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REITs have 'underperformed dramatically' amid COVID-19: TCW High Income Equities

REITs have underperformed amid COVID-19. TCW High Income Equities Managing Director Iman Brivanlou joins the On the Move panel to discuss.

Video Transcript

JULIE HYMAN: The quest for yield because that has been a big theme this year with interest rates pushing ever lower. People are looking for return. We're joined now by Iman Brivanlou. He is TCW High Income Equities managing director. He's joining us from Los Angeles.

Iman, thank you for joining us. First of all, I would ask, have you been seeing an uptick in demand in this environment because yield is somewhat difficult to come by with rates so low?

IMAN BRIVANLOU: Yeah, good morning, Julie, and thank you very much for having me. No, the answer is no, you know. Most of our investors still remain on the sidelines. You know, there are a number of open questions in many of our spaces. You know, they've been under pressure. And for now, the demand has remained muted.

ADAM SHAPIRO: Wouldn't now, though, be the time to jump in? We have a housing shortage. We're going to need to be building multi-family dwellings outside of big cities. And yet, even within big cities, the office sector is going to recover somewhat at some point. So it seemed maybe we've hit bottom, and now would be a time to jump in. Or am I wrong?

IMAN BRIVANLOU: No, you know, you raise an interesting point, Adam. So let's take a step back and talk about the performance year to date of the space.

For example, let's take REITs. They've underperformed very dramatically. They're down about 15% year to date at a time when the S&P, more broadly, is up about 7%. So you're underperforming by about 20% or so.

And, you know, I think it's important to remember that many of the subsectors within real estate, for example, take lodging or take retail, you know, really were at the epicenter of the pandemic and the damage caused by the shutdown.

So in those specific subsectors, you're down anywhere from 45% to 55% year to date. And so, you know, that type of activity, that type of performance has really spooked, you know, say, market participants.

And, you know, to your point about, you know, office perhaps beginning to bottom out, you know, other sectors perhaps, you know, having some upward momentum, I would say that there are still a number of open questions out there that remain to be worked out.

So for example, you know, the success of work-from-home models I think really brings into question how much demand will come back, even when we recover, for office space. To the extent that you have increased inventory within office, what does that do to the, you know, other spaces, other sectors? Residential, for example, comes to mind.

So I'd say the market still has to work out through all of these issues and questions for the near term. For the long term, you know, of course, you know, this space is attractive for the same reasons it has always been attractive. You know, it provides a level of diversification for investors. And, of course, investors are drawn to income. And we don't think that's going to change.

EMILY MCCORMICK: Iman, bringing it back to the election in the near term, questions around that, up until that point, what do you see as being more important to equity investors and what they're actually pricing in? Whether there might be certainty and a clear cut victory for one candidate and a reduction in the likelihood that we get a contested election, or is it whether one candidate specifically actually wins the White House come November?

IMAN BRIVANLOU: It's a great question, Emily. You know, so I would say the first order effect is, of course, the market abhors any kind of uncertainty, you know, any outcomes that, you know, may broaden the spectrum and are generally viewed negatively, to the extent that, you know, you have more certainty around the outcome, to the extent that you take some of the really bad scenarios of, you know, a constitutional crisis, contested elections, and so forth, off the table. Of course, the market, you know, will view on that favorably.

I would say that, you know, if the polls, as they currently stand, end up, you know, proving accurate, you know, if Biden comes into office, perhaps if you have a blue sweep, you know, it raises also the prospects of a more concerted, kind of a more directed effort in containing the pandemic. That, of course, would be strongly favorable.

To the extent that, again, that blue wave results in perhaps a less antagonistic stance towards China, you know, that benefits us. Less protectionism, you know, definitely, I think, would be viewed favorably. So I would say that all of those things are factors that the market is currently weighing in and pricing in.

JULIE HYMAN: So Iman, I would also ask you about Biden's tax plan and the effect that could have on corporate profits. I believe it was bank America with a note earlier in the week, looking at the potential effect and the potential hit to corporations, although there's also the possibility that, as corporations frequently do, they will find a way to pay less taxes, even if the overall rate does go up.

IMAN BRIVANLOU: Yeah, it's a great question, Julie. You know, the-- I guess, let me take a step back. You know, when President Trump first got elected and there was the talk of, you know-- and the implementation of the tax cut, corporate tax cut, of course, you saw the rest of the market, you know, kind of those sectors outside of our bread and butter areas that are, you know, REITs and BDCs and those high income sectors, really benefit tremendously.

So, you know, what we have is, you know, for many of our structures, for example, again, REITs, you know, they don't pay corporate taxes. BDCs also don't pay corporate taxes. So, you know, when you have the tax cuts, you know, other sectors that kind of benefited more from that deregulation, benefited more from that overhang of the-- lifting of the overhang of that tax burden really did well.

What I envision is if Joe Biden comes in, and there is a blue sweep, you know, perhaps if corporate rates-- corporate tax rates go up, then you might get a little bit of an unwind of that-- you know, of that dynamic. And so, what I envision, again, is perhaps there, you know, those sectors that were more out of favor, the REITs, the BDCs and so on, they would actually benefit from that from a relative standpoint.

JULIE HYMAN: Interesting, something to watch out for. Iman Brivanlou, thank you so much, TCW High Income Equities managing director, appreciate it.