I don’t think I’ve ever looked at a teaser ad from Wealthpress before, so today I’m answering a reader question about the teaser pitch for Jeff Zananiri’s Monthly Money Flows service.

And it seems a little bit like a “bait and switch” ad, because they’re essentially promoting a dividend-paying wealth-builder of a company, and a second company that might become the same, and those work best when given many years to compound… but they’re actually advertising a service that they say aims to be in and out of stock and option trades in a month.

Not sure why the disconnect, but maybe they just know that a monthly dividend payer is a good way to get the attention of new investors these days — when the exciting stocks are falling 10% in a day, suddenly everyone loves steady dividends.

But regardless, I appreciate a good dividend-paying company, and the pitch is built around an attention-getting thesis with this idea that we’re evolving into “Landlord Nation,” so I thought I’d dig in. I can, at least, look at those two dividend-paying stocks for you.

As you might imagine, the ad from Zananiri don’t soft-pedal anything:

“… what my team and I have uncovered could be the biggest downfall of our nation’s history…

“I’m talking about a catastrophic event… Even GREATER than the 2008 Recession…

“And as I speak… The dominoes are starting to fall….

“This will be an extremely painful time for a lot of hard working Americans.

“Millions could lose their homes… But for investors who take action today… Getting ahead of this great wealth migration…

“Well, I believe that they’ll be in front of some life-changing market moves…”

So what’s about to happen?

Wait for it…

wait for it…

the Fed is going to raise interest rates again!

I know, shocking!

More from the ad:

“… the markets are already starting to price it in… Ahead of time…

“The mortgage rates are continuing to climb, only escalating this crisis…

“Honestly, I wouldn’t be shocked if a few months from now… Mortgages are 8… 9… maybe even 10%.

“A lot of people have no clue… but right now the Federal Reserve is set to make a move that could completely up-root millions of Americans from their homes…

“Devastating families… And wreaking havoc on local communities.

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“And anyone who is retired, or hoping to retire, needs to take action today… Before this nationwide issue could turn disastrous.”

It’s true that inflation and rising short-term interest rates from the Federal Reserve have pushed mortgage rates higher — so far the recent peak was in June, at nearly 6%, and there was a dip after that but we’re still pretty close to those highs, which are now the highest they’ve been in about 14 years, since the market crash started in late 2008. This has been the steepest and most sustained increase in mortgage rates since the early 1980s.

So where might one find these winning ideas while mortgage rates climb? Assuming they might continue to climb? From the pitch:

“It’s in a completely overlooked sector of the real estate market… and that’s the secret behind today’s stock and the $3 billion opportunity at bay…

“CNBC reported…

‘Millennials and Gen Zers do want to buy homes—they just can’t afford it, even as adults… nearly two-thirds said affordability was the main reason they hadn’t yet purchased a home…’

“So what do they do? They turn to alternative housing options…”

Whatever could those alternatives be? I’ll give you a hint, it rhymes with “shmenting.”

Again, this is not news. Most of us have seen the stories about giant companies who are buying up whole neighborhoods’ worth of homes to rent them out, and about how valuable apartment buildings are today, now that rents are soaring through the roof.

This ad is all about the havoc wreaked on the housing market by the move to zero interest rates as the Federal Reserve sought to continue to stimulate the economy (and after the pandemic hit, to rescue it)… and then, this year, the rapid increase of interest rates as the Federal Reserve had to begin pulling back on that stimulus, in order to fight rising inflation.

This is how I put it in a note to the Irregulars back in May, shared just so I can avoid having to retype the words — rates have risen now, and the market has recovered some, but as the Fed continues to be assertive in “talking down” animal spirits, including with Jerome Powell’s latest speech at Jackson Hole, the situation is very similar to what we saw a few months ago:

“The pain from inflation is going to stay with us for a while, one expects — it will take the Federal Reserve a while to get rates high enough to slow the real economy, particularly if they’re trying to avoid a shock, and therefore to cut demand for goods and services, but, as we’ve noted before, that still won’t kill inflation dead, not when supply is held hostage to continuing supply chain snarls that are most evident in China, whose factories seem to make at least a part of almost everything in the world. You can’t fix supply problems from war or disease with higher interest rates, but you can eventually bring a lot of prices down if you slam on the economic brakes hard enough in your attempt to reduce demand.

“Part of the challenge this week seems to have come from increasing commentary out of Fed officials that was somewhat ‘hawkish’, they’re trying to make sure that people understand they care more about monetary stability than about causing negative reactions in the stock market. Their job is both to force the economic growth down by raising rates, and to talk it down by posturing about raising rates even faster. This week was mostly talk, but with Target and Walmart pushing inflation to the front page, and with wild Jim Cramer screaming for faster rate increases and being visibly panicked about inflation for his CNBC audience, it was talk that hit home.

“First to fall seems likely to be housing, which is a huge chunk of spending and does trickle through to the inflation numbers — housing affordability has been a growing issue for years, of course, but a house is one of the few things that almost everybody buys on credit, which means the Fed can have a much more meaningful impact on the price, much more quickly. The move up in mortgage interest rates from 3% to 5.5% was incredibly rapid, and it will take time for the housing market to readjust — most people buy houses with an eye on what they can afford to finance, not on the top-line price, which means that the real price of buying a new home jumped by about 35% in the past few months.

“That is already slowing the secondary market a little, but it means we’re very likely to see a lot of cancellations of new home purchase agreements, or of agreements to reduce prices or subsidize borrowing costs to some degree to ease that burden a little — the home builders are all cheap based on either trailing or forward earnings, but they’ll probably get cheaper as cancellations begin to pile up and their order backlog shrinks. A lot of the people who placed an order for a new home with a payment of $1,300 a month in mind can’t swing the new price of $1,800 a month as interest rates rise….

“The one thing that the Fed can definitely do is crush animal spirits a bit, beating down the “wealth effect” (how rich we all feel when our portfolios and home prices are rising), by pressuring housing prices and hurting the stock market, which doesn’t have much of a direct effect on our daily consumption patterns or on CPI in any given month, but does certainly impact sentiment. That may be enough to slow inflation down enough that we can get to a period of low economic growth and ‘muddling through’ as China figures out how to manage COVID-19 and reopens its factories and ports to smooth the flow of trade and help fix the supply chain crisis, and as the world deals with the energy upheaval coming out of the Russian invasion of Ukraine, but that’s the rosy ‘soft landing’ scenario.”

And it has, as expected, come to hurt the housing market — cancellations are rising for the homebuilders (though as of the last round of quarterly updates, not as much as I thought they would), and home sales are falling quickly… particularly in the areas that soared during COVID (exurbs, places like Boise, Idaho, where everyone from California seemingly went to hide, etc.) It’s working, the Fed has talked up mortgage rates a bit, the home bubble is deflating in a lot of places, and that trickles through.

The pitch here from Wealthpress is really just taking that to an extreme to get your attention: home ownership is over, we will all be renters, and it’s time to profit from that. More from the ad…

“The American dream is gone. Long gone. Welcome to Landlord Nation…

“The end of home ownership in America. And you can’t escape it…

“Newsweek said:

‘First-time home buyers are going to be in for a real problem, and it won’t change in the slowdown. The next group that suffers the most are baby boomers trying to downsize and looking for move-up buyers, and move-up buyers who can’t sell to first-time buyers.'”

So what does that mean? Mostly, it appears, it means “invest in the landlords.” Here’s where he begins to actually talk about some investments…

“I’ve identified one stock that stands to benefit greatly from the Landlord Nation.

“It’s a housing company that owns more than 11,000 rental properties worldwide.

“And right now, Wall Street is buying up shares of one stock like crazy…

“Bank of America owns north of $1 billion of this company…

“Blackrock is nearing a $3.7 billion stake.

“And Vanguard reportedly bought up $6.4 billion of this stock…”

There have been a lot of “buy up single family homes” real estate companies created over the past decade, including some really large operators like American Homes4Rent (AMH), which carries a valuation of $12 billion and owns more than 50,000 homes, or the even larger Invitation Homes (INVH, $22 billion and 80,000+ homes), as well as giant apartment complex owners AvalonBay Communities (AVB) and Equity Residential (EQR), each of which own more than 75,000 apartments (both stocks are valued around $25-30 billion). That’s just a sample, there are several other companies of comparable size. There are even large-cap companies that own mobile home parks and RV campgrounds — if rent is paid for some kind of property, Wall Street has been lookin for a way to roll up those rents into a big package for years now.

So in that context, 11,000 rental properties is not a whole heck of a lot… what is he talking about? It has to be pretty big if Vanguard owns a $6.4 billion stake.

You know what it is? It’s the same stock that he later reveals for free… and it’s an odd match.

“A little known stock that has already outperformed the S&P 5-to-1 over the last 25 years…

“And could hand investors yet another windfall over the coming months, even weeks…”

That’s actually the freebie, a well-known dividend darling called Realty Income (O), which has marketed itself as the “monthly dividend company” for decades now (and been teased by lots of different newsletters). They are one of the leaders of the triple net sale/leaseback business, and they have tremendous breadth, owning the property that underlies hundreds of fast food restaurants, car dealerships, pharmacies, strip malls and the like. (“Triple net,” sometimes abbreviated NNN, just means the tenant pays for everything — maintenance, insurance, taxes, etc. — and the landlord has very low operating costs.)

Realty Income is a fantastic company, and they have built remarkable scale in the ownership of retail properties… but it’s entirely wrong and misleading to say they are a “housing company that owns more than 11,000 rental properties” — kind of seems like they might have let the new intern write the script for this ad. They do own 11,400 properties, and yes, those are exact matches for the Vanguard, Blackrock and Bank of America’s ownership hints… but Realty Income does not own a single apartment building or single-family home. They own almost exclusively stand-alone retail properties (84% of the portfolio), with a little bit of industrial (14%) and less than 1% each of agricultural and office properties. Not an apartment in the bunch.

They’re pretty well diversified within that sector, too — their biggest tenant is only 4% of the portfolio (essentially a three-way tie with Walgreens, Dollar General and 7-Eleven), they’re in every state (yes, even Alaska, with six properties), and they’ve begun expanding overseas with some properties in the UK and Spain.

Realty Income is quite huge, with a market cap of about $42 billion now, one of the biggest Real Estate Investment Trusts (REITs) in the world, and it is has historically been most well-known as the “Monthly Dividend Company” — they’ve paid their dividend every month for something like 25 years, and have provided a very strong and usually pretty steady return for shareholders that averages out to about 15% a year, including the slow growth of the dividend.

I do not get the connection to home ownership or this “landlord nation” stuff, honestly. Yes, they do own some Home Depot properties (home improvement is about 5% of the portfolio), but any connection to this “people will have to rent instead of buy homes” trend just seems very misleading.

But yes, if you get that out of your head, Realty Income is a great company and has been an excellent investment. They are not going to grow very fast — they increase their dividend by 3-5% per year, and the stock mostly follows that. They’ve benefitted greatly from the fall in interest rates during their first 25 years in the public markets, and the biggest risk is probably that they could suffer if the recent rise in interest rates becomes a long term trend, so it might be that we’re overpaying these days, with a dividend yield of about 4% as investors have recently flocked to the perceived safety of Realty Income shares… but so far they’ve done a great job.

I don’t own Realty Income, but I do admire the company. If I were thinking about the stock, this is the chart that would give me some pause at the current valuation — this is the correlation between the yield on Realty Income shares and the 10-year Treasury Note interest rate. They are not moving in perfect sync, of course, but they’re clearly related. Both have fallen quite dramatically over the past 25 years, and 10-year Treasury rates are starting to climb pretty sharply… if that climb sticks, and rates go considerably higher, then Realty Income’s dividend yield might have to rise, too. The only way for the dividend to rise meaningfully, beyond what they can give you by raising the dividend payout by 4% a year or so, is if buyers insist on higher yields and therefore bid lower prices to buy shares.

Dividend Yield Chart" />

O Dividend Yield data by YCharts

That might not happen anytime soon, even if the trend continues — Realty Income has cultivated a very strong shareholder base who have trusted the firm for decades, and I’ll bet they will be more solid than a lot of their competitors even if interest rates begin to exert more pressure on REITs in general. But that’s what I’d worry about, the 10-year rate continuing to rise, and dividend yields for slow-growth REITs like Realty Income being forced higher to compete (and share prices therefore forced lower). You can check out Realty Income’s most recent Investor Presentation here if you’d like to hear the pitch from them directly.

Still, that’s the freebie… what’s the “secret” stock? More hints:

“But it’s critical that investors take action before September 20th: when the Fed hikes rates again.

“Because, based on all of my research… It could severely spike demand in these rental units.

“I’ve also included a company that’s, frankly, a rival to Realty Income Corp….

“While I firmly believe that Realty Income Corp could be the ‘Apple’ of the Landlord Nation…

“I could never guarantee that…

“That’s why I’m including another ticker that I believe could see exponential growth as well. “

Maybe this one will actually have some connection to the current crisis in housing and apartment rents? Fingers crossed? Here are the clues:

“This other ‘Landlord Nation’ stock is a much smaller, under the radar company…

“Right now it’s only about 1/10th of the size of Realty Income Corp…

“And analysts are already projecting that over the next three years, the revenues for this company will grow from $339 million to $642 million…”

A couple other clues:

“Leonberg Capital’s High Yield Investor said this company has…

‘Proven to be one of the most recession-proof equity investments’….

“Principal Financial group has accumulated nearly 6 million shares

“Vanguard owns over 11 million…

“And BlackRock has purchased over 13 million shares of this tiny company….

“… based on my research, I believe these two competitors stand to benefit the most from the massive shift to rentals in 2022 and beyond…

“And I want you to be able to diversify: Having access to both.

“The first one… A ‘blue chip’ of the industry…

“And the second one… A high-growth potential pick – just 1/10th the size of its competitor.”

So… sorry, again no real connection to housing or mortgage rates. That second one is Agree Realty (ADC), which does indeed have a similar business to Realty Income — and it even came public in the same year, 1994, though it has always been much smaller. This is, again, a retail net lease landlord that owns properties that are leased to Costco and Target and Autozone and lots of other retailers and fast food companies. They are almost as diversified as Realty Income, their biggest tenant is Walmart (7% of rent), and they are in at least all the 48 mainland states. There’s a lot of overlap among the tenant base for these two companies. Both mostly rent to large national retailers and well-known brands — in fact, Agree has even sold a bunch of properties as they’ve cycled through some of the portfolio over the years, and a bunch of those sales were of Walgreens locations that might have eventually been bought by Realty Income (I didn’t check, but Realty Income owns lots of Walgreen locations).

Here’s the chart for those two compared to the S&P 500, in case you’re curious — both have been long-term outperformers as they’ve compounded rents from steady businesses into gigantic portfolios and enjoyed the tailwind of falling interest rates, beating the S&P 500 quite handily.

And their relative size has also been similar over the years, interestingly enough — both started out small, but in the mid-1990s Realty Income was roughly a $400 million company… and Agree Realty was valued at about $40 million. A few months ago, it was $4.5 billion for Agree, and $40 billion for Realty Income. Agree has never really outperformed or “closed the gap” with Realty Income in any meaningful way during the past 25 or 30 years, but both have been good investments. I think Realty Income’s cultivation of its long-term shareholders, and its reputation as the “monthly dividend company,” probably help it hold up slightly better during periods of brief market panic, as O did better during the weakness earlier this year than ADC did, but over time it tends to even out.

Incidentally, that long-term outperformance masks their recent underperformance — retail real estate was not a hot idea when retail went into hibernation in 2000, and both companies suffered and have not yet recovered, this is that chart for the past three years:

So what’s the risk here? Well, there was clearly some fear of “vacancy risk” with businesses closing during the pandemic, but most of the chains ended up doing just fine in the end. Neither of these REITs had meaningful problems with vacancies, during 2020 or really during any other time in the past couple decades.

As with almost all income-driven investments, it’s probably mostly rising interest rates that are a substantial risk to valuation… which means the same thing that Wealthpress teases as being the catalyst for “landlord nation” is also, in my opinion, the most obvious near-term risk for the price of these two stocks. Companies like Agree and Realty Income can be relatively shielded from economic weakness because they primarily partner with pretty steady companies, and are quite diversified both regionally and across business sectors, but they are still owned primarily because they pay dividend income to shareholders.

The challenges for real estate companies during times of inflation and rising interest rates are really twofold:

First, they might have to pay more to borrow money. Commercial loans are generally for five or ten years and are non-amortizing, they never pay off the principal, they just pay the interest and refinance the debt when it comes due… if rates are higher when they have to refinance or raise growth capital, their profit margins will therefore shrink unless their rental income can more than keep up with the rising cost of borrowing. If things get really ugly in real estate, their borrowing costs could even accelerate — that happens if they’re securitizing their loans with real estate, either directly or indirectly, and the value of the real estate falls. That’s somewhat rare for commercial property with established tenants, but it’s far from being impossible.

Second, they have to appeal to income-seeking investors to keep their share price high, which enables them to sell more shares when they find new properties to acquire (REITs pay out essentially all of their cash flow as dividends, so they have to sell shares and borrow more money, usually in fairly equal proportions for a stabilized REIT, to have the capital to make more acquisitions). The problem with rising rates is that it raises that bar — a few years ago it was appealing to buy a somewhat riskier income investment with a 2-3% yield, because the only “safe” yields were down at 1.5-2% (10-year government notes, five-year CD’s, etc.). Now, with the 10-year note getting up over 3% this summer (as inflation rages at 9%), the competition is tougher.

Interest rates gradually fell for almost 40 years following the inflation panic of the late 1970s and early 1980s, and that provided a fantastic backdrop for all kinds of real estate and lots of different income investments — as rates fall, investors demand lower dividend yields, which means prices rise. That has reversed over the past year or so, with rates rising.

Will rates keep rising? Well, probably, at least for a few more months — the Fed is very likely to raise rates again at their September meeting (in about two weeks), and that will probably continue to put upward pressure on longer-term interest rates… though rates won’t move in a straight line. They also rose for many 3-6 month periods over the past 30 years, even occasionally for a year or two, despite the fact that the longer term trend was decidedly lower.

And when rates rise, income investments usually fall. At least temporarily. Real estate has typically still held up well during rising rates, during the long term, but not always during shorter periods of time. You have to be patient with it as rent increases or asset price resets let real estate stocks recover from the immediate shock.

In the last “rate panic” period before COVID… from mid-2016 into early 2018, the Fed raised the overnight rate from 0.5% to 2.25%, the 10-year note rate doubled from 1.6% to 3%, and the share prices of a lot of REITs fell — the average REIT dropped about 9%, Realty Income fell a little less, about 7.5%. Agree Realty, interestingly, held up better, it rose 21%, almost keeping up with the S&P 500. So that’s one sign of hope.

On the other hand, companies that have a reputation for steady profits, own assets that remain valuable, and pay out above-average dividends, (or nicely rising dividends), tend to do relatively well when the overall market is in panic mode. It depends on the cause of the crisis, of course — the 2008 crash was largely precipitated by the implosion of the housing bubble, so real estate didn’t do great at that time, but other kinds of “blue chip” stocks did. And so far this year, as volatility picks up and the high-tech growth darlings lose 40-80% of their value, investors have flocked to stocks that are seen as bulwarks against the feared hordes of barbarian invaders.

So far this year, the Fed Funds rate has gone from 0.25% to 2.5%, the 10-year note from 1.5% to 3% again, much like 2016… and both real estate in general and the S&P 500 are down about 10%… but some perceived safer harbors are up, Realty Income is up about 3%, and Agree Realty is again outperforming, up 19%.

What happens next? Your turn to guess. I’d be delighted to hear what you think… and if you’ve ever tried out Jeff Zananiri’s Monthly Money Flows service, please click here to review it for your fellow Gumshoe readers — that one’s new to us.

P.S. Zananiri also teased a couple other real estate-related stocks as winners from this “Landlord Nation” idea… I’ve run long today, but I’ll take a look at those tomorrow.

Disclosure: I am not invested in any of the companies mentioned above. I will not trade in any stocks covered for at least three days after publication, per Stock Gumshoe’s trading rules.