REITs are down nearly 3% intraday on what appears to be worry about a more hawkish Fed. Rosengren, Boston’s Fed president, who is typically regarded as dovish gave some commentary that the market has deemed to be indicative of potential tightening. I find this to be a massive overreaction for 3 reasons:
1) His commentary was not all that hawkish, in my opinion, as he basically echoed Yellen’s comments that a case for gradual tightening is strengthening. Additionally, Tarullo (another Fed official) gave a dovish interview today so it somewhat balances out.

2) The market’s estimate of a chance for a September hike increased from 20% to 30%. It doesn’t make sense that a 10% change in the chance for a 25 basis point hike could have an impact this large. Historically, REIT performance in a rising rate environment has been mixed, sometimes positive sometimes negative, depending on the cycle and the underlying fundamentals. So what we have here is a small increase in the chance for a very small rate hike that will have unknown impacts on REITs. Mathematically speaking, this does not warrant a 3% drop in the entire REIT index.

3) REIT fundamentals appear stable. Cap rates are low so growth is unimpressive, but existing REIT property portfolios are generally cashflowing nicely. Occupancy and rental rates are flat to slightly positive across most property types. With stable fundamentals, the main risk of a rate hike is that REITs will lose some value as a bond substitute. However, I think the 5%-10% yield on most of the stocks we hold will still seem preferable to the 1.6%-1.7% 10 year Treasury, even if it increases by 25 basis points.

We tend to like market overreactions as they create opportunistic pricing. Unfortunately, the REIT that has become most opportunistic from today’s move is MPW MPW 18.01 -0.37 -2.01% which is already a large holding. Given the size of existing exposure, we are not adding at this time. As such, we are hanging tight to current holdings and watching for an opportunistic swap that makes sense within the context of the portfolio.

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