In May 2013, then Federal Reserve Chairman Ben Bernanke hinted to Congress that the Fed would consider tapering its $70 billion monthly bond-buying program.
The markets reacted swiftly and violently to the news. Investors immediately began pulling money from the bond markets. Bond yield pushed significantly higher as money outflows scared investors. The event became known as the “taper tantrum.”
The reaction in the U.S. REIT market was just as swift. The total returns of the FTSE NAREIT All REIT Index (REM) fell sharply, ending the month down 6.6%. The index lost another 8.5% over the next six months.
The volatility in the REIT sector illustrated the conventional wisdom among investors about REIT prices and interest rates. REIT prices usually decline when interest rates rise.
This is because higher interest rates reduce the present value of future cash flows. As such, asset prices must come down — all other things being equal. And that’s exactly what happened.
But that doesn’t mean some economic law is in place here. Nor does it mean that all REITs should experience declines equally.
Residential and office REITs can actually rise with interest rates, thanks to the higher demand and rising rents that come with economic growth.
Is There A High-Yielding, Safe REIT Investment Now?
The answer to that question is yes… There is a REIT that currently pays a 10.3% dividend yield. Better yet, that yield is completely sustainable — something not often found with REITs in the face of rising interest rates.
Even more incredible, the stock trades at a discount of almost 10% to its liquidation value, meaning the stock has the potential for price appreciation in addition to its dividend payouts.
What is this fantastic REIT? It’s Two Harbors Investment Corp REIT (TWO) — a virtual bank.
So what is a virtual bank? A virtual bank does everything a regular bank does, but it does it without the brick-and-mortar branches. This means there are no tellers or walk-in customers.
But it still lends money like a regular bank. It borrows money at low interest rates and lends it out at higher rates (net interest spread). The collateral for its loans is real estate.
In other words, Two Harbors Investment operates like any other brick-and-mortar bank in America.