Interest rate head-fake affords accretive repositioning

The ten-year treasury yield has dipped to 2.89% from as high as 3.1% just a few weeks ago.  As I have stated numerous times, I do not believe REITs are fundamentally sensitive to interest rates, but their market prices often are.  During this dip in treasury yields, REITs have generally gone up in market price with some of the stocks in 2CHYP appreciating significantly.  I see these price moves as short term volatility and would not be surprised to see some of the stocks go back down if interest rates tick back up as I anticipate they will.

To capture the favorable pricing, we have trimmed or sold appreciated positions and recycled the capital into opportunistically priced REITs.  We think this will help protect us from the snapback if/when the ten-year yield goes back above 3%.

One such new position is Industrial Logistics Properties (ILPT).  We normally do not invest in properties of this caliber because they usually come at a prohibitively expensive price tag that reduces cash flow yields to a trickle.  However, ILPT is trading among the cheapest industrial REITs with a severe discount to NAV.  This affords investing in the difficult to replace Hawaiian industrial land assets at a high cashflow yield.

As the pre-crisis vintage leases roll off at well below market rates, we are anticipating average rent rollups for ILPT’s Hawaiian portfolio of about 30%.  This will start to have a material impact on the bottom line in 2019 as that is a year of heavy leasing renewal.

This opportunity is not without risks as the company is managed by RMR who I believe to have misaligned interests.  However, the magnitude of discount is such that the risk adjusted return potential looks quite good.

2CHYP Portfolio Snap Shot

5/31/18 2CHYP Performance since inception

2CHYP Weekly Trade Confirmation Report