocking to this community. But it’s really been interesting to see the explosion of demand, and it really started with BMW.
Actually, I built – as a developer, I built one of the suppliers’ facilities for BMW when they came to town. This was about a 200,000 square foot building that now is over a million square feet. You’ve got Michelin’s North American headquarters based here. So you’ve got – we’ve gotten a number of automobile suppliers and, of course, Clemson University, where I also guest lecture is – has their own automotive engineering school.
So, what’s happened is a lot of those jobs that are – were in Detroit, or were up in Maine, have now come down to the South because we’ve got a great workforce. We’ve got terrific weather. We’ve got no labor issues and a lot of nice people, really nice people.
And so I will tell you that migration is occurring for a reason and it’s not just in South Carolina and North Carolina, it’s in Georgia, it’s in Alabama, it’s in Florida, it’s in Texas. We’ve got now four of our my colleagues: Williams Equity Research, Justin Law, and others are based in Texas. And we’re seeing – they’re seeing the same thing in Austin and in Dallas.
So we’re seeing a significant demand in that sector, and I think it’s going to continue. I’m actually going to tour a lithium property hopefully, in the next day or two, that’s 30 miles away from me in a little town called Kings Mountain, North Carolina, 800 acres.
Albemarle (ALB) is getting ready to fire up a new mining facility that’s going to be enormous. Many people don’t know exactly what’s going on with Albemarle, but we’ve been really digging deep behind this company. We just published a research report on Seeking Alpha a couple of weeks ago.
So I’m going to tell you the demand here is extremely strong, and it’s not only manufacturing, of course, it’s retail, it’s multifamily, and even office. Office has got its issues, and there’s no question about it that the office space – we’re seeing tremendous changes in office utilization, especially in gateway markets in New York City and San Francisco, definitely.
But even in the Southeast, I’m still bullish with companies like Highwoods Properties Trust, ticker (NYSE:HIW), headquartered in Raleigh, Durham, North Carolina, but they’ve got office properties all up and down the Sunbelt. And we think that’s definitely the – and their fundamentals are extremely strong. There’s a lot of growth.
And so, again, I think the Sunbelt market is definitely a way to play. If you’re going to start, I know you like poker, Kirk. So if you’re going to put chips on a – in a geography, I would be overweighting those chips in the Sunbelt right now. Those markets you mentioned, I was in Minnesota back in December, it was freezing. It was negative like 10 degrees when I was there, meeting with Dividend Sensei who’s another great writer working with us here.
But those are all great towns, but I’m – I think the Sunbelt is really exploding, and I see it every single day. Warehouses are just continuing to pop up along the ID5 corridor, which of course connects Atlanta to Charlotte. So it’s just a great market, and I think investors would – should really be looking at investing in those types of markets for sure.
KS: I part agree with you on that. I part don’t agree with you on that. So let’s make a market here and talk about that. So I like the Carolina area, Virginia, Tennessee. We – we’ve invested in Tennessee. And again, I looked through things through the viewpoint of more of a private equity investor, and so we have to translate that to public markets. But I made that transition to thinking less like a broker, like, I had to back when I was a broker, to when I became an investment adviser, I could look at things differently, different regulations, different group of people I’m working with.
And I really like to look for cheap because cheap builds in a margin of safety that you don’t get when you’re paying full price for something, right? I’m sure we agree on that. My concern with the Sun belt is this, in particular, Florida. We look at things through the viewpoint of not only private equity, but also migration patterns, rents, and climate resiliency.
We are desperately afraid of Florida because we know that they have billions and billions of dollars of infrastructure that they’re going to have to repair and fortify over the next 20 years. Insurance rates are sky high. Rents have flattened in the last couple of quarters, which I think is a signal that growth is slowing there, and you really have an aging population.
So you have the combination of an aging population in Florida, it’s not a very climate resilient place. Insurance rates show that rents are flattening. You have the boom going in on the financial industry down around Ken Griffin in Citadel in Miami.
I think that probably is a supportive thing for that area, and that will help them build the 30-foot walls that are a football field thick along the ocean that they’re going to need. If you’ve been to New Orleans, you’ve seen that they had to do that along the Mississippi. And these are tremendously expensive projects.
So we don’t really invest in Florida anymore. We did years ago, especially in 2020. But all the way back, I’d say, 20 years ago, we were picking out spots down there. Do you separate where you live, an area you live from Florida, or do you bundle it all together? How do you pick and choose where do you really want your dollars to go?
BT: Oh, that’s a great question. And I kind of agree, Florida is definitely an outlier. But kind of drilling down to Florida, again, I’ve got a place in Florida and an office in Florida, and I’m down there quite a bit in a car, a car down there. So I’m not a resident yet, but maybe the car is a resident.
KS: Okay.
BT: But I may be soon, who knows. But, look, I think you’re right. I mean, in certain sectors, I would avoid in Florida. And in multifamily, you’re right, it’s got the – the department that I rent down there, rent went up 60%. And you’re right, it’s flattened and the renewal comes up in three months, so it’d be interesting to see what happens with that.
But it’s definitely I would stay away from multifamily. That – what I really like about Florida is the aging population. You just can’t deny the demographics of Florida, and the aging population has shifted there. My dad passed away about 4 years ago, and he retired in Florida and was buried in Florida, Veteran Cemetery there. And it’s just – Florida is definitely – so much demand from people coming down to retire in Florida.
And so the sectors that I would really invest in would be manufactured housing, number one, which by the way also includes Marinas, one of the companies we – that I’m invested in Sun Communities (NYSE:SUI). They also own a very large Marinas – a number of large Marinas, but one in particular is called Safe Harbor, which is in Fort Lauderdale, one of the largest in the U.S.
So I like manufactured housing. I like – as a result of the aging population, I like the healthcare business down there. There are a number of really high-quality medical office buildings down in Florida owned by Healthcare REIT (NYSE:HR) and Physicians Realty (NYSE:DOC). So healthcare certainly is correlated to that aging population.
And then I think certain retail, I like – in Florida, again, all of this – all of the consumer demand and all the people moving to Florida, but there are certain categories I agree that are getting frothy. And frankly, if I were in the – because we’re actually investing in private equity as well, if I were looking at private money, I would not – I would avoid Florida.
The only reason I own any real estate in Florida is through my REITs. And obviously, with their cost of capital advantage and their scale advantage, they’re able to generate really solid returns. So I like Florida for diversification.
I do worry there are certainly risks that you know, with the weather, hurricanes, I haven’t gone through a hurricane in Florida, I have in South Carolina, but I think you – I think definitely there are certainly risks there. But again, I think it’s all part of an asset allocation strategy. And I like the fact I do have exposure to Florida.
But I will say, I mean, the Carolinas again going back to kind of my home here, home state. It’s some very attractive opportunities here and just not as pricey. So you can get a lot more for your money, going back to the margin of safety here in the Carolinas and in Georgia and Alabama, some of those markets. So for sure.
So – but that’s a great question. And I think Florida is definitely going to be interesting. I’m glad we didn’t talk politics, Kirk, because I really didn’t want to, but obviously that’s another risk if you want to throw that in for Florida.
KS: Yes, right. Does Disney (DIS) end up picking up and leaving and going to Tennessee something like that. Yes, I love Florida. I hang out on Hollywood Beach and been to the Keys and been on a Key Lime tasting tour. I mean, it’s hard to argue with the lifestyle in Florida. But the numbers – because I’ve been looking for a second home in a low-tax state. And when you add up all the numbers, the argument for Florida isn’t as strong as it was 10, 20 years ago, right?
So the insurance costs and other costs of living. So what if your income tax is 5% or 10% lower, if all your other expenses are higher. So now you’re just making a lifestyle decision at some level and you have to weigh the pros and cons on your own personal ledger.
In your region because I really – I have a friend with Bank of America, and I’ve been following along the development. I was lucky enough in college that a friend’s dad took us to South Carolina, and I got to see what was going on there. And, man, it’s really developed.
If you had to put it in terms of a baseball game or a football game, let’s say baseball because I played baseball 35 years, and for me, it’s easy to figure out the analogy, I think Florida is probably eighth inning or ninth inning. But I think near you, it’s the middle of the game somewhere, which means that you have a lot of the S-curve left to climb. Do you think that that’s probably about right? Or where would you put it?
BT: Yes. That’s a great point. I mean up until recently, Kirk, I would say what I loved about this particularly Greenville, Spartanburg, this market in it – the – most of the markets like this in the Carolinas, Raleigh, Durham, Charleston, but these markets never had really highs and never had really big lows. So when a recession hit, we didn’t feel it as hard. It was just not as we just there – you didn’t have the bigger shocks that you have in, say, Florida, for example.
So – but what’s happened is now Greenville, Spartanburg is on the map, kind of going back to REITs, I mean, I didn’t buy many REITs 20 years ago. But, I mean, I sold some properties two REITs back then, primarily like Realty Income and some net lease stuff when I was a developer, few shopping centers. But now there’s more and more REITs that have found out about Greenville, Spartanburg.
For example, STAG Industrial (STAG) has a large portfolio, and they’re building a pretty substantial spec warehouse now right very close to BMW. And, of course, Simon (NYSE:SPG) is the dominant mall landlord in the market as well. A number of apartment – Mid-America Apartment Communities, which I also own (NYSE:MAA), they’ve got, I think, 10 communities in the Greenville, Spartanburg market.
So what’s happened is Greenville, Spartanburg is not now the little secret out there, it’s pretty well known and again, a lot of jobs coming here. So at some point, it could be expensive. But right now, I would agree with your analogy. You were probably in the fourth or fifth inning. And I hope we don’t get to the eighth or ninth inning. I hope things can maintain. Obviously, there are cost to grow and we pay the price with a lot more traffic and infrastructure here that’s needed. But, yes, it’s a great place and I think a great place to invest capital. And I like those markets.
I mean, I like – there are a number of REITs that invest in secondary markets like these. And again, I go back to Highwoods again. They’re in – a lot of they’re in Nashville, which is a great market. By the way, Tanger Outlets (NYSE:SKT) just open up a new outlet center there. I need to get over and take a look at that. But there are a lot of markets around the Southeast that I think are extremely attractive. And again, that’s really important.
And I’m not avoiding West Coast markets altogether. There’s companies like Kilroy, which is a primary life science landlord, or Essex Property Trust, which is a pure play West Coast apartment landlord. But those markets have been extremely challenged. And in terms of diversification, I would definitely try to maintain more modest exposure to those markets.
I had a reader asked me recently about Essex (NYSE:ESS). And my reply was, I definitely – I like Essex, but I would keep them a more modest exposure. I like Mid-America, I like Camden Property Trust (NYSE:CPT), those are kind of my two favorite in the multifamily space and probably not have as much exposure in Essex, given all the issues that we’re seeing in San Francisco and in other markets in California.
KS: I just got back from San Francisco, and I was there to meet with clients and look at real estate and get to know the market better for two different companies that I consult with, two funds that I consult to. And I will tell you, I was shocked at how bad San Francisco was right now.
So the transition and the fixing of San Francisco, we’re putting a two to four-year timeframe on just getting started. So it might be five to 10 years before you see real appreciation in those properties again. Because the transition of a lot of the commercial property in San Francisco proper is expensive, right? It’s going to have to go mixed use. It’s going to have to get redeveloped and they have to start with, frankly, some political solutions in the city itself on how they deal with their homeless problem and the drug abuse.
I will say it’s fixable because I just saw it happen in Milwaukee. Milwaukee fixed to 90% of their homeless problem in the last two years. And it was a pretty simple fix. I think we copied Houston maybe, and I forget the other city that did the same thing. It’s not politically popular, but it works.
So I would expect everybody to take same approach and not going to get into it here. But, yes, I’m cautious with California because I think the prices are high and coming down. And I don’t know how long the down cycle lasts. I don’t know how deep it gets. There are pockets.
One of the investors that I actually manage money for, he’s invested in Hollywood and Burbank area and doing well. But there are other parts of LA and even San Diego and San Francisco and some of the other cities that you look at and you go, hoo, oh, boy, boy.
However, the thing people don’t always grasp with California is that Silicon Valley, which I got to tour on this trip, is massive. And I knew it was massive, but it was even more massive than I thought. I think it’s something like 10% or 12% of the U.S. economy comes out of that county.
So when we take a look at California, I would tell people, I think there’s awesome opportunities coming there. I don’t think it’s immediate. But it’s something to take a look at because at some point the transition ends, the fixes end, and it just goes into another massive bull market because it is tough to beat California when it comes to economics and climate and everything else.
So they have to fix their forest situation. They have a lot of things to fix. The water that they’ve gotten recently hopefully keeps happening or at least they start doing what Las Vegas does and Las Vegas recycles like 99% of their water. So there’s fixes, but fixes are expensive and transitions take a long time. And people don’t like transitions, so they sell, and prices go way down.
I don’t know if prices in California are below fair value yet. They might just be at fair value. But if we can get them below fair value in the next couple of years, I would just tell people to put that in the back of their filing cabinet and say, hey, I got to remember to look at California because when it comes roaring back and it will, if I could have bought cheap at some point, and again, I think it’s the next couple years maybe be a great opportunity.
Let’s get into the company part of the program here. You name dropped the company. I didn’t want to say earlier, STAG Industrial (STAG). I love STAG Industrial. I like how they fix up Class B properties or Class C properties and turn them into real income generators and growth engines. I think STAG with the reshoring that’s going on that’s going to last for another decade or two, I think, STAG has huge growth potential on top of the income that they pay. What’s your take on STAG?
BT: Yes. STAG is a great company. We picked up coverage right when they listed, which has been now, I think, 2009 or something like that, maybe in ‘10 or ‘11 over a decade. And STAG, again, they started out as a small company. They didn’t have a lot of research. I think we were the first to provide research on STAG.
One of the – I guess one of the issues we saw with them early was they had a relatively high payout ratio when they listed. And they obviously did that purposely to attract retail investors. But what I admire about STAG and what the management team has done, of course, Ben Butcher is no longer the CEO, he’s this Chairman now.
But what Ben did when he was CEO over a decade is he was able to do something that many other REITs could not do. And that is grow the dividend and reduce the payout ratio. Now that sounds easy, but it’s not. And so they had to grow their AFFO per share and could drop that payout ratio down, they wanted to do both, and they executed on that. And now they got that payout ratio down to a very manageable level.
Right now the dividend yield is 4%. You may say that’s not very high, especially in this high interest rate world. But what you get with STAG is very consistent earnings growth now that – and now very consistent dividend growth. Right now, analysts have forecasted about 5% growth in AFFO in ‘24, ’25, that’s very consistent with their business model. Again, they’ve been able to get investment grade balance sheet. So this is very safe money.
The other thing I like that they’ve done, excuse me, is they have – they pay monthly dividends. And again, for a lot of investors, paying monthly is no big deal, but they did that purposely to attract retail investors And I think for a lot of investors, that’s really important to have that that monthly income stream, especially a retiree who’s living on a social security plus dividends and have that money coming in every month.
So company has done a great job. Definitely an easy buy for us right now. A little pricey I might add, so I would definitely wait on a pullback in terms of jumping all in today, but I’m certainly happy to have STAG in the portfolio, and I’ve had it in my portfolio for probably a decade or so.
KS: Right. It’s – I like the company. I think that the chances of negative surprises are very low, and I think that the opportunity or the outlook for positive surprises is unusually high. And I tie this to the whole reshoring that’s going on. And I like their management. I agree it’s pricey right now, but we’re watching it. If we can get it in the ‘20s again somewhere, I think that it kind of becomes a no-brainer.
So if you get a macro-driven stock market correction, I think, this is one of the ones that people again should put in their file cabinet and say, I had to take a look at these guys because they don’t have a lot of downside and I think they have a lot of upside. It doesn’t mean that it’ll manifest. It doesn’t mean they’ll execute. But the track record suggests that they will.
The secular trends are on their side. And if you can invest near the bottom of the cycle, get three, four, five years of great ownership out of it on the next upcycle and maybe longer, I’m forecasting a huge millennial economic boom starting soon. And I think it’s going to be very similar to the baby boomer boom of the ‘80s and ‘90s and early 2000s.
So I’m on board with Tom Lee over at Fundstrat and FS Insight. People see him on TV all the time. He’s one of the institutional investors that I follow. And I think that we’re going to see a transition period here for the next couple of years. It has to do with energy and technology and politics and geopolitical and currencies and everything else.
But as energy gets cheap, which it will, in the next few years, and as AI starts to make the economy even more efficient, right, we haven’t seen a lot of productivity growth, but I think we’re going to. I think that folks really should think that idea set through. It’s maybe more optimistic than most people believe or feel. But the gift of geography and technology and our system and everything else that we got going for America, I think, it all lines up that it’s going to be very supportive for STAG and companies like STAG.
So STAG compared to Prologis. Prologis is gigantic, right? And then STAG is the smaller company. So I kind of think of it like a small cap REIT with a lot of upside. Does that make sense to you?
BT: Yes. I think, of course, STAG is now $6 billion. Plymouth (NYSE:PLYM) is kind of a almost identical, PLYM to STAG, and they’re both based in Boston. I wonder and by the way, Plymouth is about $1 billion market cap. I’ve often wondered why STAG doesn’t just take them out, in other words, buy them.
The current AFFO yield, the equity yield for Plymouth right now is about 7%, probably a little more expensive for STAG today. I mean, they could have probably bought them somewhere 20 or below, but right now the share is about $23. But I definitely think Plymouth is kind of the next up and coming STAG.
And again, I think it – it’s – and by the way, I think, Kirk, I just finished an article on M&A. I think you’re going to see some M&A – more M&A industrially. We already saw the Prologis’ Duke deal unfold tremendous value with Prologis. And with that deal, I think, you’re going to see some more in industrial. And where I’m really thinking you’re going to see more net lease or M&A is in the net lease sector, there’s 17 or 18 net lease REITs right now. And that includes the two gaming REITs, by the way.
So I just finished an article and I’ve picked – or our team has picked three of the net lease REITs that we think will not exist in a year because they will get absorbed either through public M&A or private M&A.
KS: Since I’m in Las Vegas, then let’s talk about gaming REITs. I’m playing in the World Series of Poker right now. And I’m pretty hooked up in Las Vegas through relatives and friends. Got in on the Caesars deal pretty early on. And that, of course, when Caesar had been bankrupt before that, they spun out (VICI).
So a lot of people love VICI, and it’s been on my list. We’ve invested in it. I think some of my investors still hold it. I don’t have it in the accounts that I manage right now, and I have my reasons. What do you think about VICI?
BT: VICI was our best pick in 2022. It was the top. It was not only our best pick in ’22, we picked it, and they were the top performing REIT in equity and mortgage REIT in 2022. We have very high convictions for them in ‘23.
So far, this year, the sector in this – when I say the sector, there’s only other one gaming REIT, which is Gaming and Leisure, (NASDAQ:GLPI). Thanks in large part to the merger of VICI and MGM Growth Properties. That was transformational. But year-to-date, the two Gaming REITs are down about 1.8%.
So not necessarily crushing it this year, but VICI has – I mean, the management team is doing everything right. We’ve interviewed Ed Pitoniak, I don’t know how many times, the CEO, probably at least two dozen times since the Caesar’s deal was completed, and VICI was formed and it’s just amazing to see. This has to be the fastest-growing REIT. They got in the S&P 500 in record time and also want to give credit not only to their management team, I know all the c-suites pretty well, but also the Board.
You may or may not know that you’ve got Craig Macnab sitting on the Board. Craig was the former CEO of National Retail Properties. And there I could go through each of their Board members. They’ve got a really solid Board providing tremendous value. What’s really interesting with VICI though, and I think this is really unique is how they’ve been able to maintain extremely low G&A, especially compared to their peer group. I mean, these are huge assets that they manage.
So they don’t need that many people. They’re not really collecting that many rent checks. A lot of these leases are master leases, so they get – I don’t know how many total operators, but it’s not that many monthly payments they get. So their G&A costs are extremely low. They’re headquartered in New York. They’ve got a small office there. They don’t need tremendous overhead. And so they – I think these guys are really what I would call a consolidator machine.
I think you’re going to see them continue to conduct sale leasebacks. It’ll be interesting to see how far outside of the gaming sector they go. They like to call themselves more of an experiential REIT. They’ve got investments in gaming parks and other experiential, like Great Wolf is one example of that. But it’ll be interesting to see how far they expand that envelope in that experiential.
I think they should stay in the gaming space. There’s plenty of opportunity, especially when you consider Canada, which they ventured out into, as well as Europe, which I think is definitely on the radar. And Ed’s told me many times that they’ve got people, boots on the ground in Europe, so I would not be surprised to see some European news sooner than later.
But VICI is hitting all cylinders, cost to capital advantage, scale advantage, great management team, and just you couldn’t find another bet. And I know you’re in Vegas, so I would definitely be putting a lot of chips on VICI. I still have very high conviction for the company.
I like them better than gaming and leisure just I mean, I own gaming and leisure, but I like the more – I like the Las Vegas market. I think there’s a lot of dynamics in Vegas. You know, about the sports and everything going on there in the town. And look, in a recession kind of going back to that first question we talked about, look, I don’t know, I’ve been to Vegas. I think now 25 years, there’s one year that I did not miss going to Vegas out of 25, I used to go to the shopping center convention every single year. It was huge like the Super Bowl for retail, all the REITs are there, all the developers, all the retailers, and there’s one year I missed.
But I went through all of those except for The Great Recession. And what I found though is even in a recession, and Kirk, I’d love to get your feedback because you’re more boots on the ground than I’m for Vegas. But even in a recession, people are gambling.
In fact, I would argue that in a recession, as long as it’s modest, a modest one, I think you’re going to have more people playing blackjack and pulling those slots in a recession because they perhaps are down on their luck, they lost their job, whatever, but they’re going to go win it all back by spinning the wheel. So what are your thoughts on gaming and recessions?
BT: There are certain stocks that get beat up in a recession. And gambling and hotels and restaurants, there’s all sorts of recession bear market fatalities. And I think this is our thesis right now, that VICI could get dinged from a recession. And if you take a look at their chart and the chart of similar companies because VICI’s chart isn’t that long. But if you go back to Sands and you go to everybody else that’s in this space, the variance, which is a poker term, too, the variance of the share price is high.
So you’re going to get volatility. And if you get volatility in these stocks to the downside, VICI is one if you want a REITs that I think you have to buy. Again, we’re not in it now. I think the company is fairly valued right now. And I don’t buy fairly valued. But if they would get back down towards 20 again, I think that it becomes kind of a no-brainer.
So if it took a 30% digger, I think that you have to own it. Because I think that the nature of entertainment has changed for the millennials and for the Zs and whoever’s after the Zs. Are they going to start the alphabet over? I’m not really sure. But you take a look at Vegas right now. And last year, when I was here, I did some podcast. I wrote some articles. I think there’s some on Seeking Alpha, 40 days in the desert or seven days in the desert. I don’t know, you can take a look at my blog on Seeking Alpha. And I’ll write another one when I get back comparing poker to investing probably. But Last year, I thought it was the busiest I’d ever seen, and this year it’s busier.
So people go to Vegas, and I’ve been talking to people from around the world, talk to a Chinese guy who was from Feng Yi. And he didn’t think I knew what it was, and I did and we were talking and I go, you’ve been to Macau? He goes, yes, I go to Macau. Compare Macau and Las Vegas to me. And he just basically said, Macau is good, but everybody wants to go to Vegas.
So I think it’s clear that VICI has a sweet spot here. The risk for VICI is they get too aggressive, and they focus on growth at all costs, which Boards are prone to do. So you have to watch to make sure they don’t do that. I like their Board. However, bad things happen. And if you watch the mini-series Succession, you start to understand the corporate Boards, at least in my opinion, aren’t all that they’re cracked up to be.
I think that 40, 56 some around half of the people on Boards are worthless, but they get paid a lot of money. I don’t think that’s the case with VICI. But I like to see execution, and I like to see cheap prices for me to get in at. I think the execution has been there, but I think they’re starting to enter a phase where they have to expand out of Vegas. There’s not a lot of growth left in Vegas. The – this last stretch from the south end of the strip towards California, that’s it. There’s just no more land.
So you’re going to see growth in Vegas slow, for sure. There’s no doubt about that. And they’re going to have to replace that in other parts of the world. And I think that they are one of two REITs that I’m really excited to watch and see how they execute. So that’s where I’m at on VICI. I think that it’s just an okay investment right now from these prices, but it’s a great company. And it’s hard to ever be negative about a great company.
So that’s where I would come down on that. If they give it to me, if investors panic and just dump it out the baby with the bathwater, that’s what I’m looking for. If I can get this stock in the lower ‘20 again, I’m all in.
KS: All right. So folks, we are up against some hard time limits. And we’re going to talk about some other things in another call, but we’re going to stop at VICI. And I want to thank Brad Thomas for coming on, and we will be back with you. I think this is a great one to continue with. What do you think, Brad?
BT: Oh, man, let’s do it, and good luck in Vegas. I can’t wait to hear how you’re doing.
KS: All right. Take care, everybody.
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