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I have not been able to post here for several weeks, due to a combination of a minor health issue, a great deal of volunteer work, and the anguish of having to send our eldest Golden Retriever, Riley, over that "Rainbow Bridge" (but he did live to age 15, which is great for a big dog). So posting has been a low priority for me.

Just to let you know that I am still alive, and hope to come back more regularly, I will post a few quick thoughts about the current swoon in REIT stock prices - for the little they may be worth.

Traders, who believe they can accurately forecast interest rates and bond yields, have been selling REIT stocks. So have hedge funds and other short-term investors. The yields on the 10-year Treasury and Baa-rated bond index have risen since early this year. Conventional wisdom is that REIT stocks decline as interest rates and bond yields rise, and of course this becomes, over the short term, a self-fulfilling prophecy. I am agnostic on interest rates and bond yields, the latter being more important to the prices of CRE and REIT stock prices. Bond yields could continue to rise somewhat - or they could level off and do nothing for months. It would take a lot more inflation and a much stronger global economy to get bond yields to rise more than another 50-70 bps.

All I know – and I have a lot of confidence in this – is that REIT stocks are on the bargain counter. NAV discounts are very widespread, even among the best of the best. And there is no evidence that somewhat higher bond yields are putting upward pressure on property cap rates. There is a huge amount of institutional capital looking to invest in quality commercial real estate. That, of course, doesn’t prevent REIT stocks from declining further if traders sell/short them for reasons having nothing to do with fundamentals or values.

Actually, I love today’s REIT market – there are some incredible values for investors who have a time horizon longer than a few weeks or months and aren’t concerned about a temporary decline in REIT stock prices. I would post a few ideas, but fear that nobody would be interested because of the negative momentum in REIT shares. In fact, REITs cannot seem to even "buy" an up day. Today the 10-year yield is down almost 10 bps, due to the Greek crisis (how much does Greece have to do with US CRE?), but REIT stocks are just hanging on to a very small gain.

P.S. Proving that it’s not REITs’ businesses that are reflected in the stocks’ decline, look at the stocks of electric utes this year – they are down something like 12%. And the reason? They are regarded as “interest rate sensitive.” This short-term performance stuff is a great game for hedge funds but not so much fun for the ordinary investor trying to figure out what’s going on.

Ralph
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