These REITs Look Great As Fed Starts Cutting Cycle

Core Insights - The Federal Reserve's potential cuts to the Fed Funds rate are expected to influence the yield curve, particularly benefiting certain securities [1][6][27] - The current yield curve is upward sloping, but there are anomalies with short-term rates being higher than 2-year Treasuries [2][4] - A significant amount of capital is currently held in money market funds, which may shift to longer-duration Treasuries or high-yield securities as rates change [9][35] Yield Curve Dynamics - The yield curve typically slopes upward, with longer-duration bonds offering higher yields due to increased duration risk [1] - Recent trends show an inverted yield curve, but it has normalized with short-term rates above 4% due to the Fed Funds rate [2][4] - The Fed's recent cut to the Fed Funds rate to a range of 400 to 425 basis points is expected to lower short-term yields, with uncertain effects on long-term yields [6][7] Capital Flows and Investment Opportunities - An estimated $7.3 trillion is currently in money market funds, a 143% increase since pre-pandemic levels, indicating a potential shift in capital as rates decline [9][16] - If the Fed continues to cut rates, capital from money market funds may flow into long-duration Treasuries or high-yield securities, impacting market prices positively [17][19] - High-yield corporate bonds, high-dividend equities, and preferred stocks are expected to benefit from this capital influx [18][19] Company-Specific Insights - Gladstone Commercial (GOOD) stands to benefit from reduced interest expenses as its variable rate debt is linked to SOFR, with each 25 basis point cut reducing annual interest expense by approximately $1.156 million [22][24] - The anticipated cuts could lead to significant FFO and AFFO accretion for GOOD, enhancing its ability to maintain a high dividend yield of 9.5% [28] - Companies with high debt relative to equity, such as NexPoint Residential (NXRT), may also see benefits from lower interest rates, although their debt is largely hedged to fixed rates [33][34] Market Trends and Predictions - The REIT preferred market is expected to see increased activity as capital flows into high-yield securities, with many preferreds currently offering yields above 8% [36][38] - The market may bid up preferreds to or above par as interest rates decline, creating opportunities for capital appreciation [39][41] - Overall, the investment landscape is shifting towards high-yield securities as traditional risk-free options become less attractive [19][41]