ADC and O: REITs That Hold Up When the Fed Stays Hawkish

The Federal Reserve's next rate decision weighs on REITs. A hawkish outcome, a hold through the summer or a cut delayed past September, would raise borrowing costs across the sector. REITs borrow short and lend long. When short-term rates stay elevated, the drag from floating-rate debt and maturing fixed-rate paper that refinances at higher coupons eats into funds from operations. Not all REITs carry that risk equally, the analyst wrote.

The analyst identified two net-lease REITs with low leverage and long-duration fixed-rate debt that would hold up better under a hawkish Fed. Agree Realty (ADC) and Realty Income (O) both carry dividend yields above 5% and have debt stacks that lock in low rates for years. Their portfolios tilt toward investment-grade tenants with contractual rent increases, shielding cash flow from rate-driven weakness.

ADC owns about 2,200 single-tenant retail properties. Tenants include Dollar General and Walmart, names that keep paying rent even in a slowdown. The portfolio is 99.7% leased. Net debt-to-EBITDA is 4.5 times, below the sector median. Nearly all of ADC's debt is fixed rate, with a weighted average maturity of 6.5 years. Only 3% of its debt matures before 2026. That means a hawkish Fed does not force ADC to refinance at punitive rates. The dividend yield is 5.1%, and the payout ratio against adjusted FFO is roughly 78%.

O is the largest net-lease REIT by market cap, with over 15,000 properties across the United States and Europe. Tenants include 7-Eleven and Walgreens, plus other investment-grade names. The portfolio is 98.5% leased. Net debt-to-EBITDA is 5.2 times. O's weighted average interest rate on debt is 3.7%, and the average maturity is 7.2 years. Only 5% of its debt matures annually through 2027. The dividend yield is 5.6%. O has raised its payout for 29 consecutive years. The analyst said the model works because the rent roll is contractual and the debt stack is locked.

The simple take is that high-yield REITs fall when rates rise. The better read, the analyst wrote, is that the damage concentrates in REITs with short-duration debt and variable-rate exposure. Apartment REITs with large floating-rate construction loans or office REITs with near-term maturities on empty buildings face the biggest risk. ADC and O sit on the other side of that divide. If the Fed stays hawkish, the market prices in slower growth. That hurts cyclical REITs. For net-lease REITs with long-duration fixed-rate debt and contractual rent bumps, the dividend stream is more resilient. The risk is not a dividend cut. The risk is multiple compression as the risk-free rate rises, lowering the stock price even as cash flow holds. That is timing risk, not thesis risk, the analyst argued.

The thesis would be confirmed if the Fed's dot plot in June shows the median rate path above 4.5% for 2025. That would push the 10-year yield above 4.5% and compress REIT multiples across the board, according to the analyst. ADC and O would fall with the sector. Their FFO per share would not deteriorate. A buyer at a lower price would lock in a higher yield on the same cash flow. A reversal would come if the Fed signals a September cut. That would lift the sector broadly, and ADC and O would rally with it. The trade works in either direction because the dividend is safe either way, the analyst concluded.

Read more on how June's job report shapes Fed expectations.