Dividend Cut 'Effectively Unavoidable': Investing Legend Chanos Lends Megaphone To REIT Skeptic

Real estate investment trusts, or REITs, are generally considered defensive plays because of their steady dividend streams even during times of market volatility. This sector could be slowly losing that appeal due to the potential ramification of rising interest rates on their debt servicing costs, hedge fund manager Jim Chanos suggested recently.

What Happened: Chanos shared his thoughts on REITs in response to a tweet by a user going by the Twitter handle @xdemarksthespot, who delved into the fundamentals of Medical Properties Trust, Inc. MPW. Medical Properties Trust is a Birmingham, Alabama-based REIT, which invests in healthcare facilities. Its portfolio is spread across geographies, with 61% in the U.S., 21% in the U.K., 4% each in Australia and Switzerland, 3% in Germany, 1% in Spain, 3% in other countries and 3% in other non-country entities.

If the company were to refinance $11 billion of its debt at current market rates, which is about 400-600 basis points higher than its present weighted average interest rate, it would wipe away about $0.75 to $1.10, or 50-67% off its adjusted funds from operations guidance, the Twitter user said.

The fed funds rate against which most interest rates are benchmarked has been climbing steadily since March 2022, when the Federal Reserve began raising rates after keeping them at extremely accommodative levels since the outbreak of the COVID-19 pandemic.

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Even without any rent reductions from its tenants over the next five years, the REIT's dividend "would need to be massively reduced" so that it can be covered by the company’s cash flow, he said.

If Medical Properties Trust’s debt is refinanced eventually, its non-interest AFFO needs to rise over 50% just to keep the AFFO from declining, the Twitter user said. “They have a huge hole to fill by the time it does in order to maintain the dividend,” he added.

Chanos Chimes In: Chanos extrapolated the risk Medical Properties Trust is facing to other REITs as well. Quote-tweeting the user’s tweet thread, he said, “This observation applies to many REIT’s, that have very low debt service costs.”

“Leases renewing at lower rates, debt rolling at higher rates.”

The Vanguard Real Estate Index Fund ETF VNQ ended Friday’s session up 1.52% at $86.93, according to Benzinga Pro data. The Charles Schwabb US REIT ETF SCHH added 1.45% to $20.25.

Read Next: These Five REITs Are Being Highlighted By Analysts As Investment Targets In 2023

Photo: Asia Society on flickr