To The Moon

$Realty Income(O)$ $NNN REIT INC(NNN)$ $Simon Property(SPG)$

Real estate investment trusts (REITs) have experienced a significant decline in recent weeks. On average, they've dropped by about 13%, with individual REITs like Realty Income falling by over 20%. The primary reason behind this sell-off is the growing uncertainty about future inflation. As a result, the Federal Reserve (FED) has decided to pause its rate cuts for the time being. Until now, the investment thesis for REITs was largely based on expectations of rate cuts. The assumption was that REITs had dropped due to rate hikes, and thus, they should rebound once rates were reduced. However, with fewer rate cuts expected, many investors are questioning why they should continue to invest in REITs.

Uncertainty Projection

If you're feeling uncertain, I want to reassure you that rate cuts are not off the table entirely—they’re just being delayed a bit to ensure inflation doesn’t accelerate. Long-term projections from the FED, reflected in their "dot plot," still indicate that interest rates are expected to land around 3% by the end of 2027. While the market is now pricing in fewer rate cuts in 2025 than it did six months ago, the general expectation remains that rates will fall to about 3% in the next few years.

For long-term investors like myself, this presents a great buying opportunity, as many REITs have recently given up a significant portion of their gains due to short-term focus. However, the long-term prospects remain largely unchanged. REITs are currently trading at near decade-low valuations, even with inflation returning to pre-pandemic levels (around 2%) and the FED already cutting rates by 100 basis points. Once the current uncertainty around inflation passes and the FED resumes rate cuts, I believe REITs will continue their recovery.

Now is not the time to abandon REITs. On the contrary, I’m doubling down on some of my top picks for 2025. Many REITs are priced as if we are in a "higher-for-longer" interest rate environment, but I believe that scenario is unlikely.

FEB Rate Hike Continue

It’s important to remember that the FED's rate hikes were unprecedented due to the surge in inflation, which was driven by the pandemic. The pandemic triggered massive stimulus spending, leading to distorted consumer behavior and increased demand for goods, while supply chain disruptions created a mismatch between demand and supply, fueling inflation. This inflation was temporary, and as of now, inflation has already dropped below 2%, staying there for about a year and a half (adjusted for shelter costs). This has given the FED enough confidence to cut rates by 100 basis points. The FED has clearly indicated that it will continue to reduce rates, though it's currently taking a pause.

I believe part of the reason for this pause is the change in administration, which brings its own set of uncertainties. Statements from former President Trump about potential mass deportations, tax cuts, and tariffs, along with the possibility of a trade war, have raised concerns that inflation could accelerate. These concerns have already pushed long-term interest rates higher, prompting the FED to pause in order to maintain stability.

Long-Term VS Short-Term

If you can take a long-term view and weather the current short-term volatility and uncertainty, we remain confident that the trend will continue toward low inflation and lower interest rates. We are, in my view, returning to a pre-pandemic economy. As I discussed in a recent market update, the "five horsemen" of inflation—demographics, technology, inequality, globalization, and over-leverage—are still as potent as ever. These factors are driving slower GDP growth, lower inflation, and ultimately, lower interest rates. If you're interested in learning more about this, I’ve made that market update available for free, and you can find it linked in the description of this video.

This is what gives me the confidence that interest rates will trend lower over the next few years, which is why I’m excited to buy during this dip. The current market behavior is driven by impatience and a narrow focus on the short-term. It’s true that uncertainty is growing right now, but the broader, long-term outlook remains largely unchanged. Despite significant rate cuts already, these REITs are now more affordable. With that in mind, here are some of the rates I’m buying today.

Interest Rate Expected Go Lower

I really appreciate the strong alignment of interests here, and over the next few years, I believe the company will benefit from several significant catalysts. First, as I mentioned earlier, interest rates are expected to continue moving lower, which will benefit most REITs. However, BSR REIT has an additional catalyst: I anticipate its rent growth will accelerate. Apartment REITs, particularly those focused on Sun Belt markets, have faced challenges in recent years, primarily due to oversupply. But one consequence of the recent spike in interest rates is that it has effectively paused most new development projects, leading to a sharp reduction in new supply. By mid-2025, and even more so in 2026, new supply is expected to drop significantly, which should contribute to a notable increase in rent growth.

The combination of lower interest rates and faster rent growth presents a powerful catalyst for undervalued apartment REITs like BSR REIT. I believe this could lead to upside potential of 30-50% from here. Plus, while you wait, you're earning a 5% dividend yield.

Conclusion

To wrap up, I want to remind you that patience is often richly rewarded when investing in REITs. Unfortunately, many smart investors today are making the classic mistake of losing patience and giving up on REITs. While it’s true that they’ve under performed for years, and it’s understandable that some investors may lose confidence, this is precisely the moment when you should be considering re-entering the sector—or even doubling down. Historically, when REITs have been heavily discounted, they’ve been highly rewarding in the following periods. There are numerous studies supporting this, and I’ll share one on the screen that shows REITs have delivered a 90% total return over the next three years after being priced at a 20% discount to net asset value. Given that valuations are even lower today, after a prolonged period of under performance, there’s a clear correlation between low valuations and future returns.

With valuations so low and REITs poised to benefit from significant catalysts—both from interest rate cuts and accelerating rent growth—I believe the next five years will be very rewarding. However, these returns won’t come in a straight line, and the ride will be bumpy with some uncertainty, just as we’re seeing now. Still, I don’t believe the long-term outlook has changed, which is why I continue to accumulate more REITs.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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