Minimizing Interest Rate Risk: How REITs Employ Hedging Tools, According to Chatham Financial’s Gavin Duckworth

Chatham Financial’s Gavin Duckworth has said that real estate investment trusts (REITs) are using hedging tools to minimize interest rate risk. In a video interview for Nareit’s REITwise: 2023 Law, Accounting & Finance Conference in Phoenix, Arizona, Duckworth noted that over the past year and a half, REIT clients have made use of Treasury locks and forward swaps to help mitigate the risk. The inverted yield curve is also prompting clients to lock in rates, he said. Many are keen to swap rates for three or four years. Duckworth said the hedging tools have overall “played out very well”.

Meanwhile, Duckworth discussed the issue of REIT clients’ LIBOR debt or hedges that are yet to transition to SOFR. He said the basis adjustment is not as favourable and execution charges have significantly increased, leading many of Chatham’s clients to slow down their transition process.

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Chatham Financial provides risk management advisory services, including derivatives, to global clients in industries such as private equity, real estate, and energy. The firm has advised more than 1,500 public and private clients worldwide, helping them minimize risks ranging from fast-changing interest rates to complex regulatory environments.

REITs invest in income-generating real estate assets such as apartments, hotels or office buildings, and essentially serve as landlords. They are required to distribute nearly all of their taxable income to shareholders as dividends each year. However, REITs face risks as interest rates rise, as they make borrowing more expensive, weighing on returns and eroding the value of their property portfolios. This makes hedging tools particularly important.

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Duckworth also noted the challenges facing the transition from LIBOR to the alternative interest rate benchmark, SOFR. The phase-out of the benchmark is scheduled for the end of 2021. In recent years, several banks such as JP Morgan and Goldman Sachs have issued SOFR-linked securities, indicating that the benchmark is gaining acceptance in the markets.

In summary, Chatham Financial’s Gavin Duckworth says that hedging tools are being used to mitigate interest rate risk among REITs. While these tools have proved effective, there are some issues related to the transition from LIBOR to SOFR. In the meantime, the use of Treasury locks and forward swaps is likely to continue in order to buffer against interest rate rises.

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