Solid Balance Sheets Prepare REITs for Rising Interest Rates
January 26, 2022 | Calvin Schnure | Nareit
With inflation running high and the Federal Reserve poised to begin raising interest rates, new questions have arisen in the outlook for REITs. While REITs tend to outperform the broader stock market during periods of moderate to high inflation, many investors are also interested in REIT exposures to rising interest rates.
Fortunately, REITs have strengthened their balance sheets and reduced exposures to interest rates over the past decade in ways that will help them continue their recent solid performance in the year ahead. Indeed, a close examination of their financial exposures suggests that increases in interest rates may have little impact on their operating performance and, presumably, stock market returns.
The primary factor driving these reduced exposures to interest rates is that REITs lowered their leverage in the years since the financial crisis in 2008-2009. Chart 1 shows the debt-to-book assets leverage ratio, which declined from nearly 60% in 2008 to a recent low of 48%. Market leverage (which substitutes stock market capitalization for book shareholder equity in the denominator of the ratio) declined even further, to a record low of 29%. (Note: all the charts and data presented in this market commentary are available for free download in the Nareit T-Tracker®.)
