Several years of rock-bottom interest rates, fueled by the federal government, have had investors in a desperate search for yield. That was a plus for real estate investment trusts (REITs), which are required to pay 90 percent of their profits out in the form of dividends to investors. The minute rates began to rise, suddenly the darlings became the duds.
At an annual industry conference in Chicago this week, rising interest rates are front and center. Representatives of more than a hundred REITs are questioning how they will have to change their strategies should rates suddenly soar.
"REITs are highly sensitive to the interest rate environment, they're effectively bond substitutes on the equity side. They are enormous users of capital," says David Toti, a REIT analyst at Cantor Fitzgerald. "A change in rates impacts their cost of capital, and it impacts their ability to acquire aggressively."
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