real estate fund or REITs are generally considered defensive games due to their steady stream of dividends even during times of market volatility. This sector could slowly become less attractive due to the potential impact of rising interest rates on their debt servicing costs, hedge fund managers Jim Chanos recently proposed.

What happened: Chanos shared his thoughts on REITs in response to a tweet from a user with the Twitter handle @xdemarksthespot that addressed the basics of REITs Medical Properties Trust, Inc. MPW. Medical Properties Trust is a Birmingham, Alabama-based REIT that invests in healthcare facilities. The portfolio is geographically distributed, with 61% in the US, 21% in the UK, 4% each in Australia and Switzerland, 3% in Germany, 1% in Spain, 3% in other countries and 3% in other non- national companies.

If the company refinanced $11 billion of its debt at current market rates, which is about 400 to 600 basis points above its current weighted average rate, it would be about $0.75 to $1.10, or 50 to 67% of its adjusted rate Interest rates take away funds from operations, the Twitter user said.

The fed funds rate, by which most interest rates are measured, has been rising steadily since March 2022, when the The Federal Reserve began raising interest rates having been kept at extremely accommodating levels since the outbreak of the COVID-19 pandemic.

See also: The best REITs to buy

Even without rent reductions from its tenants over the next five years, the REIT’s dividend would have to be “cut massively” in order for the company’s cash flow to cover it, he said.

When Medical Properties Trust’s debt eventually refinances, interest-free AFFO will need to increase by over 50% just to keep AFFO from falling, the Twitter user said. “By then, they have a huge hole to fill in order to maintain the dividend,” he added.

Chanos strikes: Chanos extrapolated the risk Medical Properties Trust faces to…