Market Commentary | April 11, 2022

Interest Rates on the Ascent

This past week’s release of the minutes from the Fed’s March 15-16 meeting confirmed that inflation is no longer perceived as transitory and efforts to bring inflation down quickly have moved to front and center.  After March’s 25 basis point hike, investors now anticipate 50 basis point increases at each Fed meeting in May and June.

Bond markets have responded with sustained selloffs and 10y US Treasury yields have jumped from 1.52% at the start of the year to 2.72% at Friday’s close. The rates on new mortgages have climbed even faster, with the average rate on new 30-year fixed exceeding 5% this past week.

With an estimated 5 to 8 additional interest rate increases expected in the next 18 months, what is an income investor to do?

The Inflation Protected, Rising Rate Nature of Net Lease Real Estate

While a 3% 10y T-Note issued by a credit worthy US government will pay contractual income, inflation will slowly erode its face value purchasing power at maturity and high inflation in the interim will reduce its market trading price. Well structured triple net real estate addresses this problem with contractual annual rent increases on long term leases. The contractually rising income works to preserve purchasing power and the inflation adjusted value of the underlying property.

3 Opportunistic Examples

VICI: VICI Properties owns one of the world’s largest hospitality, gaming, and entertainment property portfolios. Its leases, with average remaining term of 43 years, carry contractual 1.8% annual rent escalators and 97% are subject to a CPI escalator.  (2MC portfolios own MGP, which is being acquired by VICI, but is available at an arbitrage discounted price)

MPW: Medical Properties Trust owns 438 net leased hospitals and healthcare facilities in North America, UK, Europe, Australia, and South America.  MPW’s leases all carry annual rent hikes, with 90% of leases tied to a CPI escalator with an annual ceiling of 4.5%. MPW has passed these rent hikes on to shareholders by raising its dividend for each of the last 9 years.

WPC: WP Carey owns more than 1,300 industrial, office, and retail properties net leased to credit tenants across North America and Europe. All leases have rent escalators, with 59% specifically tied to CPI.  WPC has raised its dividend every year since its 1998 NSYE listing.

Carefully selected net lease real estate can help protect investors from the ravages of inflation.

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