Sunny Ray talks with David Auerbach, Chief Investment Officer of Hoya Capital, about why the common belief that REITs suffer whenever interest rates rise misses the point. Auerbach explains that REIT-owned properties such as data centers, cell towers, apartments, and shopping centers are used by people every day, and that what matters most is whether tenants keep paying rent and whether companies can grow earnings and dividends. He recounts how he fell into the industry through a newspaper job ad and began on a REIT trading desk. The conversation covers the link between data center power growth and demand for industrial space, the many sectors inside REITs, including cannabis and billboards, and the housing affordability gap that supports apartments, single family rentals, and manufactured housing. Auerbach also shares Hoya's goal of reaching one billion dollars in ETF assets, his focus on positioning the firm's message for the year ahead, and his view that monthly dividend paying REITs with reinvested dividends can be a powerful long-term gift for a child. He closes with where listeners can find his work.
David Auerbach argues REITs are not really rate sensitive, because tenants keep paying rent and you use REIT properties every day.
What do people get wrong about REITs and rising interest rates?
People think REITs are interest rate sensitive, yet we use REIT-owned properties every single day, from data centers to cell towers. Rates can matter when a REIT refinances debt or takes on new financing, but running the properties is not rate sensitive. What I care about is whether the rent gets paid and whether the company can grow earnings and dividends.
Can you give an example of rent getting paid when conditions look bad?
The best performing REIT during COVID was a casino REIT, Vichy Properties, even though every casino was closed across the country. Its tenants, MGM for example, kept paying rent every month despite no revenue coming in the door. So the rent got paid, the dividend got paid, and it was business as usual.
How did you end up in real estate investment trusts?
It was literally by chance. The newspaper used to run a daily job section, and one day there was a two-line ad asking for a particular securities license. I called the number, got the interview, and landed a junior trader role on a REIT trading desk. That is how I got my foot in the door.
How do data centers connect to other kinds of REITs?
For every new gigawatt of power generated at a data center, the estimate is about 2 million square feet of new industrial space. So industrial REITs benefit from each new watt of data center power. People read the headline, but you have to peel back the layers and look at each company's fundamentals.
What makes housing a category of its own for investors?
Housing has many layers: apartments, single family rentals, manufactured housing, and senior living. Home affordability is a real problem, with the 30-year mortgage north of seven percent, so demand is huge and affordable supply is short. That demand benefits apartment, single family rental, and manufactured housing REITs, and builders who can deliver affordable homes.
You are aiming for one billion dollars. What does that road look like?
We are about 10 percent of the way there, and that number is mine. Few ETF issuers manage over a billion dollars, mostly household names like Vanguard, BlackRock, and State Street. A two-man REIT shop building a billion dollar ETF brand in a narrow niche would be pretty amazing. Over the next 90 days I am focused on positioning our message for next year.
Who gets this asset class, and who never will?
I think REITs belong in every investor's portfolio. They are slow and steady, the tortoise in the race, and a nice backstop on volatile days. Who does not get it? Someone who is all risk all the time, or investors who seek income in ways besides owning bricks and mortar real estate.
What is the best gift an investor can give a child or grandchild?
Buy monthly dividend paying REITs on the day they are born and reinvest those dividends. Over decades that can be the difference between seven figures and six figures at retirement. You are giving that child a free head start toward retirement just by buying and reinvesting.
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