Interest rate related crash

Outgoing FBRNY President Bill Dudley had some hawkish commentary indicating his preference for 4 hikes instead of 3 in 2018.  This sent interest rates up, and particularly on the short end of the curve.  REITs, unsurprisingly, dropped materially extending their losses in YTD 2018.

I find it immensely important to separate market price movement and fundamentals.  For those of us fortunate enough to have long investment horizons, the market price movements are unconcerning and may even be beneficial as it provides a better entry price for reinvested dividends.  Concern would only be warranted if there was something fundamentally troubling.

I remain convinced that rising rates are not harmful to REIT fundamentals.  Only about 20% of REIT debt is variable rate and FFO is generally going up faster than interest expense.  In fact, EBITDA coverage of interest expense has expanded to over 4X in recent years.  REITs are presently lower leverage compared to most of their history and property quality is higher than most of REIT history.

A strong underlying economy portends well for rental rates and occupancy and the higher cap rates that are likely to follow interest rate increases facilitate growth through property acquisition.  I anticipate market prices will continue to suffer if interest rates do in fact rise, but I view it as an opportunity to increase dividend income.

In particular, we are looking at buying more triple net REITs which have been hit particularly hard on the news.  Other opportunities are the healthcare REITs which have also traded down.  MPW still seems like the best stock in the space.

Presently, however, trading is impeded by the low prices which make it challenging to free up capital.  Our intention is to harvest gains when the market affords an accretive swap.

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.

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1/11/18 2CHYP Performance since inception

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