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Speaker 1: Global business news twenty four hours a day. If Bloomberg

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Speaker 1: dot Com the radio plus mobile LAC and on your radio.

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Speaker 1: This is a Bloomberg Business Flight from Bloomberg World Headquarters.

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Speaker 1: I'm Charlie Pelota, Dow, b SMP, NAZDAK all declining. We

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Speaker 1: have got just over forty minutes to go before we

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Speaker 1: wrap up the trading month of August. Let's head right

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Speaker 1: over the first Word breaking news desk for today's afternoon call,

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Speaker 1: and here is at Lalan. Good afternoon, Charlie, man U.

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Speaker 1: Saverages are lower today, with the Dow down sixty five,

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Speaker 1: SMP falls eight and NASDAK declines fifteen, small caps six

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Speaker 1: centered lower by four, and the US tenure yelle at

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Speaker 1: one point five seven per cent. All ten SMP sectors

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Speaker 1: are lower, led by losses in energy, materials and industrials down,

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Speaker 1: Transports fall, NASDAC, Biotex lose twenty five, utilities down one,

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Speaker 1: and the VIX rises five. Leaders to the downside of

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Speaker 1: the down include Chevron, Boeing, and DuPont, while down leaders

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Speaker 1: to the upside include McDonald's and Intel. H and R

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Speaker 1: Block falls ten percent after first quarter results trailed estimates.

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Speaker 1: Viva system rises eight percent after beating estimates and raising guidance.

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Speaker 1: Pallo Alto Networks loses eight percent after giving a down

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Speaker 1: beat forecast for the current quarter, and Brown Foreman loses

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Speaker 1: four percent after missing first quarter estimates. After the Bell tonight,

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Speaker 1: watch for earnings from Salesforce dot Com and five below,

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Speaker 1: and also after the Bell, watched for Costco to kick

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Speaker 1: off August retail cops sales reports live from the first

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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: a w K on your terminal, and we're brought to

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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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Speaker 1: looking at the markets. This is Bloomberg, Bloomer. Taking Stock

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