Debt is the lifeblood of real estate investing, especially for real estate investment trusts (REITs). REITs have to pay out most of their net income in dividends, so they can finance new purchases only with debt or by issuing new shares. Most of the time, they choose to use debt. It works well in good times, and REITs can grow fast while still paying reliable dividends. But what happens when the market turns?

The dividend payout rule means REITs rarely pay debt off completely without unloading properties. Cash flow gets distributed to shareholders or used as a down payment on new properties, and debt eventually gets refinanced and pushed further into the future. With interest rates going up and revenues potentially coming down, high-debt REITs may have a problem refinancing in the future and keeping the same margins.

Let's take a look at two REITs, Extra Space Storage (EXR -1.10%) and Boston Properties (BXP -1.74%), that have big debt loads and may have trouble in the next few years navigating the new normal.

1. Extra Space

Extra Space has been one of two big dogs in the self-storage industry over the past decade. It has used debt to buy up mom-and-pop self-storage shops, using its economies of scale and centralized administration to make the shops far more efficient.

There's no arguing that it has performed well. Revenue is up from $520 million in 2013 to $1.76 billion today. The stock has a total return of 918% over the last 10 years. The dividend has almost doubled over the last five years. And the REIT now manages 2,130 properties, 995 of them wholly owned.

The question is whether Extra Space has painted itself into a corner with debt use. It has $6.3 billion in debt and $58 million in cash. Interest expense of $47 million was about 10% of revenue over the first six months of 2022. The good news is that interest expense of 10% of revenue isn't super high for a REIT, and it has debt coverage ratios over 6 -- it likely won't have any issue making its current debt payments.

The bad news is that around $1.6 billion of the debt has a variable rate, meaning the payments will go up as interest rates go up, and another $1.5 billion comes due by 2026.

That means close to half of its total debt, plus any new debt it uses to buy more properties, will soon have a far higher interest rate. And the only way for Extra Space to raise cash to pay down debt is by buying more properties to produce more cash flow.

The second part of the problem is valuation. Years of consistent revenue and dividend growth have made the stock popular, and it currently trades for 25 times management's best-case estimate for cash flow in 2022. There are plenty of attractive REITs trading for far lower multiples that don't have worrisome balance sheets.

2. Boston Properties

Boston Properties is an office REIT that struggled with the rise in remote working during the pandemic. Unlike Extra Space's, its price-to-cash-flow multiple is fine at around 12. But, like Extra Space, it's loaded with debt.

The REIT has $13.6 billion in consolidated debt and about $635 million in cash or equivalents. Interest expense of $104 million is 13% of revenue. 93.5% of that debt does have a fixed rate, but over $4 billion is due by 2026.

As a more seasoned REIT with, arguably, better properties (skyscraper office buildings versus self-storage facilities) to use as collateral, Boston Properties has a balance sheet in slightly better shape than Extra Space's. But the income statement certainly isn't.

2021's revenue was less than 2019's, and revenue over the last 12 months has been basically equal to 2019 numbers. Meanwhile, the REIT still has over 5 million square feet in available space, and that number went up in the last quarter. For comparison, vacant space at the end of Q2 2019 was under 3 million square feet, and it was around 5 million at the end of June a year ago.

Boston Properties could be at a crossroads. The pandemic increased its vacant space by two-thirds, and so far, it hasn't been able to reduce vacancies much. It has $4 billion in debt coming due over the next few years and close to $1 billion of variable-rate debt.

If it can turn the business around and grow revenue organically by filling existing space, it may be able to use that momentum to buy more properties and keep cash flowing. If it can't, it may have to start selling buildings in a bad market to pay down debt.