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By Julie Hyman, Yahoo Finance
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
Video Transcript
It's a big noisy universe of stocks out there.
Welcome to, good buy 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 investments for us as commercial concerns have made some investors hesitant.
I'm here with FM Investment Chief Executive Officer, Alex Morris.
Good to see Alex.
Thanks for coming in.
Thanks for having me back.
So obviously this is a group that has really been weighed on by interest rates by and large.
There's a lot of other other stuff going on in real estate, but it's pretty differentiated among the different sub sectors within it.
So let's get to it here.
The stock that you like here is called Stag Industrial.
The share is 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.
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So it's an industrial re but you said within industrial, it's sort of well diversified.
So what does that mean to you?
So we, we think about reeds in general, they do all sorts of stuff, they own homes, they own, you know, as we're talking 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 68, 10 years, management's been on a tear of actually trying to do a good job with 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.
And they've really succeeded there mean an 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.
And when you talk about owning factories as well or the factory facilities, at least there is, of course, this big push for on shoring for near shoring in the United States.
Absolutely.
So as jobs come back, right.
Every big political election coming up, politicians can talk about bringing jobs to America.
They're well positioned for 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, 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 gonna be in the right spot interesting.
OK. 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 of a more steady, 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 and the right markets acquiring at the right rates saying no to deals that don't make a lot of sense.
It's not gonna just keep growing because it looks like the growth there.
Management's demanded to know that they will be continuing growth over the next 56, 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 interesting.
Ok. And then let's talk about what maybe could be something that could be a risk here and that's economic weakness among customers.
Absolutely.
I mean, 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 maybe in a compounded way, it just seems unlikely given all of the break points they put in as well as the sort of fire breaks they have in their business model and just quickly as well.
I wanna just allude to rates here as a, as a factor, not just for this company, but for reach generally.
Right.
We've been seeing, for example, yesterday, some investors come back into RES as we saw rates come down a little bit.
What do you expect there to continue to happen?
Well, we're, you and I are usually talking about t bill rates and what 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 re market and into the actual economy of folks getting loans until that rate cut actually happens.
So whether it's two starting in September or 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 market?
So now is the time to start putting your bets on and building a position because you're not going to do it all in one day.
Got you.
All right.
Let's talk about the stock though that you think folks should avoid within this sector or more sort of the, the subgroup, I guess within res this one sort of representative of that we're talking about cub smart in this case, but we're talking about self storage more broadly here and you say there, there's too much of it.
There is and their staff 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.
Yeah, it doesn't sound like.
And as you mentioned, effective rates are down here are, are they slowing down building as a result of all of this?
They are, I 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 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 and then also the future.
What does that look like, you know, because one would think at some point we're gonna see an improvement in the housing market that might spur things on.
But what does this look like too?
Well, so we do think that will 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 is 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.
Ok. Got you.
Well, when we talk about the risks to the downside, um for stag, let's talk about the risk of the upside that there's excess capacity that leaves quicker than expected.
Or if interest rates come down more quickly, if interest rates come down faster, people move more or now they just have more money to buy more stuff and they need to put their 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.
All right.
Fair enough, Alex.
Thanks a lot.
And do you have any position in, in either of these guys?
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.
Ok. Gotcha.
Thanks so much.
Thank you.
Good to see you and thank you for watching.
Goodbye or goodbye.
We'll be bringing you new episodes next week at 3:30 p.m. Eastern.
Bitcoin Gained 164% in 2023 but Crypto Millionaire Abandoned It For This
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P.S. He's predicting an 8,788% return for this coin in the next 5 years. Find out its name here.
