Encouraging news

It is often the case that REITs do not move up on news that affects their underlying fundamentals because REITs are not seen as being impacted.  SPG and WPG continue to languish despite the strength of the holiday shopping season and the benefits retailers are likely to reap from tax reform.  Of any of the 11 GICS sectors (Global Industry Classification Standard), retail is expected to get the largest tax breaks due to it currently having the highest marginal tax rate.

Perhaps the market thinks retail REITs will not benefit because a large portion of rent is contractual, so strong sales will not increase REIT revenue.  REITs will also not directly get revenue from the retailers becoming more profitable through tax breaks.

We disagree with this perspective.

Underlying fundamentals eventually filter through to the REITs.  Higher sales per square foot improves leasing spreads upon renewal.  Lower taxes for retailers makes it easier to pay the rents they already owe.  Additionally, and this is the big one, most mall REITs have participating rent.  To the extent that retailers are selling well this holiday season, mall REITs should have excellent fourth quarter reports.

Tax reform, if passed, will provide affluent consumers with more cash to spend.  This will have positive implications for BOTH brick and mortar retail and e-tail.  Similar benefits will trickle through to industrial, apartment, manufactured housing, hotel and office REITs.

In my opinion it is important to keep a long run perspective.  For those with a long investment horizon, the weak market pricing of fundamentally strong REITs is not a bad thing, but rather a buying opportunity.  If the fundamentals are as strong as they appear to be the returns will follow.  Even if capital gains fail to manifest, dividends will flow and the growth will facilitate dividend increases.

Commentary may contain forward looking statements which are by definition uncertain.  We retain no obligation to update or correct forward looking statements should the available information change.  Actual results may differ materially from our forecasts or estimations.

2CHYP Portfolio Snap Shot

12/7/17 2CHYP Performance since inception

2CHYP Weekly Trade Confirmation Report:  No trades this week