The short answer is debt and equity.

REIT’s are allowed to borrow up to 35% of the value of its properties. It can even exceed that percentage if it is a highly rated borrower.

So if it needs to make monthly payments on this debt, won’t that increase a REIT’s expenses and therefore reduce its income and the corresponding dividends? Will rising interest rates have the same effect? Preventing this is basically what the REIT fund manager is paid to do. They need to make sure that the rental income of a newly acquired property is more than the expenses (including debt repayments) associated with that property. That extra amount will result in higher dividends paid to the shareholders.

Another way that a REIT can fund its acquisitions is using equity. It can do a proprty-for-share swap or it can also sell more shares on the Philippine Stock Exchange. The question then is: If there will be more shares issued, won’t that reduce the quarterly dividend since the REIT’s income will now be divided among an increased number of shareholders? Just like the previous explanation, the fund managers need to make sure that the rental income of a newly acquired property is high enough that it will not just cover the dividend payments of the new shareholders, it will actually increase the dividends of existing ones.

REITs will always make sure that new acquisitions are accretive and not dilutive to dividends. Otherwise its shareholders will sell in droves and this will crash the price of a REIT. On a broader note, good REITs not only grow by acquiring more properties but also strive to grow the income from existing ones. They do this by yearly rental escalations or renovations to attract higher paying tenants or in extreme cases, actually demolish an existing building and build a new one. If the REIT has a good property manager, it can increase income by controlling maintenance expenses and prolonging the building’s lifespan.