Throughout this year, most real estate investment trusts except those in the data center sector traded in a downtrend. REITs fell off a cliff last week when the Federal Reserve did not change interest rates. What happened?
REIT income investors counted on the Fed shifting from a hawkish stance of rate hikes. Instead, Fed Chair Jerome Powell said that the committee will keep rates at current levels far longer than markets expected. It is highly fearful that inflation is entrenched. For example, core inflation is lower but energy prices are on a sharp uptrend. This could cause price instability.
Worker strikes demanding higher wages are rising. Higher salaries will cause permanent inflation, which is another risk for price stability.
W.P. Carey (WPC) led the REIT decline. After raising its dividend, it unexpectedly announced the spin-off of its office real estate. NLOP – net lease office properties is 10% of the company’s current annualized base rent. Income investors will most likely suffer a dividend cut in exchange for NLOP shares.
Medical Properties (MPW), another busted REIT, lost 16% last week. Investors who held the stock to collect the 60 cents in annualized dividends lost more overall.
Be wary of REITs. The interest rate increase cycle is not yet over.