The spread between a REIT's dividend yield and its cost of debt is doing more work than most people track
When a REIT yields 6 percent and borrows at 4, the spread funds growth and keeps dividends intact. When that same REIT borrows at 7, the business model has to change whether management says so or not. I have been sitting with this because rate moves in 2022 and 2023 compressed or inverted that spread across most sectors, and the equity market was slow to reprice it. The names that held up were the ones that locked long-duration debt before rates moved, so the spread stayed positive on existing capital even while new deals got harder to pencil. The ones that looked cheap on yield were often cheap because the debt stack was rolling over into a worse rate environment, not because the market was being irrational. Office REITs made this visible in an ugly way, but the same pressure ran through net lease and some healthcare names with heavy near-term maturities. What I keep coming back to is that yield alone is a bad entry signal when the debt maturity schedule is front-loaded, and you can see that schedule in the annual report without doing any exotic work. The question worth asking before any position: what is the weighted average interest rate on current debt, when does the biggest tranche mature, and what does the spread look like if it refinances at today's rate rather than the rate it was written at? What sector are you looking at right now where you think the debt stack is being mispriced by the market?
