Table of Contents
Opening Notes
Changes Portfolio Holdings
Changes to HYL Ratings
The Core Portfolio (Our Main Portfolio)
The Retirement Portfolio (Our Secondary Portfolio)
The International Portfolio (Our Optional Portfolio)
1. Opening Notes
The big event of the past quarter was the Federal Reserve’s decision to cut interest rates, marking the first cut of this year.
In their commentary, they noted that the job market was weakening and implied that further rate cuts may be needed in the near term. The Fed Chair, Jerome Powell, was very measured as usual in his remarks, but the Fed Governor, Michelle Bowman, was a lot clearer. Here is what she said:
“It’s a lot easier to support the labor market by lowering the federal funds rate than it is to fix it after it’s broken. It is time for the Committee to act decisively and proactively to address decreasing labor market dynamism and emerging signs of fragility.” (emphasis added)
As a result, the debt market is now expecting two additional rate cuts by the end of this year:
And another three cuts in 2026, potentially bringing interest rates all the way down to 3% by the end of next year:
This might be concerning for some sectors of the market, as a weakening economy could lead to lower profits.
However, in the case of REITs, this is very good news because the positive impact of rate cuts is expected to be much greater than the negative impact of a weaker economy.
Most REITs are just not very cyclical. They generally own recession-resistant properties such as apartment communities, cell towers, net lease properties, data centers, e-commerce warehouses, healthcare properties, or even grocery stores. These properties are typically leased on a long-term basis with contractually agreed rent hikes for many years to come. For this reason, rents tend to rise even during recessions. It is only a minority of REITs that own offices, hotels, and other cyclical assets. Therefore, the impact of a weakening economy is not significant on most REITs.
However, the positive impact of rate cuts could be very significant because REITs are today still priced at near-decade low valuations after suffering a 3-year-long bear market that was almost entirely driven by the Fed’s rate hikes of 2022 and 2023:
Fundamentally, the rate hikes did not have much of an impact on most REITs as their leverage is at an all-time low of just about 35%. However, REITs crashed anyway because the rate hikes pulled a lot of capital out of the REIT sector into fixed-income investments.
Just look at how much money poured into money-market funds alone. Some of it came from REITs:
But as interest rates are now cut, we expect the opposite to happen, with some of that capital making its way back into REITs.
And you don’t have to take it from me.
The Fed began cutting interest rates in late 2023, and this has already pushed REITs about 40% higher as investors reallocated more heavily to them:
We are simply predicting that this recovery will continue as interest rates are cut down another 5 times over the next year, as even more investors will reallocate larger portions of their capital into REITs.
Money market funds and short-term treasuries were attractive to investors when they were offering 5% yields, but as interest rates are cut down to just 3% or less, even as inflation remains elevated and uncertain, I expect REITs to become a far more attractive option in the eyes of most investors, relatively speaking.
Ask yourself this question: Would you rather earn a 3% yield from a money market fund, which, after inflation and taxes, leaves you with a negative real return, or would you prefer to buy a 6% yielding REIT that enjoys steady growth, strong inflation protection, and could enjoy additional upside as more investors reallocate into REITs?
If you agree that REITs are becoming increasingly attractive, relatively speaking, then now is the time to allocate to them ahead of the crowd while valuations still remain low, yields are high, and many present significant upside potential.
The opportunity to buy blue-chip REITs like NNN REIT(NNN) at a near 6% dividend yield could be gone by this time next year.
Our plan for the last quarter of this year is to further consolidate our capital towards our best ideas to maximize gains in this anticipated recovery.
So far this year, we have sold 8 of our holdings to reinvest in others, and we expect to do more of the same over the coming months.
We have now also begun working on a new “Top 5 for 2026” series, which we will begin sharing with members over the coming weeks. This will be accompanied by fresh CEO interviews for many of our Top Picks.
Finally, given the extreme uncertainty we are facing, we will continue to look for new ways to increase our international diversification. I am currently writing this from Namibia, where I am studying several African REIT opportunities, which we will discuss later this month.
Stay tuned for this and more.
REITs are finally winning again, up 40% over the past 2 years alone, and now is not the time to slow down, right as the catalyst we have long been waiting for is about to unfold.
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2. Updates to Our Portfolio Holdings:
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