Many real estate investment trusts will be largely insulated from climbing interest rates for the next couple of years, a report from CIBC Capital Markets said Tuesday. 

With the Bank of Canada’s policy rate hitting 1.5 per cent in June and set to rise further, higher debt servicing costs could eat into companies’ bottom lines. Companies that loaded up on cheap debt during the pandemic to fund growth projects could be hit particularly hard.

However, REITs appear to be well-positioned to handle rising rates because of how they typically structure their debt, meaning many will be partially protected from the impact of interest rate changes until 2025-26, according to CIBC.

“REITs typically only refinance their debt as the mortgage terms come due. As a result, during the low interest rate environment of the COVID-19 pandemic, most REITs were only able to refinance a portion of their maturing debt,” the analysts said.

“As such, the debt that is coming due in the near future will be that which was issued [approximately] 5 years ago (on average), to wit, interest rates were of levels relatively similar to that of the current environment.”   

Most REITs use a practice known as debt laddering to match lease terms and distribute re-financing risks over the course of an economic cycle. 

“With laddered debt maturity structures, the near-term refinancing needs will be for debt that was placed between four and six years ago (on average), at a time when the interest rate environment was much closer to the scenario we are moving towards today,” the analysts said.

REITs also benefit from unique experience as active managers of debt, according to the report. This is because debt as a way of financing is often an integral part of the industry, as legal restrictions limit the ability of REITs to retain profits. 

“Debt as a form of financing has always been the lifeblood of their business…and as such is a skill most REIT CFOs have become quite adept at structuring,” the analysts said.

On a price to net asset valuation basis, the report said valuations for the REIT sector are now trading at a 24 per cent discount, suggesting a potential double-digit upside.