REITs Are Resilient To Currency Headwinds

Jul. 22, 2022 12:37 PM ETKRG, MPW, RL, SPG, SRC, WSR5 Comments

Summary

  • The strong dollar might cause international companies to have weaker earnings.
  • REITs are significantly more domestic in their revenues and are thus less susceptible to currency headwinds.
  • Be prepared to make adjustments to earnings rather than looking at headline numbers.
  • This idea was discussed in more depth with members of my private investing community, Portfolio Income Solutions. Learn More »

Euro Sign With Binary Codes

Eoneren

The US Dollar has hit a 20-year high. Currency is often counterintuitive in that strength can be a headwind. Indeed, this is proving to be a substantial headwind for large portions of the NASDAQ and S&P. IBM (IBM), for example, cut its guidance largely as a result of forex headwinds.

Currency functions as a multiplier on revenue. If there is no change to exchange rates from when a project was initially underwritten, the multiplier will be 1.00. However, when currency fluctuates this number can move substantially, and right now, the US dollar has strengthened so significantly that the multiplier is well below 1.00, making each sale overseas far less effective.

Currency headwinds bigger than normal

The magnitude of the currency headwind is abnormally large for 2 reasons:

  1. Companies have become increasingly international in their sales.
  2. The fluctuation to exchange rates has been quite significant.

If we look at the Euro, it has eroded from about 1.2 U.S. dollars to just barely over 1.0 U.S. dollars.

Graphical user interface, chart, line chart, scatter chart Description automatically generated

Trading Economics

The U.S. dollar has also strengthened against the Chinese Yuan from 6.4 Yuan to 6.75 Yuan.

Chart, line chart Description automatically generated

Trading Economics

I anticipate substantial weakness this earnings season as a result of exchange rates. Fortunately, there are ways to evade this challenge with certain areas of the market being immune or even benefitting from the strong dollar.

3 ways REITs outperform with strong dollar

There are 3 categories by which REITs come out ahead in this strong dollar environment

  1. By not having exposure to currency
  2. By having substantial Euro-denominated debt
  3. By being exposed to net importers

The portion of sales for the broader market that comes from overseas is variable but consistently rather high. It peaked in 2017 at 43.6% of S&P revenues coming from overseas.

In contrast, the majority of REITs are domestic with properties in the U.S. collecting rents in U.S. dollars. We can now add this to the list as yet another headwind that is harsher for the broader market than it is for REITs:

  • Inflation (REITs benefit from inflation)
  • Rising interest rates (REITs have lower duration which mitigates impact)
  • Currency (REITs are mostly domestic)

The reduced exposure is particularly true of small and mid-cap REITs. Some of the large caps do have international properties.

Euro-denominated debt

During the zero interest rate environment, REITs had the opportunity to lock in cheap debt. Those with good balance sheets could get debt at low rates, and those with European exposure could get even cheaper rates with Euro-denominated notes. Interest rates in Europe have been consistently lower than in the U.S., so some opted to overleverage in Europe to lock in the basically free financing.

One of the greatest beneficiaries of this opportunity is Medical Properties Trust (MPW). Below is their debt table:

Table Description automatically generated

10-K

MPW successfully issued £1.85B pounds and €1.0B Euros of debt at exceedingly low interest rates. With the other currencies weakening since issuance, MPW's interest burden is further reduced and its debt load is slightly lower.

This largely offsets MPW's revenue exposure in these areas. Since MPW overleveraged in Europe and underleveraged in the U.S., they do not have to redomicile foreign revenues. The earnings made in Europe pay off European loans making it essentially hedged to currency.

Net importers

Retail is one of the areas that REITs will particularly benefit from with regard to the strong dollar. Retailers who buy goods from overseas and sell in the U.S. will get expanded margins, but the challenge with buying the retailers themselves is that most of the publicly traded ones also sell around the world.

However, in buying the retail real estate here in the U.S. you are exclusively getting exposure to the U.S. sold products. Ralph Lauren (RL) sells all over the world, but if you own a brick and mortar store in the U.S. with Ralph Lauren as a tenant, that particular store is going to get currency benefitted imported goods being sold for U.S. dollars which raises the margins of that particular store.

It's not huge, but it might add a couple of percentage points to the productivity of the real estate which in turn increases the rent it can collect via either percentage rents or market rents upon lease rollover.

My retail REITs of choice are Whitestone (WSR), Kite Realty (KRG) Spirit Realty (SRC) and Simon Property (SPG). Note, however, that SPG is net harmed by the strong dollar as it has substantial international holdings.

Don't overtrade it - just be aware

While it reduces the thrust of the article, I don't think one should drastically alter their portfolio just because currency exchange rates are bouncing around. If a company misses earnings due to exchange rates the market is usually quite quick to forgive them.

Think of currency as just an additional factor to consider. If an already strong stock is benefitting from currency, it is incrementally stronger. I am leaning in the direction of the beneficiaries but not uprooting to capture a couple of percentage points.

Heading into earnings season, it behooves us to be aware that there will be significant exchange rate impacts on earnings. There will be bad reports that end up hitting estimates due to a forex benefit and good reports that end up missing due to currency.

Don't make the mistake of just looking at the headline number. Know the cause of misses and beats and make the adjustment for currency.

Make your money work for you

At Portfolio Income Solutions we do the rigorous analysis to determine which stocks will work and which won’t. We then curate a portfolio of the most opportunistic individual stocks and provide members with continuous analysis to help keep their investments in shape. We constantly watch the market in order to buy and sell the right stocks at the right times.

Start investing with the aid of dedicated research by joining Portfolio Income Solutions.

Not sure yet? Grab a free trial. Canceling is easy and there are no obligations.

This article was written by

Dane Bowler profile picture
22.45K Followers
Access professional analysis and a curated high yield portfolio

2nd Market Capital Advisory specializes in the analysis and trading of real estate securities. Through a selective process and consideration of market dynamics, we aim to construct portfolios for rising streams of dividend income and capital appreciation.

Our Portfolio Income Solutions Marketplace service provides stock picks, extensive analysis and data sheets to help enhance the returns of do-it-yourself investors.

Investment Advisory Services

We now offer a way to directly invest in our Proprietary Investment Portfolio Strategy via REIT Total Return, which replicates our activity in client accounts. Total Return client’s brokerage accounts are automatically invested simultaneously and at the same price when we make a trade in the REIT Total Return Portfolio (also known as 2CHYP).

Learn more about our REIT Total Return Portfolio.

Dane Bowler, along with fellow SA contributors Simon Bowler and Ross Bowler, is an investment advisory representative of 2nd Market Capital Advisory Corporation (2MCAC). As a state registered investment advisor, 2MCAC is a fiduciary to our advisory clients.


Full Disclosure. All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of the specific person. Please see our SA Disclosure Statement for our Full Disclaimer.

Disclosure: I/we have a beneficial long position in the shares of WSR, SPG, KRG, SRC, MPW either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Important Notes and Disclosure
All articles are published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person.
The information offered is impersonal and not tailored to the investment needs of any specific person. Readers should verify all claims and do their own due diligence before investing in any securities, including those mentioned in the article. NEVER make an investment decision based solely on the information provided in our articles.
It should not be assumed that any of the securities transactions or holdings discussed were profitable or will prove to be profitable. Past Performance does not guarantee future results. Investing in publicly held securities is speculative and involves risk, including the possible loss of principal. Historical returns should not be used as the primary basis for investment decisions.
Commentary may contain forward looking statements which are by definition uncertain. Actual results may differ materially from our forecasts or estimations, and 2MC and its affiliates cannot be held liable for the use of and reliance upon the opinions, estimates, forecasts, and findings in this article.
S&P Global Market Intelligence LLC. Contains copyrighted material distributed under license from S&P
2nd Market Capital Advisory Corporation (2MCAC) is a Wisconsin registered investment advisor. Dane Bowler is an investment advisor representative of 2nd Market Capital Advisory Corporation.

Recommended For You

Comments (5)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.