REITs outperform in a higher interest rate environment, says BMO Capital's Brian Belski

It’s a real estate, you know you had this no doubt basically saying that conditions were oversold and investors should be buying on the dip. What are the the cases that you have to make that would suggest that the market is basically missed prices sector. We’ve built a career about zigging when everyone’s zagging and we have a process in how we look at things from the market to sectors to industries to stocks. And it’s looking at valuation, earnings, operating performance and performance. If you take a look at the percentage of stocks in the SP500 with respect to REITs is at an all time low. If you look at the reaction with respect to this higher for longer interest rates, it’s been an overreaction because our analysis shows that actually Reit’s outperform in a higher interest rate environment. Now BMO has learned that interest rates are going back to 0. So I mean you know so we have to kind of be in this range here we think between 3 1/2 and 4 1/2 on the 10 year treasury four to five. We think that’s a very, very good sign with respect to fundamentals, free cash flow which we talked about with respect to the communication services industry and Warner Brothers Discovery in particular, free cash flow yield for Reit’s continue to go up with debt going down and oh by the way payouts are going up as well. Lastly, from a contrarian basis, if you take a look at the amount of hold rated companies and all the S&P 500 companies in terms of Reit’s, they’re going up where the buy ratings are going down. So by the time that analysts are starting to turn real negative and dropping all their earnings, we think it’s time to get back into the sector. Now this isn’t a glaring jump up and down buy Reit’s and double double exposure, this is that we think they’re oversold. There’s an opportunity and we think the theme there is that that this is a contrarian by what everybody hates the sector, but real estate is not monolith. And you know, you’ve got areas like commercial real estate where there’s perhaps too much supply, too little demand, areas like residential that are starting to maybe see some cracks, but very constrained supply. So how are you kind of navigating within the real estate sector? So if you take a look at Reed’s, it’s no different than the real estate sector in terms of location, location, location. I mean if you’re if you’re in New York City like I’ve been this week and you try to travel around Midtown between 3:00 and 7:00 PM, can’t get around, everyone’s working, we’re coming back to work again. So I think the the death of commercial real estate is way, way precluded. I think people have predicted that way too early, number one. Number two, we’re starting to see reimaging of commercial properties into residential properties just like we saw the reimaging of retail properties into into apartments and consumer properties following the Great Recession. So I think this is a trend that is beginning to happen again. Lastly, I think still from data warehousing to industrial reads to healthcare reads, technology reads, I think people are kind of missing the boat there and so focused on commercial real estate in this notion of bad loans and the like and still negative which is your beat in terms of financials, right everyone, I think everyone’s way too fun. Yeah, I mean what we’re looking at by the way what’s coming up here, I mean it’s Equinix which is up on earnings in part that’s a REIT, but it’s all data centers, correct, things like Public Storage, again not commercial real estate related, right. And towers, you know cell phones. So there are plenty within the RE universe that are not necessarily just commercial real. So our, I would say our momentum kind of picks where fundamentals are greatest is Simon Properties. We love Cube because of the New York City market and the storage side of things. We love Prologis because everybody hates it in the warehousing side. And then from the commercial real estate and just that side of things, Boston Properties because those types of names, we own them in the portfolios that we have with the good fortune of running for BMO Wealth management. But we think now is the time to kind of start looking at those things. You know, you don’t want to be contrarian just to be contrarian or different if the analysis backs up to think differently, it is in this case. So that’s why we, what about a slowing economy though, Brian, Overall, what if we are really slowing and we start to see, you know, almost a recession, let’s call it. They’re not going to perform particularly well, are they? They typically do not. However, with respect to where the economy is, I think we’re still several quarters if not several years away from doing and that’s what the Fed is telling you and that’s what interest rates and oh, by the way, the employment situation is telling you, I think the whole notion with respect to the Fed investors have it wrong. We cannot be waiting around for the Fed to cut. I think that has been the wrong call all along. We’ve reared an entire generation of investors that think that stocks only go up if interest rates go down. What we’re beginning to learn now is that actually stocks can go up if interest rates flatten out and I think that’s very positive. We’re kind of back into the mid 80s, mid 90s type environment.