By: Tim McPartland,
After a brief respite yesterday REITs got hammered today—off by over 2%. We had mentioned that down the road REITs would be back (price wise) and they will no doubt jump again–but probably only after they fall a bunch more. The 10 year treasury headed higher today after yesterdays fall on FED baloney.
As we survey the REITs we see no reason why they shouldn’t fall anywhere from 10-20% over the next 60-120 days. Anytime a sector moves up by 20 or 30% a year like REITs did last year there will come a time when they have to correct the excesses–and it is likely now is the time. On Tuesday the Wall Street Journal had an article on the Apartment REITs (our favorites in the last year)–it is simple economics and it happens all the time in the REIT sector–when a sector is hot more buildings are built until you reach a point of oversupply. And during this time of buildup they are raising rates like crazy. We need to correct some of this excess. Unfortunately, at the same time there is excess coming on stream interest rates are ticking higher. Most REITs are not financed by long term debt and refinancing will have to occur at much higher interest rates. We could see a pinch coming a few quarters from now.
We are not going to do a wholesale sellout of our REIT positions at this time for 2 reasons. 1st we could well be wrong (sure wouldn’t be the first time) and they could turn and race higher and 2ndly we are not smart enough to know which issues to sell and what to do with the proceeds once they are sold. This is the reason we try to diversify correctly. We will do a nice calm survey of holdings and possibly sell a few issues next week–although it won’t be more than 2 issues