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Interest rate sensitive REITs, also known as real estate investment trusts, are one of the sectors poised to benefit from the Fed's monetary easing in the months ahead. Already, the summer has been very good to this sector. Over the past few months, US REITs have closed a performance gap with the S&P 500. Our next guest seeing potential for more outperformance. Joining us now, we want to bring in Richard Anderson, Webush managing director of equity research covering REITs. It's great to have you here, Richard. Talk to us about the bounce back that we've seen. Certainly some excitement ahead of the rate cuts that are expected next week, but is there more room to run?

There sure is. And thanks for having me. Um, you know, a part of this is kind of an instant gratification scenario where you know, we've seen the 10-year treasury come in uh over the past few months and the REITs, you know, not not surprisingly have recovered ground. Um, and so obviously any kind of investment vehicle with a with an income component like the REITs uh is going to do better in a in a in a declining rate environment, interest rate environment. Certainly that sentiment isn't going in that direction. We all can see that. The question is what happens longer term. And uh, you know, what we'll get into in this conversation, but you know, we're thinking about what does a better rate environment, a normal sloping rate yield curve due to people's attention of the fundamentals of commercial real estate. And that's really where we're thinking that the next leg of opportunity is for the US REITs.

Well, let's talk about that exactly, Richard. I mean, yields have been obviously volatile, disinverting, then reinverting, now disinverting again. How does the yield curve impact REITs?

The most important part of the yield curve is the 10-year uh for the REITs because that's the best match with the dividend yield. Uh, but what it also does is, you know, as as we get into something of a more of a range bound 10-year, you know, in the range of, you know, three and a half to four or four and a half percent, as long as we have some certainty about where we're going to be, uh then the REITs can start to, you know, deploying capital and and and growing earnings through external sources. Um, we're starting to see that happen uh for those that have access today and it's it's certainly bleeding into the conversation. And so, um, the short end of the curve is interesting and and perhaps creates, you know, daily changes in how the REITs perform. But the real thing that we're watching is the longer end of the curve. And if we get some certainty there, then, you know, perhaps off to the races and and perhaps we'll have an outperformance year in 2024 from the REITs.

Yeah, Richard, I was going to ask you and and you answered right there just how quickly you can then perform, or we could see the REITs get back to that outperformance. Let's expand a little bit on that. You touched quickly about maybe what this signals about the fundamentals, some of the behavior that we have seen from investors right now, finding that reason to buy. Then, what does that tell us about the setup and where you are seeing the most attractive investment opportunities within REITs?

Right. So I think part part of the problem here is there's perhaps a lack of understanding about what's the makeup of the REIT market. The office sector, which is the one one sector that continues to be the most shorted sector in the in the in the industry and it has its share of problems, makes up 3% of the REIT industry. Um, so so, you know, let's put that in perspective. The other 97% of the REIT industry fundamentals are actually performing quite well. Um, and so if we can turn our attention there to industries like industrial, to industries like multifamily, even life science, if we get get some some recovery back there, I think putting shining some light on some of those real positive fundamental observations and and sort of turning the page on the the the the general thought from generalists perhaps that the office sector is overwhelming the space. It just isn't, it's just not true. So, that's what we want to say.