By Michelle Choi, an insider at Lease Advisors
Earlier this year, investors pulled $1 billion in shares in anticipation of rising federal interest rates. This move sent real estate investment trusts (REITs) on their longest losing streak in five years. And when the Fed indicated in March that the impending rise would actually be a slow-paced increase, REITs rebounded and had their best week in three years. This volatility is because investors reflexively react to protect their investments. Increased costs of borrowed money used to finance business and residential investments suggest losses in profit regardless of the type of investment. Buyers are less inclined to purchase investments and this decreased demand, in effect, leads to low valuations.
In the cell tower industry, REITs and lease aggregators are the buyers who signal devaluation in cell tower properties. REITs have tax advantages for lowering the cost of financing real estate and extending property ownership to more people. They pay 90% of their profit as dividends and enjoy a higher Sharpe ratio (higher returns with lower risk) than other types of investments. Additionally, tower companies that select properties to buy, sell, lease, or develop, hold the same deeply ingrained reactions that caused this year’s sharp gains and losses. Protecting investments and subsequently abandoning underperforming properties results in an excess in the supply of cell towers which causes their prices and valuation to decline.
Clearly, these buyers with their eyes on low valuations will profit when the effects of the interest rate hikes are triggered within the year. Portfolio manager Joel Beam of the Forward Select Income Fund cut borrowing, sold holdings, and freed cash to be ready for the price drop. “If prices end up dropping steeply, I want to be the guy with the money,” he said. The certainty of the impending rise of interest rates are directing investment managers to focus on areas of the market that would thrive in a healthy economy and are cushioned against interest rates. With buyers prepared to scope the market for areas of profitability, sellers should in turn prepare for the coming changes.
With current low interest rates, cellular leases are at peak value. When the rates increase, valuation may decrease and buyers will be positioned to capitalize on them at the expense of the cellular leaseowners. It may be in sellers’ best interest to sell before the Fed raises interest rates, as record-high valuations that prevailed under low interest rates may be coming to an end. While interest rates are hardly the only metric and Fed rates will not necessarily cause falling prices, it is an important factor to consider in the coming months.
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