REITs Drop After Fed Hike, VICI Yield Nears 6.8%

The Federal Reserve confirmed a rate increase at this week’s Federal Open Market Committee meeting, a session led by Chair Kevin Warsh. The central bank’s latest projections show about half of policymakers expect short-term rates to be higher by the end of 2026. Short-term Treasury yields climbed, with the two-year rising above 4% and near 4.2% last week.

Higher policy rates raise borrowing costs for companies and boost yields on Treasuries, which affects income-oriented investments. Real estate investment trusts use debt to buy and operate properties and typically earn from the gap between borrowing costs and rental income. When rates rise, refinancing existing loans and funding new purchases becomes more expensive, which can reduce funds from operations if higher costs are not passed to tenants.

Analysts and portfolio managers note that REITs with strong occupancy and pricing power are better positioned to handle higher financing expenses. REITs in sectors with weaker tenant demand or limited rent growth face greater pressure on payouts and valuations.

Investor flows have already shifted. As the two-year Treasury yield moved toward 4.2%, some capital that had gone into dividend-paying stocks has moved into government debt, narrowing the yield premium REITs offer over risk-free assets. Market observers say increased competition from higher-yielding Treasuries could pressure REIT returns for the remainder of the year.

VICI Properties was among the more heavily affected REITs. The company, which owns experiential assets including casinos, hotels and golf courses and holds a large portfolio in Las Vegas, saw its shares fall to a 52-week low. The share decline pushed VICI’s dividend yield to about 6.8%. Company filings show full occupancy across its portfolio, eight consecutive annual dividend increases and adjusted funds from operations that cover the payout. The firm recently added Club Med to its tenant roster.

Some income-focused investors are using recent price weakness to add to long-term REIT positions. These investors have targeted entry yields near 5.5% in some cases; earlier purchases were made around 5.7%. Market participants caution that opportunities vary by sector and by balance sheet strength, and that rising rates could continue to create headwinds for REITs without solid leasing trends or tenant demand.

REITs were established by Congress in 1960 and must distribute at least 90% of taxable income to shareholders to avoid corporate tax. Equity REITs own and operate properties across sectors such as retail, residential, healthcare, office and industrial. Mortgage REITs invest in mortgages and mortgage-backed securities and are more directly exposed to movements in interest rates.

The near-term performance of REITs will depend on whether property-level cash flows keep pace with rising financing costs and on the path of Treasury yields as Fed policy becomes clearer.