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REITs: Why industrials are the best bet

Investing in real estate can be tricky. One way to do it is through REITs or real estate investment trusts.

F/m Investments CEO Alex Morris joins Yahoo Finance for Good Buy or Goodbye to give insight into the best industrial REITs that investors should keep in mind.

Morris claims STAG Industrial (STAG) as his Good Buy citing its diversity across several industries, positioning them well for most economic cycles. In addition, he claims it has great exposure to an on-shoring/ near-shoring trend seen in manufacturing while also focused on sustainable earnings growth.

Morris picks CubeSmart (CUBE) as his Goodbye citing overbuilding and an abundance of self-storage facilities and that, given fewer people are moving, there is less demand for storage. In addition, he believes there could be growth problems ahead for the company;

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Nicholas Jacobino

00:00:07 Speaker A

It's a big noisy universe of stocks out there. Welcome to goodbye or goodbye. Our goal to help cut through that noise to navigate the best moves for your portfolio. Today we're looking at real estate investment trust, as commercial concerns have made some investors hesitant. I'm here with FM Investments Chief Executive Officer, Alex Morris. Good to see you, Alex, thanks for coming in.

00:00:28 Alex Morris

Thanks for having me back.

00:00:30 Speaker A

So obviously, this is a group that has really been weighed on by interest rates by enlarged, although there's a lot of other stuff going on in real estate, but it's been pretty differentiated among the different subsectors within it. So let's get to it here, the stock that you like here is called Stag Industrial. The shares not much changed over the past year. We've seen a little bit of an increase, so let's get to why you like it here. So it's an industrial reIT. But you say within industrial, it's sort of well diversified, so what does that mean to you?

00:01:01 Alex Morris

Absolutely. So when we think about reITs in general, they do all sorts of stuff. They own homes, they own, you know, as we talk about self-storage, this is industrial centers. These are things that collect rents. This is the, this is business at work, right? Most people don't own their factory, they end up renting it from somebody else. They have a pretty wide portfolio and over the last six, eight, 10 years, management's been on a tear of actually trying to do a good job at that. And they've done that. Same store sales are up, they found a way to be very conservative in how they acquire, to make sure they're acquiring creative properties, they've really succeeded there. And that's mean and intelligent diversification. They don't own just one sector, they're in 41 states, they're well diversified across industries, they're ready for various different parts of the economic cycle.

00:02:00 Speaker A

And when you talk about owning factories as well, or the factory facilities at least, there is of course this big push for onshoring, for nearshoring in the United States.

00:02:13 Alex Morris

Absolutely. So as jobs come back, right, every policy, big political election, politicians talk about bringing jobs to America, they're well positioned for that. Supply chain issues from the pandemic, some fixed, some not, some realizing they need to be onshore, not elsewhere, or closer to us, they own all of those facilities, and they've, they own them generally in tier one markets where we think a lot of that action will happen. So if that plays out, we think it will, they're going to be in the right spot.

00:02:48 Speaker A

Interesting. Okay. And then also, um, there's this focus on sustainable earnings growth, and you alluded to that a little bit when you talked about their sort of rational acquisition strategy as well, that, you know, they're sort of not focused on surges, but rather kind of a more steady increase.

00:03:11 Alex Morris

Absolutely. This is the traditional good management story, right? It's boring to, to be a good manager, you have to do the boring things from time to time, you can't just shoot the lights out, but they've done that. And they've really focused on finding the right properties in the right markets, acquiring the right rates, saying no to deals that don't make a lot of sense. It's not going to just keep growing because it looks like the growth there, management's demanded to know that they will be continued growth over the next five, six, 10 years. Stag 10 years ago was a different business. It was the type we said, well, it's going to be a turnaround story, let's wait and see. We think that that moment is now.

00:04:01 Speaker A

Interesting. Okay. And then let's talk about what maybe could be something that could be a risk here, and that's economic weakness among customers.

00:04:15 Alex Morris

Absolutely. I mean, it risk for every stock is that customers dry up, base dries up, but in particular, when you collect rents and you're relying on higher same store sales, which they've enjoyed for a long time, if that reverses, all of the thesis we just had starts to fall apart pretty quickly, and, and maybe in a compounded way. It just seems unlikely given all of the break points that they've put in, as well as these sort of fire breaks they have in their business model.

00:04:45 Speaker A

And just quickly as well, I want to just allude to rates here as a, as a factor, not just for this company, but for reITs generally, right?

00:04:55 Alex Morris

Absolutely.

00:04:56 Speaker A

We've been seeing, for example, yesterday, some investors come back into reITs as we saw rates come down a little bit. What do you expect there to continue to happen?

00:05:09 Alex Morris

Well, we're, you and I are usually talking about T-bill rates and whatnot, and, and those are going to come down. We still think there's one cut this year, but it won't actually make its way into the reIT market into the actual economy of folks getting loans until that rate actually cut actually happens. So whether it's two starting in September, one in December, it's really a 2025 story before that really makes it in. But the stock market is really good at guessing where are we going to be in that, that market. So now's the time to start putting your bets on and building a position, because you're not going to do it all one day.

00:05:45 Speaker A

Gotcha. All right, let's talk about the stock though that you think folks should avoid within this sector, or more sort of the sub-group, I guess, within reITs. This one sort of representative of that. We're talking about CubeSmart in this case, but we're talking about self-storage more broadly here, and you say there, there's too much of it.

00:06:09 Alex Morris

Exactly.

00:06:10 Alex Morris

There is, and there are stats prove it out. Their 90% occupancy rate, which sounds like a lot, they're used to 100% and being oversubscribed and building new facilities every month. Build rates are down, vacancy rates are up, and as a result, rents are way down. Down 60%, 16% year over year, which in the self-storage space, this is a short-term rent industry. If you're not building as much, you can't push that out and you're earning less per space. That's not a good, good growth story at all.

00:06:47 Speaker A

Yeah, doesn't sound like it. And as you mentioned, effective rates are down here. Are, are they slowing down building as a result of all of this?

00:07:00 Alex Morris

They are. They mean wisely so, but a big chunk of that industry is, this is a first derivative play on the housing market. Most folks don't go out and buy house storage just because they want to hold stuff they can't see or use. They need to move from one place to another, and they need somewhere to put their stuff for a short while. Less people moving means less need for storage, less need for storage means fewer people move, and it sort of compounds on itself.

00:07:34 Speaker A

Gotcha. And then also, the future, what does that look like? You know, because one would think at some point, we're going to see an improvement in the housing market that might spur things on, but what does this look like to you?

00:07:50 Alex Morris

Well, so we do think that'll come back, rates will help a little bit there, maybe, maybe not, but people are less mobile now than they were before, because you're locked into a pretty good interest rate on a mortgage in most cases. So we think, although this was a great ride, now's the time to take a pause, because we have a hard time seeing exactly where the growth comes from. It may, but we just don't see that linear path. So time to put our money somewhere else.

00:08:18 Speaker A

Okay, gotcha. Well, when we talk about the risks to the downside, um, for Stag, let's talk about the risks to the upside, that there's excess capacity that leaves quicker than expected or if interest rates come down more quickly.

00:08:36 Alex Morris

Yeah, if interest rates come down faster, people move more, or now they just have more money to buy more stuff, and then you need to put the old stuff somewhere, this obviously wouldn't work out. Our theory is, though, there's so much excess capacity in that space today, other competitors they have, who have done the same thing and overbuilt, that you're going to have a lot of lag between that and the stock really taking back off. You'd be able to pick that up in the numbers in a quarter or two and get back in. We just don't see that right now.

00:09:06 Speaker A

All right, fair enough, Alex. Thanks a lot. And do you have any position in either of these guys?

00:09:13 Alex Morris

Uh, so as the firm, we're buying into Stag, and we've done so with proceeds from our Cube position that we're now exiting.

00:09:22 Speaker A

Okay, gotcha. Thanks so much. Good to see you. And thank you for watching, goodbye or goodbye. We'll be bringing you new episodes next week at 3:30 PM Eastern.

00:09:30 Alex Morris

Thank you.