REITs’ Convoluted Relationship With Interest Rates

Chris Volk

Last year when the ten-year Treasury rate hit 350, many people in the market were convinced that the ten-year would stay above 3% for the foreseeable future. But then the Treasury rate dropped and net lease REIT Store Capital felt compelled to make a move. So it did a Treasury lock at 290 in order to issue debt. “We were happy with where ten-year was and we were happy issuing debt at that spread,” Chris Volk, president and CEO of the company, says. “So we locked in. Of course, as it turned out, we lost money on the lock.” Because with impeccable timing, the Treasury promptly dropped to 240 after STORE Capital’s lock.

It’s all good, though, Volk says. “We managed to borrow money a little cheaper than we would have” and that somewhat offset the loss. At any rate STORE Capital, as well as any other REIT more than one day old, knows it is more important to set and adhere to an overarching business and investment strategy than to make major decisions based on interest rates. A long period of stable interest rate policy-making still tends to be of shorter duration than, say, a REIT’s five-year strategic plan.