The average real estate investment trust (REIT) has fallen roughly 8% over the past three months, as of this writing. Realty Income (NYSE:O), the largest net-lease REIT, is down 14%, and Agree Realty (NYSE:ADC), a smaller, faster-growing peer, is off by 16%. The main driver of the sell-off is rising interest rates and bond yields.
Dividend investors could find that this drawdown is opening up a long-term high-yield opportunity. Realty Income and Agree are both net-lease REITs, meaning their tenants are responsible for most property-level operating costs. Very often, these REITs buy properties directly from companies that occupy them, then rent them right back under long-term leases, in what is known as a sale-leaseback transaction.
These are usually financing arrangements for the seller, which gets to free up capital to invest in other things, like growing its business or shoring up its balance sheet. Act 2 Could Be 15x Bigger. Most investors think they missed the AI boat because they didn't buy Nvidia in 2005.
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With bond yields and interest rates rising, these REITs will have to contend with a higher cost of capital. Meanwhile, long-term leases generally lock in rent hikes, but at levels that may seem low today, in a world facing elevated inflation. Profitability is under pressure, and investors are reacting accordingly, shifting into the guaranteed income stream offered by bonds, which now offer more compelling yields.
From a near-term perspective, Realty Income is probably better positioned to navigate the current environment. It is the industry giant, with a market cap of $53 billion and a portfolio of over 15,500 properties. Its assets are spread over retail, industrial, and more unique property types, including casinos and data centers.
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