🌪️ The REITpocalypse is HERE!
The REITpocalypse isn’t just here- It’s already happened. Since last August, the Vanguard real estate ETF is down by 11.5%, while the broader market is down by 4.53%. This is of course primarily due to one thing: A substantial rise in treasury rates in a very short period of time. Over the past month alone, the 2-year Treasury yield has climbed roughly 38 basis points. The 10-year is up 45 basis points, and the 30-year has increased 35 basis points. For perspective, 100 basis points equals one percentage point. The increases are even larger compared with a year ago. This of course impacts dramatically how attractive investors find the dividend yield of REITs when comparing Treasury yields as the alternative. This certainly weighs down the price of REITs- But impacts them in another (much more significant) way that most investors are missing. And many REITs are addressing this issue in their own unique way. The issue? Cost of capital. Let’s review 3 popular REITs and how they are attempting to mitigate this difficult environment. Subscribe now 🏢 How REITs Make the Numbers Work At a basic level, these REITs own properties, lease them to tenants, and collect rent. The ultimate goal is to grow AFFO per share, the north star metric for REITs. If AFFO per share is growing, then generally speaking, intrinsic value is growing. But the way REITs drive AFFO per share growth is far different from most stocks. REITs are required by law to payout 90% of their taxable earnings in the form of a dividend- Which leaves little capital left over for reinvestment back into the business. This is why REITs have historically grown via two methods: Taking on debt Issuing shares Both come with a cost. When a REIT borrows money, it pays interest. The higher the interest rate, the more rental income must go toward servicing that debt. Issuing shares has a cost as well. Every new share represents another claim on the company’s cash flow. The properties purchased with that capital must generate enough additional income to increase AFFO per share after accounting for the larger share count. For example, raising $100 million at $50 per share requires issuing 2 million shares. At $40 per share, raising that same amount requires issuing 2.5 million shares. The company receives the same capital, but the income it generates must now be divided among more shares. That’s why falling share prices make equity capital more expensive. The goal is to invest that capital at a return that exceeds its financing cost. This is called spread investing. Imagine a REIT acquires properties at a 7% initial annual yield and funds the purchase with a mix of debt and equity carrying an estimated blended cost of 5%. The difference is a 2-percentage-point investment spread. On a $100 million acquisition, that represents approximately $2 million annually before overhead and other adjustments. It’s a simplified example, but it illustrates the economics. Now imagine the blended financing cost rises to 6.5%. The same properties still generate a 7% initial yield, but the spread shrinks to just 0.5 percentage points, or approximately $500,000. The properties haven’t changed. Their rental income hasn’t changed. …But the economics of buying them have become much less attractive. That is the challenge REITs are facing right now as Treasury yields rise while their share prices fall. Higher Treasury yields generally push up the cost of new borrowing. Lower share prices increase the dilution associated with raising equity. Unless acquisition yields rise enough to compensate… The investment spread narrows. And that brings us to VICI Properties, Realty Income, and Agree Realty- Each of which has a different way to navigate this environment… Which will have serious implications for long term AFFO per share growth. 1. 🎰 VICI Properties Are you concerned about VICI stock? The REIT is now down 26% in the last year. While their primary issue continues to be the fact their largest tenant is being taken private- Let’s address their cost of capital issue. VICI recently announced a 2.2% dividend increase. Management had previously indicated that dividend growth should roughly track AFFO per share growth. Its latest 2026 guidance implies approximately 3.4% growth at the midpoint. So the dividend is growing slower than their cash flow. Why would this be the case? There are a few potential explanations worth watching: Management could eventually revise AFFO guidance lower. It could be setting dividend growth based on a more conservative outlook beyond 2026. It could be targeting a lower payout ratio The most likely scenario is number three, due to changing cost of capital. As we discussed above, VICI faces higher costs on new borrowing while its lower share price makes issuing equity less attractive. That makes the cash it generates internally more valuable as a source of funding. Growing the dividend at a slower rate than AFFO growth allows VICI to retain more cash than it otherwise would. That capital can then be used to help fund investments which decreases the need of the company to issue stock or take on debt. This helps alleviate their increasing cost of capital. If AFFO growth continues to outpace dividend growth over time, the payout ratio will naturally decline as well. Accepting a smaller dividend increase today will support future growth and balance-sheet flexibility. The benefit ultimately depends on how effectively management uses the retained cash. I wouldn’t interpret a 2.2% increase as evidence that the dividend is immediately in trouble. Based on current guidance, it remains well covered by AFFO. We need to be looking closely for further indication as to whether the smaller increase reflects a deliberate decision to preserve capital, a more cautious growth outlook, or a combination of the two. 2. 💵 Realty Income Realty Income is down 7.5% in the last year. Like VICI and all other REITs, they are facing the same cost of capital issue. Instead of simply decreasing dividend growth to retain cash flow, they decided to take a much different approach Again, historically REITs could either: Issue debt Issue shares But Realty Income is developing another way to fund investments and grow cash flow. Management calls this evolution “Realty Income 3.0.” The idea is to combine its traditional property ownership business with an investment management platform, using its relationships and real estate expertise to invest alongside outside capital. Here’s how that works: Institutional investors contribute capital to a fund or partnership. Realty Income sources properties, evaluates the investments, and manages the portfolio. It invests some of its own capital alongside those investors and can also earn management fees. This allows Realty Income to generate earnings without supplying every dollar needed to purchase the properties. In its traditional model, acquiring a property requires Realty Income to fund the purchase through some combination of debt, equity, retained cash, or asset sales. With third-party capital, outside investors fund part of the investment. Realty Income earns returns on its ownership stake, while applicable management fees provide an additional source of income. That creates the potential to generate more earnings relative to the amount of its own capital invested. For a simple illustration, managing $1 billion of fee-paying capital at a 1% annual fee would generate $10 million of gross annual fee income before expenses. This is a strategy that is already being implemented. At the end of Q2, Realty Income reported approximately $2.68 billion of fee-earning equity under management. Quarterly management fee income reached $3.2 million, up from $2 million in Q1. Keep in mind that fee income still remains a small part of the overall business- It will take time for this platform to become a substantial earnings contributor. However, we need to admit that the timing of Realty Income 3.0 is quite impressive, as their other sources of capital have become far more expensive. This was no doubt an impressive move by the management team. Realty Income’s latest 2026 guidance calls for AFFO per share of $4.44–$4.45, representing approximately 4% growth at the midpoint. I’ll be interviewing Realty Income CEO, Sumit Roy, and releasing it on the Mispriced Podcast in the coming days. 3. 🛒 Agree Realty Agree Realty is down 6.5% in the last year. But their approach to cost of capital is perhaps the most compelling in the REIT space. ADC entered this environment with financing already arranged and limited near-term pressure to refinance its long-term debt. That gives management more flexibility to keep investing without urgently raising capital on unfavorable terms. At the end of Q2, ADC reported approximately $1.9 billion of liquidity, including roughly $1.1 billion of anticipated proceeds from outstanding forward equity offerings. It also highlighted no material long-term debt maturities until 2028. No debt maturities means they don’t have to refinance their debt during this higher rate environment, meaning less interest expense, meaning higher AFFO per share growth- But the forward equity part is quite important as well. These agreements allow ADC to arrange an equity sale and receive the proceeds later when it settles the transaction. In this case, the company had substantial equity capital arranged before the recent selloff. Remember our earlier example: A lower share price requires a REIT to issue more shares to raise the same amount of money. By arranging equity ahead of time, ADC reduced its dependence on whatever price investors are willing to pay for its shares today. Those agreements still involve issuing shares, and settlement proceeds are subject to contractual adjustments- But they provide visibility into funding that would otherwise depend on future market conditions. ADC also continues to project quite strong growth overall. Its latest 2026 AFFO guidance is $4.57–$4.59 per share, representing approximately 5.8% growth at the midpoint. That is faster than the current full-year growth projections for VICI and Realty Income. At the end of Q2, ADC was 99.8% leased, with 65.8% of annualized base rent coming from investment-grade tenants. In my recent interview with CEO Joey Agree, his five-year dividend-growth aspiration translated into approximately 4.5% annual growth. ADC is already in a strong position (perhaps stronger than anyone else) to handle the increasing cost of capital with plenty of cash on hand. This is one of the healthiest REITs on the market today. 💸 What to Watch REITs have fallen dramatically in the last few months- And every single REIT on your watchlist must be looked at closely through the lens of cost of capital. This will look different for basically every REIT. VICI’s slower dividend growth preserves more cash internally. Realty Income is building a platform that attracts outside capital and generates management fees. Agree Realty has equity financing arranged in advance and limited near-term pressure to refinance its long-term debt. Each approach gives management more flexibility, but the ultimate test is the same: Can these companies continue growing AFFO per share in an environment where cost of capital is rising? 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