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This episode was recorded on March sixteenth, 2023.

Transcript

Daniel Snyder: Welcome again. I am Daniel Snyder. And at this time, we’re joined by Brad Thomas to debate the stress within the banking sector and what it means for the true property business, in addition to REITs. We get his tackle if somebody ought to decide the (JEPI) ETF or Schwab’s (SCHD) ETF, in the event that they’re on the lookout for dividend yield and you are not going to wish to miss what he stated about that. And should you’re having fun with the present, please go away a score or evaluation in your platform of selection. It helps us hold making these episodes for you.

Now, let’s get to the interview. All proper. So it is a actual pleasure to have the person with over a 108,000 followers on Looking for Alpha becoming a member of the podcast at this time. Brad, how’s it going?

Brad Thomas: No downside, Daniel. It is nice to be on. And, yeah, 108,000. It is exhausting to consider, however I recognize each one in all them.

Daniel Snyder: So Brad, can I ask you to simply perhaps give a one to two-minute intro for the folks that do not know who you might be? How did you get into investing? And what do you do now?

Brad Thomas: Certain. So I began actually early, early age. My mom was in actual property, so I sort of watched her promote homes for – by way of center college and highschool. And determined, I suppose, once I was in faculty, I wished to get into actual property. It is at all times been an fascinating asset class. And so I obtained my actual property license at a really younger age. I used to be 17 and simply my freshman yr in in faculty.

And so I am going to provide the reader’s digest model as I spent 20 years or over 20 years, perhaps 25 years as an actual property developer. I began small and constructed – I truly purchased some townhouses and a few duplexes after which satisfied a banker to lend me cash to construct my first superior all partly retailer. That point, they had been privately held firm in lower than a 100 areas within the Carolinas as much as Roanoke, Virginia, the place they had been primarily based.

And so I began to construct shops throughout the Southeast for them. It was actually a great way for me to study easy methods to purchase actual property and rent architects and engineers, negotiate leases, which is a really essential a part of the worth creation course of. And so – and in addition to promote these properties, and create that full liquidity occasion, which is what I used to be doing.

So did that for various years. Constructed over 50 shops for Advance Auto Components (AAP), after which I went to O’Reilly Auto Components (ORLY) and moved as much as Greenback Common (DG) and Household Greenback and Blockbuster Video on the time. A few of you might not keep in mind Blockbuster, however I definitely do. And I watched the evolution in that business. It was actually fascinating to observe.

And I constructed various eating places: Outback, Applebee’s, Apple Home, IHOP, after which I moved into procuring facilities. And I discovered which you can, very similar to cell towers, by the best way, the place you may take a core tenant and add extra income to that current to the property and create larger returns and better revenue margin.

So I went into grocery shops, began constructing grocery anchored facilities After which Walmart was sort of the height of all of it the place I put collectively a combined use grasp plan neighborhood. Took me a few years to construct all of it out, however – anyway, in order that was the extent of it. However I discovered plenty of totally different property sectors, Daniel, and that gave me publicity to plenty of various things.

Industrial, I constructed for a number of the BMW suppliers in my hometown of Spartanburg, South Carolina. And my enterprise accomplice truly constructed golf programs and accommodations And so it was actually fascinating simply to see all of the totally different property sectors and the way you can create worth.

And so when the good recession hit, which now has been nearly a distant reminiscence, however that wasn’t actually a troublesome time for me as a result of I used to be truly unwinding my partnership, which was sort of very troublesome, very straining to my relationship and to my household as effectively. However then the good recession. And that is when principally all the pieces shutdown.

All of the banks, most of them closed, which is admittedly fascinating now that we’re seeing some elevated financial institution closures at this time, however I used to be proper there on the bottom flooring of all of that and watching all these banks fail. After which, after all, I landed on Looking for Alpha.

And I want I knew precisely how I landed on Looking for Alpha, but it surely actually does not matter. I did. It is most likely probably the greatest issues, Daniel, that I ever did. And right here I’m at this time, 108,000 followers. And I do not know, 13 years, my children have grown up on Looking for Alpha. So it is undoubtedly been a very a enjoyable time to do – to be on this enterprise and to construct a such a singular platform.

In fact, our staff, we’ve got two merchandise at Looking for Alpha. I learn on – Alpha is our REIT protection enterprise then we’ve got our Dividend Kings enterprise, which covers actually your entire dividend progress universe. So it is actually thrilling that we have been in a position to assemble that and I’ve obtained some nice friendships on Looking for Alpha. And once more, I wish to thanks once more and your organization for – Looking for Alpha for permitting me to be a part of that neighborhood.

Daniel Snyder: So I’ve obtained to ask you, you went from all this actual property growth. How did you get began with REIT investing and constructing out this product?

Brad Thomas: Yeah. So once I was a developer and, by the best way, I am nonetheless an actual property investor. I am truly doing a little fairly giant tasks now on the personal aspect. However once I was personal actual property developer, I’d promote a few of these properties to REITs. So I’d attend at numerous conferences. There was an enormous one which was referred to as The Worldwide Council of Purchasing Middle’s Annual Recon Convention. It was primarily based in Las Vegas, and I’d go, stroll by way of this convention. I used to be in my 20s on the time, even my early 20s proper out of school.

And I used to be simply amazed to see these enormous cubicles with these massive REITs, say, Kimco (KIM) and Simon Property Group (SPG) and Taubman, and I’d simply stroll round and simply be mesmerized by how a lot cash they had been spending on not solely the cubicles, however simply the entire convention. They might rent firms or folks like Aretha Franklin and just a few actually massive names to return in and put events in all this.

And admittedly, had I seen all that, I’d have most likely been in a position to predict the Nice Recession as a result of this was the wave of retail that I used to be proper there within the floor flooring. I constructed one of many first House Depot (HD) procuring facilities ever in South Carolina and sort of witnessed the evolution of the retail enterprise.

And in order that’s how I knew about REITs. I used to be uncovered to them. I ended up promoting a number of the properties, particularly a number of the procuring facilities I had developed and the web lease properties to some REITs like Realty Revenue (NYSE:O), which by the best way is now my largest holding and simply wrote an article on Looking for Alpha on Realty Revenue. That is the place I obtained to find out about these REITs.

And the truth that they’d simply dominating scale they usually had dominant price of capital. I imply, as a small city developer, there isn’t any means that I might compete with a REIT. And by way of the checks that they’d write. And so anyway, in order that’s how I obtained uncovered to the enterprise. And now having sort of gone full circle and being on either side, I’d – I am going to let you know REITs are simply completely – I am most likely the largest cheerleader on the planet with REITs.

However I’ll say, I imply, it is – they do have fairly good administration groups, not all, and there are definitely instances the place we do name out administration once they aren’t doing issues proper. However for the big half, we have got some actually good administration groups. And naturally, these, in contrast to once I was a developer, personal proprietor, I must cope with all of the complications, the roof leaks and the bathroom leaks are breakdowns and accumulating lease and evicting tenants and all of these issues, that is powerful.

I imply, landlord is just not a simple process. And so proudly owning REITs is known as a lot higher car, particularly for the person or common investor. So, yeah, I actually suppose it is – I discovered rather a lot. I do know this enterprise from the bottom up. And now that I spend an terrible lot of time with administration groups, I interview CEOs nearly day-after-day, and you’ll see plenty of that content material that I learn on Alpha, the place we publish plenty of video CEOs interviews.

And that is been a very priceless a part of not solely our platform that I learn on Alpha, however only for me personally to have the ability to work together with administration groups frequently. As a result of all 10 instances, I could not study as a lot about that particular firm. However I would study one thing or discover some clues about one in all their rivals which will allow me from shopping for shares or from making me multiply shares.

So it is actually good to have the sort of this massive circle of folks that we’ve got sources that we will go to for various articles and totally different analysis studies.

Daniel Snyder: So being so intertwined with actual property and understanding how that that sector is in such a partnership with banking. Are you apprehensive concerning the stress occurring within the banking sector proper now?

Brad Thomas: That is a fantastic query. I used to be truly on the cellphone final evening with a – one in all my sources who truly used to work at Credit score Suisse (CS). And he informed me he stated, “Brad, to begin with, Credit score Suisse has been bailed out not less than 3 times already. They don’t seem to be effectively run”. He talked about UBS (UBS). He additionally had labored at UBS. He stated, “That is an analogous story there”.

Nicely, I discovered this fascinating. He stated that any financial institution who has the nation identify on it isn’t going to fail. Truly, posted this on Twitter final evening with Credit score Suisse. And Credit score Suisse has the identify, the nation identify. They’re, guess what? They’re getting billed out. I simply noticed that on Looking for Alpha this morning. And Financial institution of America (BAC), too, massive to fail. America’s identify is in that, it is not going to fail.

So I believed that was sort of a humorous solution to put it. However I feel Credit score Suisse suffers from some actually poor administration they’ve had. They clearly have not been construct out, however they only have not been a really stable financial institution. In fact, we cowl the banking sector right here as effectively on Dividend Kings. And we have really useful various banks.

However I feel there’ll undoubtedly be some extra fallout. I see fallout by way of some shopping for alternatives, frankly. I do not suppose we will see as many – I do know we’re undoubtedly not going to see the financial institution closures that I noticed and you probably did two in 2008 and 2009. Nevertheless it’s been a wake-up name. And admittedly, for me and for our staff, we have determined, look, we have to stress check our portfolios. Let’s be proactive right here. Let’s take a look at these classes discovered that we have seen with Silicon Valley (SIVB) and in Credit score Suisse and Signature Financial institution (SBNY). And let’s go forward and be proactive and stress check our income mannequin.

Let’s take a look at our base. Let’s take a look at these tenants which can be in these REIT portfolios, are these BDC portfolios, are these midstream portfolios, And let’s ensure that these – this earnings is stress examined as a result of the big majority of our clients’ annual are earnings buyers. They’re coming to us as a result of they need a really regular and rising stream of dividend earnings as a result of everyone knows the key to sleeping effectively at evening. And that’s to have a really dependable, predictable earnings stream. In order that’s one of many issues that we’re right here very intently in stress testing our picks.

Daniel Snyder: Brad, let me ask you, what has been your greatest takeaway to date this yr inside listening to re-earning calls and speaking to the CEOs at your interview?

Brad Thomas: Yeah. I feel, look, the largest massive takeaway is that the – after we enter January, I imply, all people’s feeling fairly good about market and attain normally. And naturally, with the accelerated price will increase that we’re seeing, it has been a file – we’re seeing file will increase in charges. And that’s impactful, not solely to REITs, however any firm goes to see their debt improve.

So there’s been half – we’re having to regulate to that, and we have needed to reprice plenty of the businesses. We only recently went by way of our whole protection spectrum right here at Irene [ph] and Alpha to have a look at all of our goal costs, our trim costs. What we discovered within the first quarter now that that is over which is definitely the – I suppose, the fourth quarter outcomes and year-end outcomes. However we came upon is that almost all of those firms are having to very intently at their earnings in ‘23 and make these changes as a result of their debt ranges have gone up.

Now what’s actually fascinating right here, Daniel, and that is actually the massive takeaway that I’ve seen is that whereas debt has elevated for nearly all REITs, it is actually placing extra pressure on these larger leveraged REITs. And never a lot on the REITs which can be investment-grade rated, and cap charges are starting to regulate in a short time to this paradigm. And so I feel definitely like within the web lease sector, you are not seeing the identical funding spreads that you’d see, say, six months in the past or 12 months in the past. However we’re nonetheless seeing fairly vast spreads.

For instance, Realty Revenue, once more, I simply wrote on that firm and VICI Properties (VICI), one other one I simply wrote on. They’ve tailored to cap charges. They don’t seem to be shopping for, for instance, Realty Revenue is just not shopping for at cap charges of round 6% at this time. They’re now transferring as much as that, say, 7% vary. Clearly, their price of capital goes up as effectively, however they’re nonetheless in a position to generate funding spreads within the roughly 125 foundation level to 150 foundation level vary. And that enables the corporate to proceed to develop externally after which not forgetting the inner progress drivers.

I do know they’re modest, however Realty Revenue does have lease bumps and these different web lease REITs do have these lease bumps. And so these levered returns are someplace nearer to 2% a yr. So even with no acquisitions, these firms proceed to develop. And so, yeah, I feel that is the massive factor. It is simply actually – we have needed to alter to that, however the sell-off has been extreme, and that is clearly created some shopping for alternatives.

However once more, I feel, as I’ve at all times stated right here on Looking for Alpha, I simply – it is not the time to be too cute to attempt to go in and purchase these firms that yield 12%, 13%, 14%, I feel there’s much more ache forward, particularly for these firms which have fairly extremely levered stability sheets.

Daniel Snyder: I really feel like we already know the reply, however I obtained to ask you in any case, what’s your favourite REIT for the following quarter or for the remainder of this yr?

Brad Thomas: Yeah. So once more, I like Realty Revenue, however, once more, they’ve the dimensions benefit and the price of capital benefit. However that does not imply they’re the perfect firms to personal. They nonetheless obtained to exit and purchase properties. They did information for $5 billion this yr. I feel that is extremely conservative. I feel they will find yourself doing most likely nearer to $10 billion. They did $9 billion in ‘22.

However Realty Revenue is just not my – what I’d name my finest decide proper now. It will be VICI Properties. VICI has been – had an unimaginable run. In fact, they got here out of Caesars and Caesars went bankrupt. VICI was fashioned principally as a holding firm or a REIT for these belongings. So these had been grasp leased to Caesars, and by the best way, Caesars credit score has accredited immensely over time.

And VICI has been the fastest-growing REIT that I’ve ever seen, frankly. And never – this goes all the best way again to twenty years or longer. VICI got here out they usually grew to become an S&P 500 firm sooner than any REIT that I’ve ever seen develop. And naturally, a big a part of that was the MGM Progress Properties (MGM) however they’ve continued to supply and scale this enterprise and develop their adjusted funds from operations. And so – and enhance their price of capital, their investment-grade score now – rated.

And transferring into different markets. They introduced not too long ago they are going into – they’re in Canada they usually’re probably going into Europe. So I feel it is open – it opens up for VICI much more alternative not solely within the gaming sector, however simply different totally different experiential sectors. Daniel, I feel one of many massive issues that I feel is admittedly fascinating although is and that is one thing that I feel buyers are actually lacking. It is not solely the REITs which can be having to cope with this larger debt price, it is simply company America.

I imply, plenty of these firms are seeing their debt improve. Within the latest article, I discussed VICI in Six Flags (SIX). I have been speaking about Six Flags now since 2018, 2019. And final yr, there was an activist constructing on a – Jonathan Litt, constructing in land firm, who additionally obtained fairly vocal with Six Flags recognizing that there’s appreciable actual property beneath these amusement parks that could possibly be monetized by way of a sale leaseback.

And the purpose right here I wish to make is Six Flags have some debt coming due in ‘24, ‘25, ‘26, is pretty vital debt. And when that must be repriced, that is definitely going to place extra pressure on their earnings. And so, I’ll let you know, now’s the time for firms like Six Flags and plenty of, many others, Daniel.

I feel that is going to essentially create this excessive rate of interest market, the place lots of people worry might damage a few of these dominant REITs, particularly the web lease REITs. The businesses like VICI and Realty Revenue are in a fantastic place as a result of they’ll capitalize on these – on that actual property that these firms personal as a result of their debt price is now a lot larger and it is simpler to transact extra a 7% cap price on their actual property.

To allow them to reinvest of their core companies like Six flags. They’ll spend money on their amusement parks or pay down debt or purchase again shares, various levers that they’ll pull. So I do suppose that that is one of many lacking issues I am seeing out there’s it is not solely the REITs, it is these firms and it’ll create extra demand. Actually, I’d even name a catalyst for these web lease REITs to have the ability to conduct extra sale leasebacks. So I feel you are going to see increasingly more of that going ahead.

Daniel Snyder: Let’s transition a bit since you additionally talked about earlier within the episode that you simply cowl plenty of the dividend earnings area. Needed to see should you had a thought or opinion on the JEPI ETF versus the Schwab SCHD, one other plenty of dialog proper now. Any ideas?

Brad Thomas: Yeah. So we’ve got been transferring into extra ETF protection. Now there is a purpose to that reign is or reign to that purpose is that I’m on the point of announce my very own REIT ETF index. Once more, I am not distributing the ETF. I am not a licensed securities dealer. However hopefully, there will be someone who will distribute that. However we’re determined, frankly, plenty of this is because of Looking for Alpha in simply the followers they usually’ve all come to – lots of them have come to us and ask us to place collectively Bear’s indexes.

So we’re launching our first REIT index inside days. And so we felt like we wish to cowl that sector, not solely simply the REITs, but additionally simply all the dividend ETFs. In order that’s one of many causes that we have enhanced our protection. We wish to see what these firms appear like and the way they differ – how they’re differentiated.

The levered ETFs, I imply, JEPI is clearly fairly excessive yielding and fairly interesting for buyers. I purchased a number of shares in JEPI after we revealed that preliminary article. I like Schwab rather a lot. I feel Schwab is the not solely the corporate, but additionally the, I suppose, the bellwether ETF. That firm is certainly extra of a sleep effectively at evening sort of all in dividend – dividend-focused ETF platform. I personal that firm as a result of, once more, I focus totally on REITs. That is my core of competence. I can not cowl all of the dividend firms on the planet.

So I feel for sure buyers who do not have the time or maybe the experience, or maybe the cash, I feel the Schwab ETF actually makes plenty of sense. The JEPI ETF is definitely fascinating. However once more, I feel that is definitely obtained extra threat that must be taken in consideration. However – and I actually like ETFs. And we additionally look very intently on the charges. There are – many of the ones that I like are passive ETFs.

The lively funds get pretty costly. And so these must – definitely have extra technique that goes into place. However I feel that is undoubtedly evolving. And, frankly, Daniel, this type of goes again to sort of again to Looking for Alpha. I feel there are actually two forms of buyers on this planet at this time. They’re the do-it-yourself buyers. And that is largely I feel the Looking for Alpha viewers that is listening to this and plenty of others that they like going into the Looking for Alpha platform, which is a terrific platform to combination analysis and evaluate analysts and the notes. There’s simply a lot priceless data and knowledge is – that is obtainable. So that is the do-it-yourself an investor, DIY.

The opposite universe or the opposite, I suppose, bucket, if you’ll, are the do-it-for-you buyers. And people are folks that simply wished someone else to do it for them. And that is the place ETFs are available. It makes it very easy for these forms of buyers who simply do not have, like I stated, that perhaps the time, the cash, the experience to construct their very own portfolio. So these ETFs are available actually helpful. So I am actually excited to be concerned on this ETF world, and we’re undoubtedly going to be ramping up our protection. So keep tuned for extra.

Daniel Snyder: So to place you on the recent seat actual fast, if an investor got here to you proper now and was like, I wish to spend money on one ETF, both JEPI or SCHD, which one would you decide for someone new?

Brad Thomas: Yeah. That may be a powerful query. I really like these powerful questions, Daniel. You are superb. I can inform, you have performed this earlier than. So it is exhausting. I imply, it is – it actually is dependent upon the danger profile of that investor. As I stated, I do personal each. I am simply personally, I’ve over weighted SCHD as a result of I’m extra threat averse. I simply do not like an entire lot of leverage. And I feel it actually comes right down to a dialog there.

However once more, it actually is dependent upon the danger profile of the person investor. Look, plenty of buyers and I see them day-after-day on Looking for Alpha. They are surely interested in yield. And that is – there’s nothing improper with that. However I suppose our mantra at Broad Moat Analysis and our whole firm is specializing in fundamentals and having larger leverage is admittedly one thing that we attempt to advise to steer clear of.

Look, something that is yielding 10% or larger, you have to look actually intently at that income stream. And I simply revealed an article at this time on Looking for Alpha, hopefully, it’s going to be trending. However it’s on dividend cuts. Why – I feel the title of this text is why I keep away from dividend cuts in any respect prices? And it actually will get into the a number of the picks that we made the place we really useful to steer clear of various these 10%, 11%, 12%, 13% dividend yields. And never that we have – we’re in a position to bat 400, however we have been fairly profitable there.

So I feel by way of your reply, I’d simply warn buyers whenever you get to these 10%. 11%, 12% yields or larger, simply ensure that that is a sustainable enterprise mannequin. As a result of that is – on the finish of the day, that is actually what we’re recommending are firms which can be going to proceed to maintain these dividends. And so, I like – once more, I like Schwab. It is for a extra conservative investor. I feel that is the best way I’d go.

Daniel Snyder: Wonderful. Thanks a lot for giving us a lot of your time at this time, Brad, in answering these questions. If folks wish to keep in contact with you, discover you, the place can they attain out?

Brad Thomas: Certain. Nicely, we’re on Looking for Alpha for nearly each single day, so that will be a fantastic place to seek out me, and I am additionally on Twitter. We have been pretty – I have been pretty lively there. That is @rbradthomas, and sit up for seeing anyone. And once more, Daniel, I wish to thanks on your – for on a regular basis you place into this and Looking for Alpha as effectively. We actually recognize the collaboration and the partnership we’ve got and sit up for many, a few years forward.

Daniel Snyder: Yeah. We want your continued success as effectively. And I am simply trying right here 427 5-star opinions on – iREIT on Alpha. I imply, you guys are undoubtedly going one thing proper. So completely happy to have you ever on the podcast. Thanks a lot. We’ll have you ever again on once more, and we’ll discuss to you subsequent time.

Only a reminder, something you hear on this podcast shouldn’t be thought of funding recommendation. At instances, myself or the visitor, my very own positions within the securities talked about, however that is for leisure functions solely and it’s best to search recommendation from a licensed skilled earlier than investing.

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