2 Stocks I'd Actively Avoid This Week
Debt is the lifeblood of real estate investing, especially for real estate investment trusts (REITs). REITs have to pay out most of their net income in dividends, so they can finance new purchases only with debt or by issuing new shares. Most of the time, they choose to use debt. It works well in good times, and REITs can grow fast while still paying reliable dividends. But what happens when the market turns?
The dividend payout rule means REITs rarely pay debt off completely without unloading properties. Cash flow gets distributed to shareholders or used as a down payment on new properties, and debt eventually gets refinanced and pushed further into the future. With interest rates going up and revenues potentially coming down, high-debt REITs may have a problem refinancing in the future and keeping the same margins.
Let's take a look at two REITs, Extra Space Storage (NYSE: EXR) and Boston Properties (NYSE: BXP), that have big debt loads and may have trouble in the next few years navigating the new normal.
Source Fool.com
