Obama's Secret China Deal

The U.S. Congress has been a dysfunctional mess for nearly seven years. They’ve shut the government down, got the U.S. a credit downgrade from Standard & Poor’s, haven’t passed a budget (never mind a balanced one), did nothing on their promises to fix immigration rules and the tax code (but they voted to repeal Obamacare 50 times in two years), tried to block a bill for 9/11 responders…

The last two Congresses (112 and 113) worked a little over 140 days a year and passed the least amount of legislation since the 1940s. Who knows? Maybe that’s a good thing. As former Speaker Boehner once said, don’t judge us on how many laws we create — judge us on how many laws we repeal.

Of course, they didn’t repeal any laws either, but whatever, it sounded good at the time.

Yes, Congress has become such a joke (with an approval rating down around 15%) that I can’t blame you if you pretty much ignore them completely.

But every once in a while, a piece of legislation comes out of Congress has some big implications for investors. Now is one of those times.

Last Friday, President Obama signed a $1.8 trillion spending and tax bill. This bill ended the ban on U.S. oil exports. That’s a good move, and it may be worth some upside for oil stocks. However, that’s not the “big implication” I’m talking about…

No, the “big implication” in that spending deal has to do with the Foreign Investment in Real Property Tax Act of 1980, also known as FIRPTA…

FIRPTA was enacted to restrict foreign buying of U.S. farmland.

Before FIRPTA, the U.S. had no way to tax foreign owners of U.S. real estate. FIRPTA required that foreign owners of U.S. real estate pay transaction taxes as well as capital gains taxes. And it required that a certain percentage of the purchase price (10%) and rent (30%) had to be set aside to meet tax obligations.

Total tax obligations went up as much as 60% for foreign investors. Needless to say, taking that much off the top was a serious impediment to foreign investment and ownership of U.S. real estate.

But now, those rules are being eased in an effort to attract foreign money. And foreign money, especially from China, has been eager to get into the safe haven of U.S. assets. 

Give US Your Tired, Your Poor, Your Pension Funds

So far this year, foreign investment in U.S. real estate has totaled $78.4, according to Bloomberg. That’s 16% of the total $483 billion real estate investment. Foreign pension funds accounted for around 10% of the total foreign investment.

The new FIRPTA rules say that the transaction tax to foreign investors will be waived. They also state that foreign pension funds can own up to 10% of a publicly traded real estate investment trust, or REIT. Right now, they can only own 5%, so this effectively allows them to double their stake.

That’s a big deal. There are trillions of dollars in foreign pension funds, and billions of dollars in foreign investment are likely to come flooding into the REIT sector. China’s basic endowment pension has $578 billion, and China can be counted to aggressively invest in foreign markets.

If you don’t know, a REIT is a tax-exempt corporate structure that owns real estate, collects rent, and has to pay roughly 95% of income as dividends to its investors. That makes for some very nice (large) dividends that are great for retirement saving and income.

And the stocks are very stable, too. With one notable exception (*ahem*), real estate prices stay pretty stable. Besides that, REITs typically have leases signed with their tenants for 10- to 20-year terms, so cash flow is also pretty predictable and stable.

REITs typically have inflation adjustments in lease agreements so they can raise rent in line with inflation.

REITs grow by acquiring more property and then monetizing it with rent, thereby increasing cash flow. REITs also sell stock to fund new acquisitions.

If they can dilute shares by 5% but add 10% a year in earnings, it’s a win-win. Growth outpaces dilution, and they get low-cost financing because they are not paying interest on a loan or bond.

STRATEGIC TIP: When buying a REIT, it’s a great idea to wait for the announcement of a secondary offering of stock to make your purchase because you’ll stand a good shot at catching the stock down as much as 10%.

Where to Look for REITs

My Wealth Advisory income and dividend newsletter focuses on, well, income and dividends. And I’ve got several top-quality REITs in The Wealth Advisory’s portfolio.

One you may know is Realty Income Trust (NYSE: O). Realty Income is one of the best-known REITs around. It leases space to fast-food restaurants, movie theaters, drug stores, and other retailers.

Realty Income Trust has returned 16.3% since 1994, making it among the very best investments you could have made. 

My Wealth Advisory subscribers are up as much as 180% since we recommended the stock a few years ago. We’ve also got 181% gains on a health care REIT and another 80% on a data center REIT. My point is not to brag about these gains but to show you how well you can do if you hold a REIT for a few years. With that in mind, I’ll share my most recent REIT recommendation with you…

It’s called Tanger Outlets (NYSE: SKT). You may have seen its outlet malls around — it has 47 outlet malls in 24 states. You’ll often find them near vacation destinations like Ocean City, Maryland, Hilton Head and Myrtle Beach, South Carolina, and Nags Head, North Carolina. 

Tanger Outlets gets 185 million shoppers a year. And the company has kept occupancy rates at 95% or above every year since it IPO’d in 1993. The current occupancy rate is around 97%.

Upscale malls like Tanger are doing far better than discount malls these days. Discount malls anchored by stores like Macy’s or Sears just aren’t attracting the shopper, and the occupancy rates tend to be much lower.

I’ve recommend Tanger Outlets to Wealth Advisory subscribers before. We bought it in August 2013 and sold it a year ago for a 36% gain (we sold because the stock was about to head lower). Now it’s basically back to where we bought it the first time. 

I think there’s some good upside coming for Tanger Outlets.

Until next time,

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.