Deidre Woollard: Okay, Fools. It is Tuesday, it is time for The Millionacres Hour. We're going to talk about REITs this hour, so get your questions into Backstage pass. We're going to do all kinds of REIT basics today. I wanted to introduce Kayla, who runs our content at Millionacres, and she is a relatively new REIT investor. Right, Kayla?
Kayla Schorr: Yes. I invested in my first REIT probably about a year ago at this point. I'm very new to the game, but working at Millionacres, I was exposed to so much content surrounding REITs and so many experts in the real estate investing space, so I figured, why not get invested? Actually literally invested in REIT. [laughs] Here I am now as an actual REIT investor.
Deidre Woollard: I love it. Had you heard of REITs before joining Millionacres?
Kayla Schorr: I had not. I joined Millionacres a couple of years after graduating college. I really did not start my investing journey myself until a couple of years out of college, which I feel is very normal for the typical investor. Obviously, you need a certain amount of capital to actually get invested. You have to be saving money aside each month. I think one of the great advantages to REIT investing is you don't need a lot of capital in order to get started with it. That was how I got started in REIT investing is seeing that these are stocks that are not only affordable, but have low barriers to entry and high profitability and high potential to gain.
Deidre Woollard: Well, I think one of the things that's interesting is that REITs, they don't necessarily attract the younger audience. [laughs] I think there's a few reasons for that. They're not sexy tech stocks. Elon Musk isn't running a REIT and they're not doing the kind of growth that maybe people who can take on a lot of risks are kind of looking for. Matt DiLallo, when did you get started investing in REITs?
Matt DiLallo: It's probably around the same time Kayla did. I think I was in grad school at the time and I was getting my MBA, so I was really interested in finance at the time and REIT just seemed to be something that fit what I liked. I really like real estate investing and really wanted to get in either flipping properties or buying apartment buildings, but that just cost so much money for somebody that didn't have anything at the time and REIT just fit that. I'm somebody that really likes passive income, I just like getting paid for stuff I'm not doing [laughs] and REIT just fit that and it gave me cash flow that I can use to invest in higher-risk stuff. That's been my philosophy for the past 10-15 years is buying dividend stocks and using that to invest in higher-risk stuff. That way I feel like I'm putting capital risks that I can really afford to lose because I didn't really have to work to earn that money.
Deidre Woollard: I think that's an interesting strategy and I think that's one of the reasons that people really first get drawn to REITs. It's that idea of hey, it's guaranteed to give me a dividend. I think that's something that certainly draws people who are retiring. They like that source of income. I think that's why REITs tend to skew toward older people, but I think really just about anyone should invest in REITs and you can put them in a retirement account, which is nice because then your dividends can be there and you can just use them to buy more shares or buy other things. Matt, did you have other stocks that you were invested in and then you came to REITs later or did you come to REITs at the same time that you came to other stocks?
Matt DiLallo: I think it was a little bit later. I really didn't know what I was doing at the time, so I would buy things that I read in a business school textbook. It was right after the dot-com bubble. That was the one my business textbook was written. They mentioned some of these tech stocks and I looked and one was trading five dollars a share. This is cheap and it was cheap for a reason. I didn't know what I was doing at the time, but as I learn more and more about how businesses operate and what type of message I wanted to learn to be stability, cash flow value where how I skewed and REITs just really fit into that.
Deidre Woollard: That makes a lot of sense. I think for a lot of people, that idea of it being relatively stable and I feel talking about REITs for the past year, it's been interesting because last year was such an anomaly for REITs and anyone who heard us talk about REITs last year and then looked at what they were doing were probably thinking, what are these people talking about? But really for buy-and-hold over the long-term REITs are just so consistently steady and that's one of the reasons that people like them so much is that when the stock market is being crazy, REITs are usually relatively steady. Last year because businesses were shut down, because physical real estate was closed, not so great REITs, but REITs have had a phenomenal bounce back. I think one of the things that's most interesting this year is I see The Wall Street Journal writing about REITs on a regular basis. I see much more attention and interest going toward REITs this year because they're having such a great bounce back. But I think it's really opening people's eyes up to the idea that REITs are actually a great thing to invest in and a great way to play some of the trends that we're seeing right now, like e-commerce with industrial real estate, datacenter REITs, and the massive amount of data that we're all consuming and it's been fascinating to really watch REITs become more interesting in the media which is fun.
Kayla Schorr: I can definitely speak to the growing interest in REITs even in the last year or so. As a content manager at Millionacres, I'm responsible for overseeing the distribution of content across our free site. I can say we've seen an enormous growth in interest in our REITs content over the last year, which is just amazing. We're definitely very encouraging of members to look into REITs and buy REITs and our numbers are definitely speaking to that right now.
Matt DiLallo: One thing that I just find so fascinating about REITs in real estate overall is it touches everything that we do as a society. We're all remote right now, but so much of what we do and study requires real estate and REITs allow you to play that on just a lower-risk way. You mentioned e-commerce and for a lot of investors to balance out the risk of your Amazons, and your high risk, high volatility e-commerce platforms, you can buy warehouses through REITs that they get this very steady rental income and it's just a good way to balance out the volatility. You can play the same exact plays. You talked about 5G, well, there's REITs that are focused on that. Datacenters and all these different plays out there that are growing rapidly, but these just offer a lower risk way to play that. It helps to offset the volatility, which we haven't seen a lot of volatility over the past year, but it will come again and REITs will be a great way to balance that out.
Deidre Woollard: Absolutely. You made a good point about it touching everything. One of the things that I think I've started to do lately is every time I see a for lease sign somewhere I'm like, which REIT is that? Who's managing that? Or you start thinking about all the places you go that REITs touch. Every time you're in grocery stores or Starbucks or so many different places that you physically go into as well as you mentioned with e-commerce and things like that.
Kayla Schorr: Yeah, I have started to notice so many REITs in my day-to-day life. I'll be in a strip mall and I'll see that it's a Simon Property Group property or I will see that a friend sends me a funny message in her apartment buildings, community portal and it's a Brookfield Property or Jones Lang LaSalle building on my way to the grocery store, I live in urban Philadelphia, so I'm surrounded by REITs all the time. They're truly everywhere, which is another reason that I am invested because they are just so prominent in our daily lives.
Deidre Woollard: Let's go into some of the basics about REITs and what makes them different from stocks because they follow some of the same rules, but they also have their own rules.
Matt DiLallo: People have to think about REITs is like basically a portfolio of cash flow in real estate properties. A lot of them will focus on different types of real estate. We mentioned industrial properties, warehouses, office buildings, and so REITs will just focus on this. Congress created REITs back in 1960s to allow any investor access to this cash flow in real estate which was like the domain of the very rich and it leveled the playing field to allow anybody to get it and invest. They are a little bit different from stocks in that there's some different metric that you'll see on Millionacres all times, FFO, which is funds from operation. If you are familiar with stock investing, we talk about earnings, but FFO, it's like the cash flow REITs. After they get their rental income, they file their expenses. Just like the cash flow they have left and so they can pay their dividends with. This is a little bit of differences from stock investing, but you're still looking at a company, what they own is a portfolio of real estate that generates cash flow, so very similar to what you would look at like any type of business out there that has recurring cash flow like Comcast, for example. You pay your Comcast bill every month. It's similar to REIT. They're getting their rental payment every month. It's that type of business model out there where it's just you're getting these recurring cash flow stream. That cash flow allows them to pay dividends and dividends depend like great ways to grow wealth over the years and it allows them to buy more properties. It's just a great business model and that's why they've been so successful.
Deidre Woollard: A couple of the rules for REITs that they have to follow is that they have to pay out 90 percent of their taxable income in the form of shareholder dividends. That's why I think the fact that most people know about REITs. But there are some other rules that they have to follow. For example, they have to invest at least 75 percent of their total assets in real estate assets and cash. That's interesting too. When you look at a company like Simon, they're invested in their malls, of course, but they've also taken shares of a variety of different tenants over the years, and that's been another business for them, but they have to be careful to make sure that they're following that number of total assets invested in real estate and cash. Some other rules for them. They have to drive at least 75 percent of the gross income from real estate-related sources. That relates to the percentage of total assets as well. For some companies, they may start off as a private company and then become a REIT later on.
Matt DiLallo: All these rules are designed by the IRS so that these companies will qualify for this tax advantage. One of the reasons why we like REIT so much is they don't pay corporate income tax. As long as they follow these rules, they don't pay corporate income tax and that saves their average investment from double taxation. If you owed Apple, for example, they generate all this profit. They have to pay corporate income taxes, and then they pay a dividend and then the investors have to pay taxes on that dividend. Well, REITs, you get they don't have to pay that corporate income tax. Then if you own REITs in IRA, you don't have to pay taxes on those dividends, so you almost get a double tax benefit. That has really been one of the big things that has helped REITs create all these value for investors all over the years because they're not paying the government all this money that other companies are paying.
Deidre Woollard: Right. One of the complexities of that is that you can't necessarily look at REITs the same way you do traditional stocks partly because of depreciation. That's one of the reasons that we used funds from operations as a more accurate assessment of how the company and the REIT itself is performing and how it's properties are performing.
Matt DiLallo: Yeah. Not to get into the complexities of how to calculate funds from operations. But just think of it as this is the amount of cash flow that they generate similar to earnings. But if you think about a business, it's like the free cash flow. It's not even the earnings, it's the free cash flow. They can do whatever they want with that. The difference between REITs and regular stocks is you had mentioned the 90 percent rule of having to pay their actual taxable income. Well, REITs will in a lot of times pay more than that because of the funds from operations. They've got this extra cash flow because of depreciation so you don't really have to pay so much attention to the net income and all those types of taxable numbers. But this is funds from operations. This is the number that's so much more important because this is what they're banking every quarter, every month.
Deidre Woollard: Exactly. I wanted to burn through some quick REIT facts that I was looking at what I was doing some research on reit.com today. Currently, REITs own more than 3 trillion in gross real estate assets across the US. The interesting thing is that divides out with the Stock Exchange-listed REITs owning around 2 trillion and then the listed private REITs and non-traded REITs are to make up the other 1 trillion. We talked about people owning REITs, but I think a lot of people may not know that they own REITs. One-hundred-and-fort-five million people own REITs, but a lot of that is mutual funds and retirement accounts so if you've got money invested there, you may actually be already a REIT investor and you may not even know it. REITs own, I love this number, 516,000 assets across the country. One of the things that I find really interesting about REITs is they're not that old when you consider the rest of the stock market. They started around 1960 and in some sectors, there really isn't a huge amount of REIT participation. Retail, fairly saturated with things like a lot of medical. There's still a lot of medical that's privately owned. One of the things that I've been watching a lot and I know that Kayla have also been watching is that we're in an interesting situation where the average age of commercial real estate landlords is getting older and you're seeing a little bit more consolidation. Still, most commercial real estate is not held by REITs, but you're seeing more consolidation toward REITs in some sectors, which I think is really interesting to watch.
Matt DiLallo: There is so much real estate out there that's privately-owned, as you mentioned, mam-and-pops, smaller companies, even companies themselves like an Apple. I don't know offhand, but they've probably owned their big corporate office. A lot of companies do own their corporate offices. They'll own critical real estate distribution centers and they're starting to sell as often to REITs. Hospitals are another thing. A lot of talks to the hospital who own the real estate, but realize, yes, it's critical to the business but it's not critical that they own the business and they can free up a lot of capital. The money that they spent to build it or to acquire it, they can free that up and then instead of it being capital expenses, it can be an operating expenses because leases are operating expenses that they can take off of their for tax probably. It really works out for a lot of these companies to sell these properties to REITs. They call it a sales leaseback transaction where the owner of the operating business will stay in that building, though, sell it to the REITs. The REITs will lease it and it works out great for both because the REITs gets a steady income, they get a property that the tenant really needs and it's a really great win-win solution for everybody involved. We're seeing a lot more of that and this is bringing a different resale on things that they really didn't own before. Farmland has come up in the last past four years where farmers are selling their lands to REITs and leasing it back. We've seen a lot in the technology industry with cell towers, for example, have gone over to REITs and you have like Verizon will lease the space back. Then other tech companies will lease spaces, really open the door and we've seen things that you wouldn't necessarily think as real estate, but if it's got that lease-type structure, it really works well for REITs because it provides on the steady cash flow.
Deidre Woollard: Yeah. I think other things you and I have covered united to show a few weeks ago about mergers and acquisitions in the REITs space and in real estate in general and this has been just a crazy year for that. Last year, not so much. Obviously a lot of people waiting for prices to fall. A lot of people thought that prices of real estate were going to plummet, that didn't happen. They thought that there was going to be heavy, heavy problems in commercial real estate lending. Still higher-than-average but we're not seeing the gloom and doom that people were predicting. I want to share my screen for a second because I want to show the most recent data from reit.com. Let me see if I can bring this up there. Can you guys see that?
Deidre Woollard: All right. The reason I want to share this for a second is just to look at sectors of specific real estate and what we've been seeing with REITs in terms of this amazing year. Some of the numbers that jump out to me, you see the equity REITs obviously doing well. But look at some of the numbers, self storage is up almost 43 percent. Not a surprise to see residential bouncing back because we saw rents drop a lot last year, especially in your coastal areas. We saw that in San Francisco. We saw that in New York. Now, half the stores, I think Kayla and I are covering are all about rents going up here, rents going up there. It just seemed to watch what's happening.
Matt DiLallo: Okay. I will say it then [laughs]. I'm going to cover rules to reinvesting a little bit, but this touches on that a little bit, is a lot of these different REITs have different lease structures, so you mentioned self-storage. Anybody that's ventured to self-storage knows it's month-to-month. They can raise that rent every single month if the market demands that, and that's one of the reasons that's driving this. Demand is so crazy for self-storage because people are moving, they're decluttering, there's so many reasons that people need self-storage, and so these REITs are able to just consistently raise the rents as market rates. Same thing you mentioned, residential, these are typically one-year leases. Last year was a bad time for these REITs, especially on the coast because people didn't want to rent apartments, but this year everybody's because they can't find houses many select apartment. I've seen double-digit rental rate increases in big cities, even across the Sunbelt region, just crazy, and that's all based on how quickly these companies can raise rents. Some of the others where we don't see so much of this is because they can't raise rents as quickly like office rents, typically 10 years. Some of the industrial might be 15 years, but we're still seeing a lot of the industrial, but some of that into play is they are just able to get so much extra rent now because of demand.
Kayla Schorr: Yeah, I would imagine that self-storage has been so popular lately because of the housing market that we saw this summer. People were so emphatic about about selling their homes because it was quite a seller's market that we saw and are continuing to see. People, I would imagine are selling their homes quickly and needing to buy new real estate might have some time in between. Makes sense to me that's how storage has been a really growing sector.
Matt DiLallo: One thing, when I was a beginner REIT investor, I really thought that a lot of self-storage was based on that moving thing and it was temporary and I felt like a bad housing market would hurt self-storage and it does to a little degree. But what I have found, as you're saying over the years, is that I've learned, and I saw this in investor presentation a little bit ago. They call them how Hotel California, where once you're in, you never leave. They say that people think they're going to rent these for a couple of months and they end up renting for a year, 10 years because they just have all the junk. I've even heard anecdotes where it would be cheaper for people to buy a dumpster, rent a dumpster, and trash all those stuff and buy new stuff, than to rent a storage facility. It's actually such a fantastic business, and relocation is only part of it. That's one of the things that as you get into REITs you find all these fascinating things about how good they can be as businesses and self-storage is one of those really fascinating once.
Deidre Woollard: The only thing I find really interesting about self-storage is that there's only five listed REITs there, most of self-storage is still small mom-and-pop. Even the biggest players like public storage don't have as big a share of the market as you think. That tells me that there's still room for growth. A lot of concern about overbuilding in self-storage, and that's definitely a factor because it's one of the easiest things to pop up, but it's also something that really can benefit from consolidation. That's another reason that I wanted to bring up this chart as well because it's a great overview of the different types of REITs market caps. I think one of the things that's so interesting is that in some areas there are only a few players. You look at infrastructure, four major players at $245 billion market cap. That tells you is that pretty much, I think you could probably invest [laughs] in any of the companies within that sector and probably do okay. But retail is one of the bigger sectors and certainly one that was hard hit at. Kayla, we've covered so much retail this year, what are you seeing in terms of retail trends right now?
Kayla Schorr: Well, we're seeing a lot of retailers are gearing up for holiday season. We're seeing a lot of strategies in place where retailers are trying to make up for the revenue that they lost during the pandemic. But we're also seeing a lot of retailers focus on their online sales, so that ties into warehouse investing as well. I think when you look at retail you have to think of industrial REITs as well because so many of these retailers are relying on warehouses in order to store their inventory.
Deidre Woollard: Absolutely. Before I bring down this slide, I just want to mention a couple of the sectors that aren't doing quite as well. They're still bouncing back, but are still a little bit unsteady so far. One of them is health care, partly due to just how much senior housing and nursing homes were impacted by COVID-19. Things are shifting, things are bouncing back, people are feeling more safe about those types of facilities, but really tough year. The other thing is office. We've all talked about remote work so much, but I think one of the things with office, Matt talked earlier about leases. With office, you're looking at a 5-10 year lease most of the time. A lot of companies are in that space right now where they're trying to make a decision for 5-10 years from now, and that is just so hard because we hear all about hybrid work, we hear about the great resignation of people deciding that they are not going to go back to the office at all or they're not going to take a job in a place where they're being required to go to work five days a week, 40 hours a week. All of that is making the office sector a little unsteady, a little bit uncertain, there's so much to to figure out. The bright spot we've covered a lot at Millionacres is life science. Matt, I think you might have written up the story about Moderna and Alexandria Real Estate Equities. That's one of the REITs that we've followed and I know it's a recommendation in at least one of our services because that is the company that was perfectly positioned for suddenly a lot of people looking for life science office space.
Matt DiLallo: Yeah. It's astounding how that particular sector is doing. I was looking at their numbers to write that article. They had historic volume, I think they leased 1.9 million square feet of space and that was a record for them in the historic rental growth. I believe it was 20 percent or more rental growth on new and renewal leases. It was an astounding amount of demand because the governments and investors have poured so much money into life sciences companies to help with the pandemic that they are flushed with cash, and so they are expanding and that is just really good for them. It's really good for Boston Properties and other office retail focus on that. Not so much as Alexandria. That's one thing that touch on a little bit later about what a REIT owns is so important because it can be in a sector like office, but it has the right properties or in the right location where it's going to benefit. For example, San Francisco is a place that people don't really want to live because it's so expensive, and offices in that city are having problems getting people back to work. New York City, not so much. People really do New York City, but even more so in the South, the Sunbelt region, Atlanta, Nashville, just to name, a couple. People want to move there, they want to go to offices there. If you can get a highly amenitized office in Atlanta, it's going to draw people and REITs like Cousins Properties are really benefiting from this as companies move into these regions and they're that are moving there specifically to bring jobs, to the region that will require offices. I know Visa just signed a lease in Atlanta with Cousins and it's one of many companies that have signed office leases in that place because there are people who actually want to go to work in those cities because you don't have the traffic and the costs as you have, the North.
Kayla Schorr: Yeah and you have the warm weather. [laughs] I can tell you that in Philadelphia begging to walk 20 minutes to an office in a 30-degree weather. That definitely is a factor there too.
Deidre Woollard: All right. Do you guys want to dive into a couple of questions?
Matt DiLallo: Sure.
Deidre Woollard: One from Sanjay about what do you think of Store Capital, ticker, STOR, as early during the pandemic, executives in the company invested in the stock, but since that, there hasn't been meaningful insider buying. Do you think the dividend is sustainable? I think part of this is that people invested early in the pandemic is because the stock was cheaper. Store has had a steady bounce-back since really with the reopening stocks that we saw, REITs started to tick back up in November. Store Capital is certainly one of our favorites in terms of solid investments. What do you think about the dividend, Matt?
Matt DiLallo: I'm going to start with, I mentioned that I got some rules for REITs. One of my first rules for REITs is to know what they own. Anytime you're going to get started investing in the REITs, look at what it owns and because I can play a huge role. You mentioned Store Capital is a retail REIT. But there's basically three types of retail REITs. You've got the REITs like Simon properties that owns these massive indoor and closed malls. That was really hit hard by the pandemic is also facing pressure from your e-commerce because a lot of those stores that would be in a mall are better suited, sometimes of being online. While then you also have grocery anchored shopping stores, shopping centers. Those are doing really well because people have to go to grocery stores. Yes, you can get groceries online. But you see a lot of people still going grocery stores and that traffic that goes to those grocery stores will also go to the barber shop or whatever else is in that shopping center. Then you have what are called freestanding retail buildings. They might be near shopping center, on shopping center, but these are what Store Capital will own. I don't know their portfolio as much and others, but let's say it a Home Depot, that is a freestanding Home Depot or Lowe's or something like that, it's a store that people are going to all-time. If they own a home, they have projects. It's a great credit company. They're going to pay their leases. They are going to stay there for a long time and it sign to what's called a triple-net lease, where the tenants responsible for insurance, maintenance, and real estate taxes. It's a really great, stable property for these type of companies, and that's why Store Capital has done better than other REITs that they own these type of retail buildings.
Deidre Woollard: How do interest rates rising impact REITs?
Matt DiLallo: There's really two ways. I would see them impacting REITs. One is REITs have to borrow a lot of money because of the dividend role they have to payout. Like you mentioned, 90 percent of taxable income, a lot of times we'll pay out. Even more as a percentage of their cash flow, so they're borrowing money to fund acquisitions, development projects, and that sort of thing. That requires taking on a lot of debt, which is tied to interest rates. Interest rates will go up depending on, how much money the REITs needs that could impact how much their interest that they're paying on their debt costs, and especially like for example, as they borrowed money really cheap in a couple of years ago and the desk coming due, but now interest rates are up, they might have to pay more for that. That's how it impacts operations. But the other side of it is a lot of times when interest rates rise, investors will sell off yield bearing instruments. REITs are prime example that high dividend stocks because they can now get better raise on their bank CDs, they can get better rates on government bonds, and even corporate bonds. That risk reward skews towards the safer options, so we definitely typically see like a compression in the dividend yields. Right now, dividend yields for REITs are like three percent, which is really low. I think last year they are closer to four or five percent on a lot of them. Investors just won't buy REITs stocks. The other way REITs fund their business is by issuing stock. So when their dividend yield is high, they have like a lower valuation and that just makes it, they're diluting their investors more every time they issue stock. Right now however, is a great time for REIT because interest rates are low and their dividend yield so they can issue capital really cheap. That's why we're seeing hours on the day and they just have so much financial flexibility right now.
Deidre Woollard: Is there a concern though with REITs right now, you mentioned cap rates earlier. I'm seeing a lot of concerns that some particular types of real estate are two high-priced industrial is the one that keeps coming up for me. Are you concerned that some of the industrial stocks of industrial REITs are being overvalued and that they can't actually expand because the prices are getting too high in certain areas?
Matt DiLallo: I think that's the million dollar question, and if anybody have that answer it would [laughs] be correct. [laughs] Because you look at industrial real estate for on the one hand the tailwind that's driving that as we need, I think it's 300 million square feet of just space for e-commerce. Then there's also that tailwind we have here about supply chain issues. They can't get stuff here, and so businesses need to store this. We need millions, if not a billion square feet of more industrial space within the next five-years just to support the growth. From this there just isn't that space available to even build. They are just various entry of where real estate is and where these companies need to it. It's going to be really tough for them to meet that. That just makes the existing stock so much more valuable because they can raise the rents on that, and if Amazon is going to pay whatever it costs to get that prime location because they are all about next day, same day shipping. If companies want to do that they have to pay this prime prices as real estate. You look at industrial REITs trading at 30 times the FFO, which is a really expensive, great. I like to see REITs at 20 or less. But when you look at how much they're growing and you can justify that just like you look at a stock and it might be trading at 50 times earnings by the third, growing at 50 percent a year. That's a good investment. It's really tough. If the economy keeps growing and demand keeps growing then this is still going to be a good investment. We're seeing really smart people in the real estate space. Brookfield, we've talked about before, Blackstone, Sam Zell, they're all wanting to get into the space because they see this as being a megatrend, a multiyear megatrend of growth. I am going to say, I think that yes is too expensive yesterday, but I don't think we've reached that peak, where it is out of line.
Deidre Woollard: Yeah, I would agree with that, I know that one of my favorites, Americold, which is ticker, COLD, there's been some talk about that one being overvalued lately, but I'm still a big fan of Prologis also ticker, PLD, that one gets talked about a lot as being overvalued. I also own that what I don't play to part with it soon. One of the things that I like about Prologis in particular is just how global it is and the fact that it's really, they're continuing to just expand.
Deidre Woollard: Yeah, cold storage You mentioned that Americold actually facing a different headwinds is that I cover that for our Trailblazers service not that it's interesting. It's a different type of REITs in that we're seeing labor issues really impacting them and impacting their customers. They're facing near-term headwinds. If that stock comes down, that just makes them more attractive because you look at a long-term trend Tailwinds of we're doing some much more of food with online and they are well positioned for that. I'm really interested to see if they will come down anymore because I think that would be a really good investment just because of how much they've got growth-wise.
Deidre Woollard: Yes, I think if that one comes down, I'm going to add to my portfolio.
Kayla Schorr: I feel like labor shortages could actually be like a topic for an entire webinar because I think it impacts multiple sectors in real estate. It's just so difficult to get employees right now, and that can impact retail and can impact industrial real estate and warehouses really all sectors. It'll be interesting to see what happens with that because we need people to run these operations.
Deidre Woollard: Yes, that's not even including all of the construction labor issues that are facing homebuilders in multifamily. One of the things is Kayla, that we've covered is the supply-chain issues. Matt mentioned that earlier. I know Lowe's is ordered early this year. A lot of companies are ordering early which is good but I forget I don't know how many ships are down off the coast of Long Beach California, but it's got to be. Last time I looked, it was like 70 ships. That is really impacting everything.
Kayla Schorr: Deidre, I lost you for a second. I don't know if I cut out or if you cut out. But were you it sounds like you may have been referring to the port congestion issues.
Deidre Woollard: Yes.
Kayla Schorr: That is a big issue right now impacting supply chain. It's been very interesting to read about however, very tragic.
Deidre Woollard: Yes. Let's answer this question from Krueger which is, what are the main filing concerns for REITs and taxable accounts. I've heard that non-tax advantaged portfolios have considerable issues with these investments. I would say that that mostly comes down to dividends and how you want to report dividends on your taxes. It's a little bit different than Stocks. Sometimes is you have to make sure that you're accounting for dividends.
Matt DiLallo: There's two different types of dividends. There's qualified dividends, which means it qualifies for the lower capital gains tax rates, which is zero, 10, and 15. Then you have non-qualified dividends which are taxed at your ordinary tax rate, which can go as high as I believe 37 percent. So we fall into that non-qualified category which is why if you own a REIT, it's probably best to put them in an IRA. Now, I own some not in an IRA just because I like to have that cash flow and have a good accountant that can help me get deductions with other things. It really depends on what your income level is. If you're a high net-worth person, definitely put your REITs in a IRA because that will shield more of your taxes. If you have low income, it probably doesn't matter as much. For example, in my case, I want to have REITs in my ordinary brokerage account because at some point I want to use that cash flow to live on, because as much as I love writing for Millionacres, I really would prefer not to do that until I'm 65. I would like to have a boat or something like that and use my dividend income to pay for that. So I'm keeping some of my dividend outside of that for that very purpose. It all goes on what you want your life to be in the future. I want to have that income building now instead of having to go and buy a bunch of REITs because I want to retire.
Kayla Schorr: Well, Matt now I'm hoping that your portfolio just does not do well at all because I want you to write for Millionacres forever.
Matt DiLallo: I have a long time to go. I'll do a part-time.
Kayla Schorr: Okay, fair enough.
Deidre Woollard: One of the things I think that's important to mention is that sometimes people will say that they don't want to invest in REITs or in real estate in general because they're concerned about taxes. So I would say to people that are feeling like that, don't let that scare you off because it's not as hard as you think. It's just a question of, once you learn the rules, once you know what you have to report, you can certainly work with a great CPA. Sometimes I hear people say, well, I don't want to invest in real estate. It's too complicated. No. You're going to get the benefit out of it, you will be able to pay the CPA.
Matt DiLallo: Yeah. I would say if taxes are any issue just put it in an IRA and you don't have to worry about it because you don't have to report the dividends on that anyway, so it doesn't impact your taxes at all.
Deidre Woollard: Let's answer this question we've got about Digital Realty Trust, ticker, DLR. He's wondering if it's overvalued. It's gone down a bit in the past. Pretty much it was one of those ones that impacted a little bit by that reopening and so it went up a lot during the pandemic when people were using so much data and people are putting a lot of the faith into datacenters. Now it's gone down a little bit, but it's one of the biggies in the datacenter space. Matt, how are you feeling about that one?
Matt DiLallo: If you look at datacenters overall, yeah, they're probably overvalued because I think they are trading 25 times their FFO, which in REITs speak, I would say 20 is where I would be comfortable with but the other side of that is growth. Investors pay more money for companies that are growing. This company is growing, it has a history of growing. I think it's grown its dividend and its earnings at a double-digit rate for the past 10 or 15 years. That doesn't look like it's going to change because even if we use a little bit less data as companies go back to the office, we're going to be using a whole lot more data in the future. It's just the way things are going. We have driverless cars that are coming. We have just so much more on the cloud-streaming. You name all the factors driving data. We're going to be using so much more data in the future. Companies are learning how to use data to make an informed decisions in future and that's just going to make data flow back and forth a lot more so we need more datacenters. They're one of the best data. I wouldn't be worried about it being overvalued because I think they're going to grow into the valuation and continue growing after that.
Deidre Woollard: I have to share this quote from Gary who says, I joined Real Estate Winners in February, migrated about 25 percent of my IRA to dividend paying REITs to replace work income. I just retired last week in large part due to this type of planning. Thanks. Love that. That is awesome.
Matt DiLallo: That is great.
Deidre Woollard: A question from Dana, can REIT investments replaced bond ETF allocation during low and rising interest rates?
Matt DiLallo: That is an interesting question, because there's a lot of talk about the old 60-40 portfolio where you have 60 percent stocks and 40 percent bonds. With interest rates so low, who wants bonds? But one of the things that they've done studies on some of these big mutual fund and investment things is, how good REITs are as an addition to a portfolio. Maybe you take a little bit of your stock and a little bit of your bond and you put REITs in there as a slice of 5-15 percent is what they're saying. That really helps to reduce the overall volatility of the portfolio and that type of portfolio will typically perform better than the 60-40 portfolio. There is a lot of studies, I know I've written articles on how that works so I would look at Nareit which is big association for REITs. They have a lot on there of how to construct a REIT portfolio with bonds that they've got that number that I mentioned, that 5-15 percent so look at that if you're interested in learning more, but that's the guide I use is, I'd like to have a lot of 15 percent of my portfolio on REITs because they're just such great wealth-creating vehicles.
Deidre Woollard: Yeah, there was a study that came out recently that showed that equity REITs are outperforming private equity funds. I know that's something that a lot of people think that a lot of the best opportunities are not in the public market. I think that that is not necessarily true and REITs is one of the ways that we talked about it and a lot about. You can invest like billionaires. Invest the way that most people, especially the ultra network individuals, how do they make money? A lot of their money is through commercial real estate. So REITs really gives you a chance to do that. The other thing that's so great about that is you can also diversify within the REITs space. I know that that's something you consider as well, Matt.
Matt DiLallo: Yeah. I love real estate and I love architectures as it really plays into what I like. A lot of what I'll look at when I'm looking at REITs is what I really like and then try to find the best company in that space to put in my portfolio. If you look at how real estate perform over the long term, they really outpace stocks, and it's over decades, not necessarily over the past few years, but the over decades that compounding of the dividends that's growing in the capital appreciation that really works. REITs have even outperformed a lot of the private ones because the fees that investors have to pay. If you were in our private real estate fund, you're typically paying what's called two in 20 cents. Two percent annual management fees and then 20 percent of profits. Typically, you're paying the management team, so the same thing that you would do at Apple, you're paying Tim Cook and its management team to manage. You're paying the REIT management team and that just lowers the cost that it allows more of investor capital to compound onto real estate, and that's one of the many reasons why they've done so well.
Deidre Woollard: We've got about five minutes left. Kayla, I realize we didn't ask you what was your first REIT?
Kayla Schorr: My first REIT was STAG Industrial, which proved to be a very good one. I was actually looking at my portfolio right before we hopped on, and it was my first REIT and most successful REIT so far. We will continue to hold that one for a while.
Deidre Woollard: Excellent. Talking about industrial, one of the things that's great about STAG is it a mix of warehouses but also manufacturing facilities as well.
Kayla Schorr: Yeah. I remember as you were talking about at the beginning of this little chat, when I went to go buy this specific REIT, I did think to myself, well this is boring. Like do I really want to spend my money on the specific stock, and turns out it's outperforming some of the more exciting stocks I have in my portfolio. I'm definitely a REIT investor for life and we will continue adding to that position as well as others that I have.
Matt DiLallo: I actually just bought STAG Industrial for the same reasons, it's such a great performer, Industrial buildings aren't all that exciting, but the business is so exciting because they are benefiting from e-commerce and then STAG in particular, the onshoring of manufacturing. We've realized that we need to make stuff here in order to have it here when we need it, and they're going to be one of the beneficiaries of this reshoring up stuff too, you got two tailwinds going there. I really like it too.
Deidre Woollard: I think you just mentioned something really important there, which is the reshoring thing. Because I see that as a long-term trend. It's certainly something that's buzzy right now, but we talked about the supply chain issues, it's going to take at least a year, they're estimating for everything to shake out. During that time, companies of course, they are trying to get the goods they've already ordered over to the US, and that's step one. But then they are starting to think about where else can we make these goods and still have them closer next time? I think that is one of the things that I find most fascinating, especially with the ports on the West Coast being so jammed up, and maybe that's going to push activity more towards ports in the East. There has been talk about the Jacksonville, Florida, for example, has a big port. What are the things that when you think about REIT, we're really thinking about everything that happens in the world and how it all flows back through real estate and how that then impacts our investments.
Matt DiLallo: We've really seen, well, real estate has changed over the past year, people want different things, and that's made some change in what REITs are going to be performed well in the future. Even though we've been away from real estate, we've realized how valuable it is to us and to our daily lives. That I think is only going to be more proven in the future as we go back to the offices, whatever way that will be for companies. Real estate is just so vital for so many things, and that's just what makes REIT so great is anybody for just a little bit of money can start investing in these, and you can build yourself a great portfolio of businesses that are going to do very well, we think, over the next years and years and there's such a great and exciting thing.
Deidre Woollard: As we wrap up we've got question on can we each recommend three REITs we own. We can't recommend, but what three REITs do you have in your portfolio that you really like?
Matt DiLallo: I can start, I really like this one called Medical Properties Trust, which is a REIT that owns hospitals. We've seen hospitals are just so vital to our society and it's something that they've done very well by hospitals. I really like Cousins Properties, which is a REIT that focuses on office buildings in the Sunbelt region, they're growing very well. A lot of companies are relocating and they are getting office there, and Invitation Homes, which owns single family homes that they rent mostly in the Sunbelt region. They're doing very well REITs, for single family homes are growing like crazy and they are really benefiting from that.
Deidre Woollard: Awesome. I'll go next, one of them that I talked about earlier, Alexandria Real Estate Equities, that's one that I got into relatively recently, wish I had gotten into a lot earlier because it is a fantastic company and they are building life science properties really focusing in the areas where those things are building, so really like that one. I mentioned Prologis earlier, that's the big whale in industrial real estate and one that I've owned for a long time, and I pretty sure it was my first REIT investment, I held it for a while is American Tower, which is one of the biggest owners and operators of broadcast communications, cell phone towers, call it American Tower. But that always reminds me that it's actually global, and one of the things that I like most about it is that it does have a lot of investment in developing company and developing countries, and it's really positioned to capitalize on 5G and they're just increasing demand for cell tower space.
Kayla Schorr: Then for me, I'm very new REIT investor so cannot speak to the small details of REITs that I've invested in, but one of my favorites is AvalonBay Communities consistently Millionacres favorite. I mentioned STAG Industrial. First REIT, will always have a place for them in my heart, industrial real estate is at a very interesting time right now, so definitely that's on my list. Then I would imagine MGM Growth Properties for their dividend. [laughs]