Latest / Bloomberg Intelligence / Wells Fargo's LaForge on New Real Estate Sector in S&P (Audio)

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Wells Fargo's LaForge on New Real Estate Sector in S&P (Audio) · Bloomberg Intelligence

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  Speaker 1: Breaking news desk. I'm at the loan, Charlie. All right,
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  Speaker 1: thank you very much a head and to hear live
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  Speaker 1: breaking news over your bloom Bread time squawk asque you
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  Speaker 1: you by a sector Spider et F S. Why by
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  Speaker 1: a single stock when you can invest in the entire
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  Speaker 1: sector of visits sector sp d r S dot com
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  Speaker 1: or call one eight six six Sector e t F.
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  Speaker 1: I'm Charlie Pellots and that's a bloom Bread business flash.
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  Speaker 1: This is taking stock with pim Fox and Kathleen on
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  Speaker 1: Bloomberg Radio. REEFS. Real Estate Investment Trust an important milestone
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  Speaker 1: this month as the SMP five hundred decides to break
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  Speaker 1: those reach shares out of its financial index and put
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  Speaker 1: reads in their own separate category. What does this tell
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  Speaker 1: us about the growth of reads in their place in
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  Speaker 1: the economy? What does it mean for investors who were
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  Speaker 1: very happy to welcome something to the show? You can
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  Speaker 1: answer all these questions and more for us. That's John
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  Speaker 1: the Forge. He's head of real Assets Strategy at the
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  Speaker 1: Wells Fargo Investment Institute in St. Louis, Missouri. John, Welcome
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  Speaker 1: to the show. Hi, Kathleen. How are you so? Was
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  Speaker 1: this something that people were clamoring for in the industry?
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  Speaker 1: How did this come about that the S and P
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  Speaker 1: five hundred committee said, okay, reads, you get your own spot. Yeah, finally,
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  Speaker 1: but it wasn't clamoring. I'd say reats came into existence
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  Speaker 1: around nineteen that's when they were signed in the law.
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  Speaker 1: So it took a while before investors finally took them
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  Speaker 1: seriously enough where the SMP finally said, yeah, these aren't
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  Speaker 1: regular stocks, they need to be broken out. Why did
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  Speaker 1: investors take them seriously for first? It seems to me
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  Speaker 1: they've been so important and when you think about it,
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  Speaker 1: looking for a vehicle in which you could invest in
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  Speaker 1: apartment buildings or malls or some of the chunky important
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  Speaker 1: parts of the economy. Why were investors to get on
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  Speaker 1: the get on board it really is Uh. The real
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  Speaker 1: reason it stayed out of more of the public sector,
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  Speaker 1: which would be US investors, is that many investors took
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  Speaker 1: it privately, so they wanted to own it privately. But yeah,
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  Speaker 1: it took a long long time before you know, the
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  Speaker 1: the public investors such as ourselves, mutual funds, pensions and
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  Speaker 1: so on, finally took it seriously enough where it said, yeah,
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  Speaker 1: this is a space we need to be invested in.
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  Speaker 1: What's unique about reats For someone who has not invested
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  Speaker 1: in these companies yet, what do they need to know
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  Speaker 1: in terms of what makes them different and therefore that
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  Speaker 1: gives them different opportunities, whether lines of stocks with a
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  Speaker 1: kinds of companies and what is the risk with them? Yeah,
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  Speaker 1: the major differentiator is the idea that with with reads
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  Speaker 1: you actually buy law. To be classified as a real
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  Speaker 1: you have to at least seventy your business come from
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  Speaker 1: real estate, predominantly income producing real estate. If you think
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  Speaker 1: of a regular stock like take Microsoft as an example,
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  Speaker 1: they don't have to get all their business from software.
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  Speaker 1: If they wanted to go invest in place ELTs, they could,
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  Speaker 1: but in exchange for that of doing seventy percent of
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  Speaker 1: your business from real estate, you get a certain tax
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  Speaker 1: status that allows you to pass on a lot of
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  Speaker 1: your income tax free. So a read that manages real
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  Speaker 1: estate for you, they don't pay a corporate tax rate
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  Speaker 1: like Microsoft does, So you get taxed twice as an
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  Speaker 1: investor if you invest in Microsoft, you really only text
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  Speaker 1: once if you're investing in Reads. Okay, so the reads
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  Speaker 1: are gonna be there are separate indexy broadly in terms
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  Speaker 1: of reads. I mean you are overweight, you wrote recently
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  Speaker 1: if to let her earlier this month, but you have
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  Speaker 1: some concerns. Yeah, Reeds have been a great play ever
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  Speaker 1: since we've been overweight, which has been about nine months now.
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  Speaker 1: But we've seen a little bit of weakness recently, and
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  Speaker 1: we believe that is because we're starting to see one
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  Speaker 1: lending standards by banks are starting to tighten a little bit,
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  Speaker 1: not necessarily good. Uh, your real estate gains in price
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  Speaker 1: are starting to slow. And and what I mean by
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  Speaker 1: that is you're looking at year to year price games
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  Speaker 1: in real estate today about five percent, but if you
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  Speaker 1: go back a year ago, was closer to twelve percent,
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  Speaker 1: thirteen percent, and that was the same in two thousand fourteen,
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  Speaker 1: two thousand thirteen, two thousand twelve, we had those mid
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  Speaker 1: teens price games and now we're down to five percent,
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  Speaker 1: So we're still positive, but is getting weaker. Uh, And
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  Speaker 1: those are the two big ones. Plus number three is
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  Speaker 1: there's been some polling recently of real estate insiders and
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  Speaker 1: they're getting worried. These lending standards are really making it
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  Speaker 1: harder to do business. So you're starting to see some
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  Speaker 1: of the red games we've seen year to date in
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  Speaker 1: two thousands sixteen is starting to pull back in a
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  Speaker 1: little bit. So, Uh, you have I have to ask
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  Speaker 1: everybody the same question because we just about any kind
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  Speaker 1: of investment you're going to make, but particularly in any
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  Speaker 1: kind of real estate interest rate sensitivity. Right, Yeah, the
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  Speaker 1: reserve is going to meet in a couple of weeks.
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  Speaker 1: Jobs report on Friday. Would interest rate increases make a
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  Speaker 1: much of a difference to the outlook for reads? It can.
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  Speaker 1: What I would do as investors is you really need
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  Speaker 1: to look at the internals of your reads and and
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  Speaker 1: look at one particular statistic, and that is do the
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  Speaker 1: reads that you own do they have the ability to
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  Speaker 1: grow their dividends? Because what We've found when we've tested
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  Speaker 1: this historically, is if we start seeing interest rates begin
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  Speaker 1: to rise, the reds that have the ability to raise
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  Speaker 1: their dividend payments through time as interest rates are going up,
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  Speaker 1: Wall Street pretty much gives them a pass. They're okay
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  Speaker 1: with that, they still invest in them. They don't they
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  Speaker 1: don't hammer them. But it's the reds or anything really
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  Speaker 1: high yielding that does not have the ability to raise
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  Speaker 1: their div than payments. What Wall Street does is they
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  Speaker 1: typically target them as like a bond and they really
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  Speaker 1: whack them pretty hard. Well, it's gonna get rat rack
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  Speaker 1: pretty hard. That whacking might mean I guess you should
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  Speaker 1: be getting ready to lighten up on those reads or
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  Speaker 1: maybe just take a slightly different position. John LaForge, thank
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  Speaker 1: you so much for joining us. John has head of
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  Speaker 1: real asset Strategy at the Wells Fargo Investment Institute. He
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  Speaker 1: says he's had a by call sort of been a
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  Speaker 1: plus looking at reads for an investment for the last
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  Speaker 1: nine months, starting to a little more cautious on that
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  Speaker 1: for a variety of reasons. In terms of looking at
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  Speaker 1: the commercial real estate industry. Up next, we're gonna be
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