REITs take a pause

Interest rates have gone up significantly in recent days with the 10-year treasury yield briefly cresting 3.1%.  This seems to have put a pause in the REIT rally in terms of market pricing, but the fundamentals are still coming in strong.

Retail sales are looking better than expected with most retailers turning in favorable numbers.  It is important to separate tenant results from REIT results and know that stronger sales usually will not contribute directly to FFO, but it does translate over long stretches of time.  Essentially, stronger retail sales increase the market rate such that REIT leases that were above market are now closer to market rates and those that are below market will have a better chance of getting rolled up upon renewal.  As the market revises its collective estimates of forward leasing and growth rates, some participants have come to the conclusion that the retail REITs are undervalued.

We have felt this way for quite some time and it is nice to finally have others agreeing.  WPG performed strongly and helped 2CHYP to mostly evade the selloff in REITs this week.

The other strong performer was UNIT which similarly is experiencing a recovery in market sentiment.  As time goes on the focus is shifting away from WIN and toward UNIT’s organic growth potential.  The market is now viewing UNIT as a way to bet on the rollout of 5G and the cap rates of recent acquisitions and leasing suggest UNIT’s participation will be quite lucrative.

Risks remain in both WPG and UNIT and the risks are increasing as the market prices rise.  However, we still think both positions are still below scenario weighted and risk adjusted fair value.

2CHYP Portfolio Snap Shot

5/17/18 2CHYP Performance since inception

2CHYP Weekly Trade Confirmation Report:  No trades this week.