Gavin Duckworth, director of hedging and capital markets at Chatham Financial, participated in a video interview at Nareit’s REITwise: 2018 Law, Accounting & Finance Conference in Hollywood, Florida.
REITs have been working to strengthen their balance sheets in the last few years, according to Duckworth. This likely stems from their cautious and risk-averse nature, as they are looking to grow their cash flows in a sustainable manner over time. They are attuned to the business cycle and their interest rate exposures. Thus, they are more interested in hedging their revolving debt at this point.
As for REITs’ hedging strategies, they tend to be consistent, Duckworth said. “They are not looking for a speculative hedge. They are not interested in taking a view on rates. They just want a hedging strategy that’s right down the plate, that’s very transparent, where they know exactly what the objectives are and how it’s going to work,” he said.
Considering that the London Interbank Offered Rate (LIBOR) index will likely be less relevant after 2021, Duckworth says that REITs should be prepared to transition to a new index. The Secured Overnight Financing Rate index (SOFR), for instance—based on secured, overnight REPO rates—is one such LIBOR alternative. Once there is some price history around this new index, it will be possible to develop a futures market off the index too, which will further aid liquidity.
For REITs, this means they should be thinking about how best to prepare for this transition. For instance, they should look at the LIBOR exposures they have in their debt positions and determine how these debt-related documents define LIBOR, and what they can move to. Duckworth also advises REITs to keep an eye on their LIBOR-based hedges. He expects that there will be some sort of protocol developed for the transition from LIBOR to SOFR.
See part 2 of the video interview with Duckworth discussing new hedging strategies REITs can employ in the current market.