CATALYST: Real estate investment trusts (REITs) have not performed as well as hoped this year. The negative impact of the Fed’s dramatic interest rate pivot on the S&P 500’s most indebted sector has offset their defensive inflation-linked revenues and high dividend yields. But this is a double-edged sword, as we get closer to the positive catalyst of a potential Christmas rate peak, and interest rate cuts in 2023 as the inflation emergency eases. The REIT sector traditionally performs well as the market anticipates lower interest rates. See @RealEstateTrusts.
REITs: These are tax-advantaged vehicles investing in income-producing real estate. This $1.4 trillion market cap US sector does not pay income tax and must distribute 90% of its income as dividends. The cash flows are often inflation protected, with long-term inflation-linked rental contracts, though with a lag. REITs also have the highest profit margins and the lowest operating leverage (profit impact of a 1% revenue change) of any S&P 500 sector. But they also have the highest debt levels. Debt/EBITDA is over 5x and 10-year US bond yields have doubled this year.
FLAVOURS: Under the US REIT sector hood the diversity is huge (see chart). The office segment (largest is Alexandria Properties, ARE) has struggled with the very slow return-to-work trend. Industrial (PLD) with rising recession risks and the online slowdown. Data centers (EQIX) with the market tech-wreck. But nicher REITS have done better. Areas like gaming (VICI), healthcare (WELL), infrastructure (AMT), and timber (WY) have all significantly outperformed.
