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Your reply is focusing on the effect of interest rates on the businesses and profits of REITS. That is a more complex question that varies for each class of REIT, a question I realy wasn't getting into.

I was actually focusing on a simpler side of the issue. ASSUMING that as 10-year Treasury rates rise, REITS remain about as profitable as they were, won't the market's perception of the VALUE of this income steam be affected by higher interest rates?

I think it will, IMHO. All other things being equal, as 10-year rates rise, investors will ultimately pay LESS for the same income stream. This is almost a truism and is true in a simple mechanical way with bonds. When rates rise, bond prices decline, and vice versa. The Fed Model (see the Yardeni site I listed)seems to indicate that the same principle holds ROUGHLY true for stocks as for bonds. The yield on stocks, represented by the forward estimated earnings of the SP 500, is worth less to investors as rates rise. The charts of the Fed Model seem to show that this is true in the LONG run, and when investors "overpay" for the fair value of the SP 500 indicated by the Fed Model, they soon get burned. Look at the Fed Model chart just prior to the crash of 1987, signaling that the market was becoming rapidly overvalued.

I am just extending the logic of bond valuation and SP 500 valuation (by the Fed Model) to the REIT sector. I am assuming that someone, much more informed than me, has developed a model showing a relationship between (a) interest rates, probably 10-year Treasuires, and (b) the value of REIT cash flows, as measured by some approriate yardstick, which might be AFFO or dividned yield, etc. Bonds are an alternative investment to REITS, and as bond yields improve, some money is bound to flow from REITs to bonds, UNLESS REIT yields improve as well (i.e. prices fall). Looking at charts of REIT stocks, I can see, in a rough way, that rising rates in 1994 and 1999 were very damaging to REIT share prices, but I'm not sure what the exact model or formula would look like.

I'm hoping that someone can point me in the direction of existing REIT models that have been researched and used by knowledgeable REIT analysts and REIT portfolio managers.

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