Across our nine REIT reports the scores run from 8.2 to 4.2 — the widest spread of any sector we cover. The same interest rates applied to every one of them.
That should settle the most common explanation. Rates are the weather, not the mechanism. They make everything harder at once; they do not explain why one landlord is compounding and another has lost four-fifths of its value. For that you have to look at what sits between the rent and your return — and there are three things, of which only one gets discussed.
The debt, which everybody talks about
Property is bought with borrowed money, and borrowed money reprices on a schedule. With the 10-year Treasury at 5.12% as at late September, a mortgage arranged in a cheaper era does not become expensive gradually — it becomes expensive on the day it matures.
Which means the number that matters is not the average cost of debt. It is the maturity schedule: how much comes due, and when. A REIT with nothing due for five years has five years for the world to change. A REIT with a wall next year has a deadline, and deadlines are where dividends get cut.
The competition from doing nothing
The quiet one
When a government bond pays 5%, every income asset on earth has to explain itself against that number. A REIT yielding 4% with property risk attached is not obviously the better deal, and the market adjusts the only variable it can: the price.
This is the channel that makes REIT share prices move like bonds even when the buildings are full and the rent is being paid. It has nothing to do with the quality of the business — which is exactly why it creates opportunities as often as it destroys them.
The one that actually does the damage
A REIT cannot retain its earnings, so its share price is its cost of capital
Here is the mechanism nobody puts in the headline. A REIT must distribute most of its taxable income to keep its tax status. So unlike an ordinary company, it cannot fund growth out of retained profit. To buy a building it must issue shares or borrow.
Which means the share price is not a scoreboard. It is an input. When the shares fall, issuing equity to buy a property dilutes existing owners more, so fewer deals make sense, so growth slows — which is itself a reason for the shares to fall further.
That is the loop that takes the return out. Not the rent, which usually keeps arriving. The ability to compound it.
For most companies the share price is a result. For a REIT it is an ingredient.
Same rates, four-point spread
| Score | What our report found | |
|---|---|---|
| Prologis | 8.2 | Occupancy 95.5%, and in-place rents 17% below market — rent that rises on renewal without buying anything. Core FFO +11.6%. |
| Realty Income · VICI · Agree | 7.0 | Long leases to creditworthy tenants. Solid, and dependent on the cost of capital to grow. |
| Rexford | 5.4 | Cash leasing spreads −11.3%, market rents 23% below peak. The engine that drove the model ran backwards. |
| Alexandria | 5.5 | ~0.5× book and ~6× FFO with the founder buying — but revenue, occupancy and the dividend all falling. |
| IIPR | 4.2 | Roughly a quarter of the rent roll had been in default. 81% below the 2021 high. |
Look at the top and bottom rows together. One landlord's rents are 17% below market, which means its income rises as leases roll over without it spending a cent. Another's tenants were not paying at all.
Interest rates did not cause either of those facts. They are properties of the lease and the tenant — which is to say, of the business.
Three questions, before the macro view
Below market is embedded growth that costs nothing to collect — the single best feature a REIT can have. Above market means the next renewal is a cut, and it will arrive quietly.
Not the average rate. The schedule. This is where a dividend cut is written down years before it is announced.
Tenant concentration and arrears. A REIT is a credit portfolio wearing a building as a costume; the buildings are collateral, but the rent is a promise from somebody, and somebodies default.
Rents below market and a full portfolio, against a rent roll where a quarter had stopped paying.
Each with its AFFO cover, lease terms and debt schedule worked through.
Frequently asked
Why do rising interest rates hurt REITs so much?
Through three separate channels, not one. Their debt costs more when it refinances; the yield they must offer to compete with government bonds rises, which pushes the share price down; and because they must distribute most of their income, they cannot fund growth from retained profit — so a lower share price directly raises the cost of every future acquisition. The third channel is the one people miss.
Are all REITs affected the same way?
No, and this is the central point. Across our nine REIT reports the scores run from 8.2 to 4.2 — the widest spread of any sector we cover. The same rates applied to all of them. What separated them was the lease, the tenant and the debt schedule, not the macro environment.
What should I look at before buying a REIT?
Three things, in order: the AFFO payout ratio, the weighted average lease term with tenant concentration, and the debt maturity schedule. A comfortable payout with leases expiring next year is not comfortable, and a long lease with a wall of debt refinancing into higher rates is not safe. The rent tells you about this year; the leases and the maturities tell you about the next five.
Is a high REIT yield a good sign?
Usually the opposite. The clearest case in our library scored 4.2: 111 properties, and roughly a quarter of the rent roll had been in default, with the shares 81% below their 2021 high. The yield looked spectacular the whole way down, because a yield rises when the price falls — and the price was falling for a reason that was visible in the rent roll.