It looks like we’re going to get a rate cut next month.
At least that’s how the markets interpreted Federal Reserve Chair Jerome Powell’s remarks out of Jackson Hole, Wyoming, on Friday.
The Jackson Hole Economic Symposium is an annual confab of economists and central bankers. Investors pay attention for one reason – the Fed Chair’s speech. Jackson Hole is usually where the Chair telegraphs potential policy changes, and it can move markets.
For instance, in 2022, Powell mentioned Paul Volcker’s name several times in his speech. Volcker is the Fed Chair who famously hiked the Fed rate up to 20% in the early 80s to whip inflation.
Investors got the message, and the S&P was down about 12% over the next 30 days.
But that was then. What is Powell saying now?
Here’s the important line:
With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.
That was enough to send the S&P 500 climbing 96.74 points, or 1.52% on Friday. The Nasdaq rose 396.23 points, or 1.88%. And the Dow gained 846 points, or about 1.89%.
It was a clear day of celebration, as investors basked in the glorious certainty of a September Fed cut…
All else equal, the Fed cutting rates should nudge rates down across the economy. Businesses will be able to make deals at better rates… and falling Treasury yields should coax more capital into equities, hence the Friday rally.
Of course, Powell also left himself some wiggle room:
Monetary policy is not on a preset course. FOMC members will make these decisions based solely on their assessment of the data and its implications for the economic outlook and the balance of risks.
In short, it’s pretty clear he’s still hedging his bets, and there is still the chance for disappointment. Then again, as Oxford Economics’ Chief U.S. Economist Ryan Sweet noted, “Powell clearly [opened] the door for a September cut.” And once a Fed chair does that, “it’s quite difficult to close.”
Investors agree. As I write to you, the market is assigning an 86% chance to a quarter-point cut in September.
I know there are a whole lot of real estate investment trust (“REIT”) investors who hope that’s the case next month, me included.
The Case for REITs When Rates Fall
REITs, my specialty, are commercial real estate (“CRE”) owners, operators, and/or funders. By law, they have to pay at least 90% of their annual taxable income to shareholders by way of dividends.
That means they have less of their own money to work with. And that means they tend to be more at the mercy of lenders than many other companies.
Too many investors, therefore, believe that CRE in general – and REITs in particular – can’t perform well in high-interest rate environments. Wide Moat Research’s Stephen Hester debunked that theory quite nicely last year, but the myth remains widespread.
And because of their high payouts and contracted cash flows, REITs are often considered bond adjacent. I think that’s short-sighted (bonds can’t compound fundamentals), but the fact remains. Whenever rates go up, scores of investors ditch REITs without a second thought. That’s why CRE in general has struggled over the past few years.
Moreover, investors don’t even consider picking them back up until the Fed changes its tune and rates fall once again.
That’s why data center REIT Equinix (EQIX) – a company I wrote about on Thursday – saw its shares jump about 1.8% on Friday. Industrial landlord EastGroup Properties (EGP), which I also covered, rose a little more than 3.5%. And Public Storage (PSA) gained about 3.4%.
These companies have all featured impressive balance sheets and steady growth for years, high interest rates or not. Yet they’re only now finding favor from investors.
Personally, I’m not a market timer, especially when it comes to quality dividend stocks. I believe in buying up strong companies when they’re undervalued and therefore most likely to show strong investment returns.
If they faithfully pay out and raise their dividends while growing their earnings, they make it worth your while… even if it takes months (or years, in this case) for their share prices to appreciate.
That said, REITs do tend to shine in a falling rate environment. For evidence, look at how Realty Income (O) – the crown jewel in the triple-net space – performed when rates fell after the Great Financial Crisis.
From 2009 to 2019, Realty Income’s share price rose from approximately $17 to a high of $79. That would be 364% or 16.61% annualized. And that’s without accounting for the monthly dividend. If you’re not happy with that, I don’t know what would make you happy.
So, which REITs are worthy of your investment?
A Small-Cap, High-Yield REIT Bargain
If you’re a subscriber to The Wide Moat Letter, then you already have all the tools to build out the REIT segment in your portfolio. We’re currently following 12 high-quality REITs in our model portfolio (subscribers can find them here).
But there are others I have my eye on…
A few months ago, Wide Moat Research launched a new YouTube channel to discuss a wide array of asset classes. In August, we highlighted Plymouth Industrial REIT (PLYM).
Plymouth is a high-yield industrial company that’s poised to profit. As I explained on YouTube at the time, I expected it could produce 30% annualized returns.
That turned out to be conservative. Not long after, Plymouth soared a whopping 41% on big news.
It had received a takeover bid from asset manager Sixth Street Partners for $24.10 per share in cash – a 65% premium over its prior closing price.
Source: Yahoo Finance
Plymouth’s board is currently evaluating that proposal. But from our perspective, it seems like a fair offer based on valuation.
Regardless, I doubt it will jump another 41% anytime soon. So in case you missed that opportunity, consider Global Medical REIT (GMRE) instead.
Another small-cap pick, it’s currently trading at an 8.2 times price-to-adjusted-funds-from-operations multiple. Its normal (historical) multiple is 13.5 times.
That kind of discount is automatically attention grabbing, but I also like Global Medical’s business model. It primarily owns medical office buildings and inpatient rehab in attractive growth markets.
Plus, its new CEO, Mark Decker Jr., just purchased $1 million of the company’s shares. So not only does he have skin in the game, he thinks that Global Medical is on a profitable path.
The REIT’s dividend yield is a whopping 8.2%. At first glance, that might seem like a “sucker yield” that we warn investors to avoid. But I’m not too concerned about a dividend cut.
GMRE already cut that before Decker took the job, and the company looks like it’s on a better path now, regardless of whether its share price reflects that yet or not.
Source: FAST Graphs
I plan to interview Decker and quite a few other CEOs soon as a value-add for our loyal Wide Moat Research subscribers. Along those same lines, we already added a new tracking tool called The Wide Moat REIT Lab for our Premier Members.
We’ll see what Powell and the Fed does come September. But, perhaps at long last, the REIT revival is at hand.
Regards,
Brad Thomas
Editor, Wide Moat Daily
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