AIPIS 157 - The Real Estate Trusts, America’s Newest Billionaires and Watch that Rat Hole and Witness with Kenneth Campbell

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Welcome to the AIPIS show for accredited income property investment specialists and those who desire to be. This is your host, Jason Hartman where we talk about increasing your income, your productivity and just generally having a better life while serving your clients better with America's most historically proven asset class income property. We have a great interview for you today and we will be back with that in less than 60 seconds.

It's my pleasure to welcome Kenneth D. Campbell to the show. He is the founding partner, managing director and former chairman of Investment Policy Committee at ING Clarion Real Estate Securities. Found founder of Realty Stock Review, the first Investment newsletter on REITs or real estate investment trust, co author of the best selling and first full length book on REITs, the Real Estate Investment Trust, America's newest billionaires and author of the new book Watch that Rat Hole and Witness the REIT Revolution. Ken, welcome. How are you?

Thank you very much. I'm absolutely sensational today.

Good to have you on the show. Give our listeners a sense of geography, where you're located.

We're located in Radmore, Pennsylvania, right outside of Philadelphia.

Fantastic. When it comes to real estate investment trusts, and these are of course the pooled money way to invest in big real estate properties, large office buildings, etc. You're really the guy. I mean, you started doing this a long time ago. What's the history of it? I believe you said as we were just talking off air, they were legalized as a security in, what did you say, 1961?

Yep, Eisenhower, President Eisenhower signed a bill in September of 1960 to create real estate trusts. The concept was that mutual funds had been legalized in 1940 and the real estate people, primarily based in Boston and some in New York and Washington, wanted to avail themselves of the pass through tax treatment, as in mutual funds for real estate. And so they prevailed on Congress to pass the law. And as it so happened, happened I in New York City in 1961, just as they were, you know, getting off the ground. And I was employed by a magazine called House and Home. My Boss on a first news conference says, what are these REITs? And I said I didn't know. And he said he didn't know. And he said, what's that rat hole? Meaning that's your assignment. Anything that happens in the real estate investment trust world, bring it to me and we'll get a story in the magazine. And I've been watching them for 55 years.

Wow. It's a long history of watching REITs. So you talk about the REIT revolution. I mean, 55 years into it, isn't the revolution long past us now, or is there something going on we should know about?

Jason, what happened was that the Wall street got very infatuated in the late 60s and early 70s with a group called the Mortgage REITs. And they were basically companies that made construction lo to developers and builders all over the country. They had an enormous run. They probably tripled in price in probably a two and a half year period. And then the 1974, 75 recession came along and it just killed them because it basically killed building. So the mortgage rates passed into history. There were about 75, 80 voyage REITs and they had a good run on Wall street and then they died. And in the aftermath, enormous number of what we would call activist investors today, we called them vulture investors, then came in and tried to take over the REITs, the failing mortgage REITs, and some of the equity REITs. Equity REITs being those that own properties. And through the period from say 75 through 90, when I finally sold my newsletter, there were probably 150 people who tried to take over rates in various ways. And it was quite an active period. But the bottom line of all that churn, what I call churn over that 15 year period, was that Equity REITs, the owners of properties, rose to prominence. And then in 91 we had the major offering, a new equity REIT called Kymco Realty at the time. And then in 92 we had the offering of Taubman Centers, which was a very well thought of offering. And quite frankly, we went on from there. And today the REIT equity REIT industry is a little over a trillion dollars. And it's got about 165 or 170 participants in the public markets right now. And they've been doing swimmingly. They're up nearly 14% year to date as we talk today, which doubles the standard in force, 500 at about a six and a half percent gain year to date. And that's what gives me some heartburn, because I don't like to see the REITs get that far ahead of the broad market. And so while the fundamentals on real estate are really, really sol, demand seems to be good. There seems to be some overbuilding in apartments in San Francisco and New York City. But beyond that, market appears to be pretty solid.

Okay, now when you talk about the market, you're talking about the underlying real estate market, because there's really multiple markets here, of course, like in anything. I mean, there's the availability of financing, the amount of demand by tenants, the underlying real estate market. Then there's a separate market, which is really the REIT market, the traded securities market, which could be completely out of sync with the underlying asset, couldn't it? Yes, you see this all the time in like derivatives markets and in, in the stock market in general, where the stock can be doing one thing, but the industry or company specifically could be doing another thing. Right?

Yes, that's exactly correct. And that's the point. I am. But right at the moment, the market, the stock market, the stock market seem to be very exuberant on the future of real estate. Whereas in a real sense, the real real estate market, if you will, seems to be. To be very sound, but is not setting the world on fire, in my opinion, anyway. So I get skittish when those two don't march in tandem.

Right, right. Good, good stuff. So what's happening now then? I'm not sure if you really explain that. Like when you say, you talked about San Francisco and you said the apartment market might be overbuilt there, and there are many apartment REITs, it's hard to imagine that the San Francisco market could be overbuilt. With rents being so insanely high there, it seems like you need more supply to soften the prices.

The apartment market, it's not lost on everybody that the millennials, young people just entering the workforce, want to live basically in center cities where they have a broad range of amenities and generally they rent. So there has been a surge in.

Building to meet that demand.

First class apartments for the millennials. Yes, there are, I hear, 8 million millennials out there. And so back, well, maybe moving into the renter market.

But overall there's 80 million of them. It's bigger than the baby boomers, so there's a lot of them. And they are moving right into their prime rental years. And certainly they're a huge, huge factor on the real estate market and many other areas of the economy too. Every economist and demographer saw the millennials coming many years ago, of course, because it's not hard to predict when you talk about age, you know, people will reach a certain age. It's pretty much a given. But has the market for, say, apartments overbuilt for them, or is it still trying to meet that demand?

It doesn't seem to be overbuilt generally, if I look at the entire United States data. But as I say, there seem to be some building. Now, I will have to backtrack here and say that the supply of permits for new apartments seems to be tailing off in the last few months. So the supply that's being built was started in the ground two years ago, is now coming on ground onto the market seems to be the problem. Year and a half, two years down the road. I don't think that's a problem. But right at the moment, and that's the discontinuity that you find over and over and over as you analyze real estate markets. And obviously it has some effect on some REITs who are obviously bringing new properties to market in the cities I mentioned. Those are the two that have seemed to be mentioned pretty regularly. And beyond that, the apartment market seems to be doing pretty doggone well. Office market is doing okay. It's got the same kind of indigestion in center cities again in New York, in San Francisco and LA seems to be doing much better. Boston is really hot, hot market. So it varies from city to city. And obviously a major REIT wants to have properties in a, you know, a diversified portfolio so that it hedges its risk, if you will.

They diversify geographically, of course, in the world of REITs. What type of REITs do you like? For example, do you like office? Do you like apartment? Do you like industrial? What type of properties do you like as the underlying asset class?

You know, that's going to vary, Jason, from day to day, year to year and so forth. So just to come back to the basic thing, I like REITs that own properties. We call them Equity REITs. They own the equity and they borrow mortgages either through bonds issued in the stock market or direct mortgages issued by insurance companies or banks or other kinds of lenders. So I'm a fan and have been a fan for, you know, a lifetime now of the equity REITs. The property type that I favor, which is not the property type, which CBRE Clarion may favor. But you know, what my colleagues do and what. What I say is sometimes two different things. Right now is the industrial properties. I just think that they are benefiting from a surge in demand from E Commerce, and their growth rate seems to Be above average, if you will. Their stocks seem to do pretty doggone well, but like everything else, nothing grows to the sky. So.

Right.

My word would be to anybody out there that's listening to me would be to check with your financial advisor because you know I'm not going to pick a stock, but even my mind could be wrong on the future.

I got it. Let me, let me switch subjects. Okay, so I want to, I want to make sure we get time because I got to ask you about something super interesting.

Sure.

In the 80s you were involved with some of the biggest names in the financial world that we all know. Carl Icahn, the infamous Michael Milken, Sam Zell, a huge real estate investor. Warren Buffett, of course. And you were doing some deals with him. Tell me what that was like. What are those guys like?

Back in the 1980s a friend of mine and I operated an investment banking business that was essentially would act as independent advisors and validators, if you will, for mergers and acquisitions that were taking place during the 1980s. I think we did about two dozen of what is called in the trade fairness opinions on those. Carl Icon, whom I met only once. Apparently a friend of mine, a lawyer, was a friend of Carl's and Carl called him. They were talking and my friend reached into his drawer and said, hey, you should look at the REITs and pick the name off my. Whatever issue he was looking at from Realty Stock Review. And lo and behold, before you knew it, Carl had bought a majority position, or not a majority about a controlling position, around 26, 27% of the thing. And it turned out to be Carl Icahn's first foray into activist investing. A year later he had controlled the Enthalpy, which was. It originally was called Baird and Warner, based in Chicago. And he converted the name to Bayswater Realty and it became a vehicle for Carl and his real estate ventures for a number of years afterwards. During that period I tried to talk to Carl and he was very, very, very, how shall I say, non responsive to my questions. It was disappointing to me at the time that I couldn't get any real feel as to what Carl was about. And that's the only time I ever met him. But I say with truth that one of my publications.

Singled out the first deal that Icon ever did. Of course he said, he's gone on and made a few more bucks in.

You and I. Yeah, he sure has. He's obviously a big name. What about Michael Milken, Sam Zell, Warren.

Buffett, Milken, my partner and I had Been nominated and elected to be chairman and president of a very, very, very mortgage REIT. Somewhere around 1982, it had a dementia issue, convertible dementia issue that was impossible to pay. So we tried to do an exchange offer to the convertible debenture holders and wound up finding that Michael, through his Rexell Burnham at the time and through other clients of his, essentially controlled somewhere between 30 and 40% of the bonds. And we just. The bonds never went into default, interestingly enough, and my partner and I were forced out of the offices and some nominees of Michael took over. I only met Michael once and again, but not under these circumstances. So it was one of those things that happened in my life and I tell a story in the, in the book.

Yeah, interesting. Anything you want to say about Sam Zeller, Warren Buffet?

They're two different piece and APPLAUSE Sam took over again, a very highly leveraged REIT called Great American and used a device to create a book of receivables by using the tax loss it had. The Great American had huge tax loss carry forwards. And story at the time was that if you could use those within the confines of the IRS regulations, you could make a fair amount of money because your earnings were tax free for a period of time. And Sam bought into Great American at about, I think, around $8 a share somewhere in the very late 70s, 79, 80, somewhere in that range, and ultimately sold it or liquidated it in 95 at about 50 or $55. The exact price is in the book. And that was the beginning of Sam's experience in the public markets. He obviously now owns a controlling interest in Equity Residential, which is the largest department REIT out there, and he owns a controlling interest.

He's a big deal. We can leave it at that.

He's a big deal.

That's right.

Certainly a, Sam is a, is a guy that, you know, I've known over the years and he's, he's a great guy. You know, I like Sam a lot and I think he learned a lot about running public REITs from, from his experience with Great American. That's, that's the bottom line of my thing. Warren Buffett was chairman, sorry, only a director of one of the very early REITs called general growth Properties. And he and I had met him on that occasion somewhere in the early 70s, 71, 72. And then later on, he and his wife at the time started buying shares in again, REITs where there was a great liquidity, where he felt that the payoff would be great. He's very, very, very high on having a margin of safety in his things and he bought stock in a called central mortgage and you must talk in that thing called City National Mortgage and got big payoffs out of those. And I think those incidents occurred very late 70s or early 80s. But Warren is a very, very, very sharp investor. I'm sure he's lost money somewhere along the line, but I don't know when I can't piece a, you know, put together. I own a, a slice of Berkshire Hathaway today because I think he's a very smart investor and it's done very well for me.

What is the outlook on the regulatory climate as far as REITs and these pooled money assets? You know, what are your thoughts there?

My thoughts are that there's a current regulation that just has come down out of the IRS that puts some very tight strings on spinning off various types of real estate into rei, corporate real estate, if you will, into real estate investment trust. Everybody since the beginning has talked about the General Motors of real estate. And it's always been said that General Motors could do very well if it spun its factories and other real estate into an REIT. The same has been said about McDonald's, that McDonald's could do a great REIT by spinning off its food locations. And the same has been said about Macy's. Macy's is a department store that owns a lot of real estate around the country. And the IRS put rules in place within I would say two months or three months that would essentially put a lot of strings on that. I'm not saying that that can't happen, but I think that we're not going to see a General Motors REIT anytime soon. But smaller deals probably will happen. MGM spun off recently about 15 or 20 of its casinos and resort properties into a new REIT called MGM Growth Properties. So the regulatory environment is tough for large industrial and retailing and other commercial corporations to spin off their real estate into reit. But it could happen.

Very interesting stuff. Well, any thoughts on the Brexit or the economy in general as we wrap up?

I think Brexit is going to slow new construction in London for a period of time, probably two, three years, until everybody sees how everything shakes out. It's interesting. The London market vacancy had been going down very, very significantly. It's probably the lowest vacanc in the last 15 years and maybe 20 years in the London commercial market, office market. So this probably will be a help to even a medium term basis for the major REITs in London. It has also had the impact of Directing some new money flow from overseas. Let's just say there's an enormous well of foreign capital out there and they all like to invest in the United States. So my feeling is that New York City will get a fair share of that. So I think it helps New York in its competition with London as a world financial center. And it's probably part of the reason that the REITs have been so strong in the last 30, 45 days. Longer term, I don't know what the impact will be. I think it's, everybody seems to think it's going to slow growth on the cocking and a little bit and slow growth in the British in England, if you will.

I think it'll ultimately be positive though, because they're under the burden of less bureaucracy and lower taxes to, you know, a non localized governmental entity that they have really has very little accountability.

That's exactly my feeling, Jason.

So, so there may be some short term pain, but.

And I get kicked out in the teeth a little bit on that point. But I think longer term it's going to be very good for uk, London specifically, and I think it'll be good for the United States too, quite frankly.

I do too. I think one of the interesting things about it, Ken, is that I think it's going to give the Fed all the excuses they need to keep interest rates low, which, you know, of course is going to fuel the real estate market. Right?

That's true. You know, I have not seen this kind of interest rates. First house I bought was 6% mortgage and my son at one time paid I think 13 and a quarter, 13 and a half percent for a mortgage. I look at these numbers today, you know, 375, 350.

It's insane. It's an amazing time to be a real estate investor, isn't it?

Yeah, yeah, yeah, yeah. You know, I mean, real estate to me has always been a great, great, great store of wealth or value for people. And I just got so many permutations, so many ways you can go in real estate. I just happened to stumble on the REITs a long time ago and I grew up with them and my wife and I have a significant stake in the REITs through mutual funds. We don't buy stocks. If you read the book, you'll see that we don't buy stock, individual stocks, we just buy mutual funds because we think that's the easiest way they go.

They sure do take a lot of fees though.

Well, the fees are coming down. Think the fees are coming down. And you're right. The fees are high sometimes, but I think that that's probably a thing in the past. You know, I think the fees are going to be lower. You know, just. No doubt about that.

Technology has put some pressure on the fees, which is a good thing. But the interesting thing, you know, the interesting thing to me, Ken, is that there have been so many studies on how these, these fund managers, they can't even beat the index. You know, you could just buy like when. Now we're talking about stocks now, not REITs. Okay, but. But you could just buy the S and P index. Right, Like a Vanguard S and P index fund. Right. And you're gonna beat all these fund managers without all their fees on top. It's unbelievable. You know, I mean, as an average, you know, of course there's going to be a few outliers that do great.

But, you know, you know, I think people worry about the fact that they might get, you know, a big downturn. You know, we saw a very big downturn in the S and p back in 0809. So there's comfort in that. Obviously. Jack Bogle, who happens to live close to where we live and, you know, says if people are buying pizza, you better, better be selling pizza. And he's selling pizza at Vanguard, you know.

Right.

So he's doing pretty darn well.

Yeah, he certainly is. Ken, give out your website or any, any information or resources you want.

Watch that rat hole all, you know, all strewn together.com and try to keep posts up on it. Been negligent the last. My wife had a surgery a couple of weeks ago and I've been sort of.

Busy with her. Yeah, she and I've been married 65 years, so I'm going to give her the first preference.

Good stuff. Good stuff. Well, good. Kenneth D. Campbell, thank you so much for joining us today.

We much appreciate and good luck and we'll keep in touch.

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