Advanced · Real Estate

The complete guide to REITs

Q: Is FFO the same as free cash flow?

No. FFO adds real estate depreciation back to net income and strips out gains and losses on property sales, so it measures recurring operating earnings. It does not subtract the capital you must spend every year to keep buildings leased and standing. AFFO does that, which is why AFFO is the number to use for dividend safety. Neither one is the same as GAAP free cash flow.

Q: Should I ever use P/E on a REIT?

Rarely. Depreciation on buildings that are holding or gaining value pushes GAAP net income far below economic earnings, so P/E ratios of 50× or more are common and meaningless. Use P/AFFO first, P/FFO for a quick screen, and NAV or implied cap rate to sanity-check against the private property market.

Q: Do rising interest rates always hurt REITs?

The correlation is much weaker than people assume. What actually hurts is a rising cost of capital that exceeds the yield on new investments, plus refinancing at coupons above the maturing debt. A REIT with 90% fixed-rate debt, a seven-year average maturity, CPI-linked escalators and low leverage can grow through a rate cycle. A 9× levered REIT with floating debt cannot. Look at the debt schedule, not the headline.

Q: What is a cap rate, in plain terms?

Net operating income divided by property value. A building producing $1m of NOI that trades at $16m carries a 6.25% cap rate. Cap rates behave like bond yields in reverse: when they compress, values rise. The gap between the cap rate a REIT earns on acquisitions and its own cost of capital determines whether buying more buildings makes shareholders richer or poorer.

Q: What's the difference between an equity REIT and a mortgage REIT?

An equity REIT owns buildings and collects rent. A mortgage REIT owns mortgages and mortgage-backed securities financed with short-term borrowing, and earns the spread. They share a tax structure and almost nothing else. Mortgage REITs are leveraged fixed-income portfolios where book value per share, not FFO, is the number that tells you what happened.

Q: Why is part of my REIT dividend labelled return of capital?

Because depreciation reduces taxable income below the cash being distributed. The excess is treated as a return of your own capital: untaxed today, but it lowers your cost basis, so the tax shows up as a larger capital gain when you sell. It is genuine deferral rather than a free lunch, and it is one reason REIT tax reporting only arrives properly in January.

Q: Are REITs better held in a tax-advantaged account?

For a US taxpayer, usually yes, because the ordinary dividend portion is taxed at marginal rates even after the 20% Section 199A deduction. Non-US investors face 30% withholding on ordinary REIT dividends unless a treaty reduces it, and many treaties deny REITs the lower direct-investment rate. Check your own situation with someone qualified, since this varies enormously by country.

Q: What is an UPREIT and why should I care?

In an UPREIT, the listed company holds almost everything through an operating partnership. A property owner can contribute a building to that partnership in exchange for OP units under Section 721 and defer the capital gains tax. It matters for two reasons: it is how many REITs acquire assets without cash, and OP units are economically equivalent to shares, so you must include them in the share count when computing per-share FFO.

Q: How many REITs should a portfolio hold?

That's a personal allocation question rather than a rule, but the useful observation is that sector choice explains far more of the return dispersion than stock picking within a sector. Owning six REITs across five property types is a very different exposure from owning six office REITs, even if the yields look identical on a screen.

A REIT is a bargain struck with the tax code: escape corporate tax, and in exchange accept rules about what you own, how you earn, who owns you, and how much cash you must hand over every year. Everything distinctive about REIT analysis follows from that bargain.

Level:Beginner to advanced

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Read time:38 min

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Sections:20

Earnings metric

FFO → AFFO

Not EPS, not FCF

Legal payout floor

90%

Of REIT taxable income

Safety test

AFFO payout

Under 85% in most sectors

Valuation

P/AFFO + NAV

Cross-checked on cap rates

Foundations

What a REIT actually is

A real estate investment trust is a company that owns income-producing property, or lends against it, and has elected a special tax status under sections 856 to 860 of the US Internal Revenue Code. The election has one enormous benefit and a long list of conditions attached.

The benefit is the removal of one layer of tax. A normal corporation earns profit, pays corporate income tax on it, and then hands the remainder to shareholders who pay tax again. A REIT deducts the dividends it pays from its own taxable income, so income that gets distributed is taxed once, in the shareholder's hands.

Worked example

$100 of operating profit, two structures

Operating profit$100.00

Corporate tax at 21% (normal company)($21.00)

Available to distribute$79.00

Corporate tax (REIT, fully distributed)$0.00

Available to distribute$100.00

That 21% gap, compounded across decades, is the entire reason the structure exists. It is also why the rules around it are so restrictive: Congress wanted the benefit to reach passive property income and nothing else.

Everything that makes REIT analysis feel foreign comes from this trade. The mandatory payout means the company retains almost no cash, so it must return to the capital markets to grow. The heavy depreciation on buildings makes reported net income close to useless. And because rent is contracted years ahead, the interesting information sits in lease schedules rather than in the income statement.

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Key takeaway

A REIT is a tax structure wrapped around a property portfolio. Analyse the portfolio like a landlord, the balance sheet like a lender, and the tax wrapper like a set of constraints on management's freedom.

Legislation

How the law got here

Knowing the legislative history isn't trivia. Each of these changes created a structural feature you'll meet in filings, and several of them explain why one REIT can do something a competitor cannot.

Year	Law	What changed
1960	REIT Act (Cigar Excise Tax Extension Act)	Congress creates the REIT so ordinary savers can own large commercial property the way mutual funds let them own stocks. The catch: REITs had to be passive landlords managed from outside.
1986	Tax Reform Act	REITs are allowed to operate and manage their own buildings. Internal management becomes possible, and the tax shelters that had been out-competing REITs for capital are shut down. This is the law that made the modern REIT.
1992–93	UPREIT + pension look-through	The umbrella partnership (UPREIT) structure lets property owners contribute buildings for OP units without triggering tax, unleashing a wave of IPOs. Pension funds get look-through treatment on the 5/50 ownership rule, opening the door to institutional capital.
1999	REIT Modernization Act	Creates the taxable REIT subsidiary (TRS) from 2001, and cuts the mandatory payout from 95% to 90% of taxable income.
2008	RIDEA (Housing Assistance Tax Act)	Healthcare REITs may take operating upside from senior housing through a TRS plus an independent operator, instead of only collecting a fixed rent cheque.
2015	PATH Act	FIRPTA relief for qualified foreign pension funds, the publicly traded exemption widened from 5% to 10% ownership, tax-free REIT spin-offs restricted, TRS cap trimmed from 25% to 20%.
2016	GICS reclassification	Equity REITs leave Financials and become part of a standalone Real Estate sector. Generalist funds that had zero real estate suddenly have a benchmark weight to fill.
2017	Tax Cuts and Jobs Act	Section 199A gives US individuals a 20% deduction on ordinary REIT dividends, with a 2025 sunset attached.
2025	One Big Beautiful Bill Act	Signed 4 July 2025. The 199A deduction on REIT dividends becomes permanent, and the TRS asset cap goes back up to 25% for tax years beginning after 31 December 2025.

Why 1986 matters most

Before the Tax Reform Act of 1986, a REIT had to hire an outside manager and could not run its own buildings. That produced a structure where the manager's incentives and the shareholders' incentives pulled in different directions. Internal management, which most large US REITs now use, dates from that Act. External management still exists, and it remains one of the first things worth checking.

Compliance

The rulebook a REIT lives under

Four families of tests decide whether a company keeps its REIT status: how it is organised, what it owns, where its income comes from, and how much it distributes. Miss one badly and the company is taxed as a normal corporation, with a four-year lockout before it can elect again. Cure provisions exist for good-faith failures, and they come with penalty taxes.

Test	Tested	Requirement
75% asset test	Quarterly	At least 75% of gross assets in real property, mortgages on real property, cash and cash items, government securities, and shares of other REITs.
TRS cap	Quarterly	No more than 25% of assets in securities of taxable REIT subsidiaries (20% before 2026). The TRS is where non-qualifying business goes, and it pays full corporate tax.
5% single-issuer test	Quarterly	No more than 5% of assets in the securities of any one issuer, outside the qualifying and TRS buckets.
10% vote / value test	Quarterly	No more than 10% of the voting power or 10% of the value of any one issuer's securities, again outside the safe buckets.
75% income test	Annual	At least 75% of gross income from rents from real property, mortgage interest, gains on non-dealer property sales, other REITs' dividends, and foreclosure property income.
95% income test	Annual	At least 95% of gross income from everything in the 75% test plus any dividends, interest, and gains on securities.
100 shareholders	335 days/yr	At least 100 shareholders for 335 days of a 12-month tax year. Waived in year one, which is why private REITs use preferred-share accommodation programmes.
5/50 closely-held test	Second half of year	Five or fewer individuals may not own more than 50% of the value of the shares. Pension funds are looked through to their beneficiaries.
90% distribution	Annual	At least 90% of REIT taxable income (before net capital gain) must be paid out, or the whole structure fails.

What counts as good rent

The 75% income test sounds simple until you look at what disqualifies rent. These rules shape real commercial behaviour, and they are the reason certain REITs own subsidiaries that pay full corporate tax on purpose.

Situation	Effect	Detail
Rent tied to tenant profit	Disqualifying	Rent set as a share of the tenant's net income does not count as good REIT income. Rent as a percentage of gross sales is fine, which is why mall leases use gross-sales overage rent.
Related-party rent	Disqualifying	Rent from a tenant in which the REIT owns 10% or more generally fails, with a carve-out for qualifying TRS leases.
Impermissible tenant services	Taints the rent	If the REIT provides services beyond what a landlord customarily provides, the fee income (and potentially all rent from that property) can be tainted. A 1% de minimis threshold applies. The workaround is a TRS or an independent contractor.
Personal property in a lease	Partly disqualifying	Rent attributable to personal property is good income only up to 15% of total rent under the lease. Matters for data centres, cold storage, and healthcare.
Dealer property sales	100% penalty tax	Selling property held primarily for sale to customers triggers a 100% tax on the gain. Safe harbours limit how much a REIT can churn each year, which is why merchant-development activity sits inside a TRS.

◆Analyst note

The taxable REIT subsidiary is the pressure valve for all of this. Hotel operations, senior housing operations, merchant development, and tenant services all sit inside a TRS, which pays full corporate tax on its profit. The cap on TRS assets is 25% of the REIT's total from tax years beginning after 31 December 2025, up from 20%. When a REIT reports large TRS earnings, remember those dollars were taxed before they reached you.

The 90% rule sets a floor, not a target

Most healthy REITs distribute well above the legal minimum because of the separate 4% excise tax under section 4981, which bites unless calendar-year distributions cover 85% of ordinary income plus 95% of capital gain net income. This matters when you assess a payout ratio: part of the dividend is a legal obligation the company cannot cut without consequences, and part is discretionary.

Your side of it

How REIT income gets taxed in your hands

A REIT dividend is not one thing. Every January the company publishes a table breaking the prior year's distributions into components, each taxed differently. Until that table arrives, nobody knows the exact split, including the company.

Component	Where it appears	Treatment (US individual)
Ordinary dividends	1099-DIV box 1a	The bulk of a typical REIT payout. Taxed at your marginal rate, reduced by the 20% Section 199A deduction, so the top federal rate is 29.6% rather than 37%, before the 3.8% net investment income tax.
Qualified dividends	Box 1b	Usually small. Comes from earnings that already paid corporate tax somewhere, typically inside a TRS. Taxed at long-term capital gains rates.
Capital gain distributions	Box 2a	The REIT's own gains on property sales, passed through. Long-term rates, whatever your holding period.
Unrecaptured 1250 gain	Box 2b	The slice of property gain attributable to past depreciation. Taxed at up to 25%.
Return of capital	Box 3	Not taxed in the year received. It cuts your cost basis instead, so the tax arrives when you sell. This is depreciation being handed to you as deferral.

Top federal rate on ordinary REIT dividends

37% × (1 − 0.20) = 29.6% (+ 3.8% NIIT where it applies)

The 20% Section 199A deduction on ordinary REIT dividends was made permanent by the One Big Beautiful Bill Act in July 2025, removing the sunset that had been scheduled for the end of that year.

If you are not a US taxpayer

Ordinary REIT dividends paid to non-residents carry 30% US withholding by default. Treaties often cut that, commonly to 15% for small holders, but many treaties specifically deny REITs the low rate reserved for direct corporate investment. Capital gain distributions attributable to US property gains fall under FIRPTA and are treated as effectively connected income, with an exception for holders of 10% or less in a regularly traded REIT.

Withholding is not recoverable through the fund wrapper

Buying a US REIT ETF domiciled outside the US does not avoid the underlying withholding, it just moves where the leakage happens. If you are building income from US real estate as a non-US investor, model the after-withholding yield, not the headline one, and get advice for your own jurisdiction.

Taxonomy

Types, wrappers and structures

Equity REITs

Own and operate buildings, collect rent. Roughly nine of every ten dollars of listed REIT market value. When people say REIT without qualification, this is what they mean.

Mortgage REITs

Own mortgages and mortgage securities funded with repo borrowing, earning a spread. A leveraged bond book with a REIT tax wrapper. Covered separately below because almost none of the equity REIT toolkit applies.

Hybrid

A mix of both. Rare in listed markets today, common in private vehicles and in REITs that finance as well as own, such as some healthcare and gaming platforms.

Listed, non-traded, private

Dimension

Listed REIT

Non-traded NAV REIT

Pricing

Continuous, set by the market. Can trade at a discount or premium to asset value.

Set monthly by the sponsor using appraisals. Always 'at NAV', which conceals rather than removes volatility.

Liquidity

Sell any trading day at the quoted price.

Repurchase programme, commonly capped at 2% monthly and 5% quarterly of NAV, and suspendable. Investors met that cap in 2022–23.

Fees

Internal G&A, disclosed in the income statement. Often under 40bp of assets for large internally managed REITs.

Management fee plus performance fee plus shareholder servicing fees. The all-in load is materially higher.

Disclosure

10-K, 10-Q, quarterly supplemental package, earnings call.

10-K and 10-Q, but no daily price discovery and generally thinner operating detail.

Best used for

Investors who want liquidity and are willing to accept mark-to-market volatility.

Investors who want appraisal-based smoothing and accept gating risk and higher costs for it.

Internal versus external management

An internally managed REIT employs its own staff, and G&A shows up as a line in the income statement. An externally managed REIT pays an adviser a fee, usually on gross assets, sometimes with an incentive fee on top. The gross-asset fee is the problem: it pays the manager more for buying more, using more debt, whether or not the deals help shareholders. External management can work well when the manager has scale and skin in the game, and it is a durable conflict when they don't.

UPREIT, OP units and the 721 exchange

Most large US REITs are umbrella partnership REITs. The listed company is the general partner of an operating partnership, and the buildings sit in that partnership. A property owner can contribute a building to the OP in exchange for OP units under Section 721, deferring capital gains and depreciation recapture until those units are converted or the property is sold. It's a currency the REIT can pay in without touching cash or issuing shares directly.

Count the OP units

OP units convert one-for-one into shares and receive the same distribution. Any per-share figure that excludes them overstates FFO per share. Nareit's guidance is to compute FFO on a fully diluted basis including OP units, and good supplementals show both. Check which one the headline number uses.

The business

Where the money actually comes from

Below the tax wrapper is a fairly simple business: collect rent, pay the cost of running the building, and keep the difference. That difference is net operating income, and it is the atom of real estate analysis.

Property-level P&L

NOI = (Base rent − vacancy − credit loss) + recoveries + other income − property opex

Property opex means taxes, insurance, utilities, repairs and on-site management. NOI is before interest, before corporate G&A, and before any capital spending.

NOI converts to value through the cap rate, which behaves like a yield. Divide NOI by the cap rate to get value, and note what happens when the cap rate moves on a levered balance sheet.

Worked example

What a 50bp cap rate move does to equity

Portfolio NOI$120M

Market cap rate6.00%

Implied portfolio value$2,000M

Net debt($900M)

Equity value$1,100M

Cap rate widens to 6.50%Value → $1,846M

New equity value$946M

An 8% fall in property value became a 14% fall in equity value, on debt of only 45% of assets. Nothing happened to the rent. This is why leverage discipline and cap rate assumptions carry so much weight in REIT valuation, and why NAV estimates should always be shown as a range.

Lease structures, and why they change everything

Lease type	Who pays operating costs	Consequence for the investor
Gross lease	Landlord	The REIT absorbs cost inflation. Margins compress when insurance and property taxes spike.
Modified gross	Shared, with a base-year stop	Tenant pays increases above a base year. Partial inflation protection.
Triple net (NNN)	Tenant pays taxes, insurance, maintenance	Highly predictable margins. Rent escalators become the only source of organic growth.
Absolute net	Tenant pays everything, including structure	Closest thing to a bond secured by a building. Tenant credit is the entire risk.
Percentage rent	Base rent plus a share of tenant gross sales	Used in retail. Gives the landlord upside from tenant performance without failing the REIT income tests.

The three growth engines

Internal growth

Contractual escalators, occupancy gains, and releasing spreads when below-market leases roll. Free growth, in the sense that it requires no new capital. Same-store NOI is the scoreboard.

External growth

Buying or developing more property. Only creates value when the yield on the new asset exceeds the blended cost of the debt and equity used to buy it. Development typically earns 100–200bp more than acquisition, in exchange for execution risk.

Financial engineering

Refinancing at lower rates, recycling capital out of low-growth assets, buying back shares below NAV. Real but finite, and easily mistaken for operating performance.

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Key takeaway

If same-store NOI is flat and per-share AFFO is growing, growth is coming from acquisitions or leverage. Ask what happens when the cost of capital rises and that engine stalls.

Core metric

FFO, and the problem it solves

GAAP requires buildings to be depreciated over 27.5 to 39 years, as if a well-maintained warehouse were being consumed like a machine tool. Sometimes that's true. Often the building is worth more after ten years than it cost. Nareit created FFO in 1991 to strip that distortion out, and restated the definition in November 2018.

Nareit FFO — 2018 restatement

FFO = Net income (GAAP) + real estate D&A − gains on sales of depreciable property + impairments of depreciable real estate ± JV adjustments

Adjustments flow through to the REIT's share of unconsolidated joint ventures on the same basis. Non-real-estate depreciation stays in.

Worked example

From net income to FFO

Rental revenue$500M

Property operating expenses($150M)

General and administrative($35M)

Interest expense($100M)

Real estate depreciation and amortisation($180M)

Gain on sale of a building+$25M

Net income (GAAP)$60M

Add back: real estate D&A+$180M

Remove: gain on sale($25M)

Nareit FFO$215M

Net income of $60M implies a company barely breaking even. FFO of $215M reflects what the portfolio actually produced. The $25M gain was removed because selling a building once is not a repeatable business.

Nareit FFO versus Core FFO

Nearly every REIT also reports Core FFO, Normalised FFO, or Operating FFO, adding back things it considers one-off: debt extinguishment costs, transaction expenses, severance, litigation. Some of those adjustments are fair. A company that reports "one-off" costs every quarter for five years is describing its cost structure, not an anomaly. Read the reconciliation, and keep a running tally of how often the same adjustment reappears.

FFO still isn't cash

FFO subtracts no capital expenditure at all. An office REIT that spends $80 per square foot on tenant improvements and leasing commissions to fill space reports exactly the same FFO as a net lease REIT that spends nothing. That gap is the reason AFFO exists.

The safety metric

AFFO — the number the dividend is actually paid from

AFFO (also called FAD or CAD)

AFFO = FFO − recurring maintenance capex − tenant improvements − leasing commissions − straight-line rent adjustment ± above/below-market lease amortisation

There is no standard definition. Treatment of stock compensation, development capex, and non-cash interest varies from company to company, and sometimes from year to year within the same company.

Worked example

Two REITs, identical FFO, different reality

FFO — Net lease REIT$215M

Maintenance capex($4M)

Tenant improvements and leasing costs($2M)

Straight-line rent adjustment($9M)

AFFO$200M

FFO — Office REIT$215M

Maintenance capex($38M)

Tenant improvements and leasing costs($46M)

Straight-line rent adjustment($11M)

AFFO$120M

Same FFO, and the office REIT has 40% less cash available for distribution. On a $150M dividend, one is comfortably covered at a 75% payout and the other is paying out 125% of what it earns. A screen ranking these two on P/FFO would show them as equally priced.

The straight-line rent adjustment, explained

GAAP makes a landlord recognise rent evenly across a lease term, even when the contract steps up over time. In year one of a ten-year lease with 3% annual bumps, reported revenue exceeds cash collected, and the difference sits on the balance sheet as a straight-line rent receivable. AFFO removes it. If that receivable is growing fast relative to revenue, a meaningful part of reported growth is an accrual rather than money in the bank.

Rebuild it yourself, once

Take the cash flow statement, find actual capital expenditures, split maintenance from development using the supplemental, and compute your own AFFO. Do this once for a company and you'll immediately see whether its published definition is conservative or generous. Most analysts who get REITs wrong skipped this step.

Asset value

NAV, cap rates and the cost-of-capital flywheel

NAV asks a different question from FFO. Instead of what the portfolio earns, it asks what the portfolio would fetch if it were sold building by building into the private market today.

NAV build-up

NAV = Σ (forward segment NOI ÷ market cap rate) + development at cost + cash + other assets − debt − preferred

Then divide by shares plus OP units. Always run it at three cap rates, not one: the answer moves roughly 8% for every 50bp of cap rate.

Compare the result to the share price. Persistent discounts and premiums are not just scorekeeping, they change what management can do:

Trading at a premium to NAV. The REIT can issue shares above asset value, buy buildings at market cap rates, and grow NAV per share. Capital is cheap, and the flywheel spins forward.
Trading at a discount. Issuing equity destroys value. The correct move is to sell assets at private-market prices and buy back your own shares at a discount to those same assets. Management teams that keep issuing anyway are telling you something about their incentives.

Implied cap rate is the reverse of the same calculation, and it's the fastest reality check in the toolkit. Take enterprise value, divide by forward NOI, and you get the yield the public market is placing on the portfolio. If the shares imply a 7.5% cap rate while similar buildings are changing hands privately at 5.5%, either the market knows something about future rents, or there's a genuine mispricing worth investigating.

◆Analyst note

NAV is at its most useful for apartments, industrial, and net lease, where thousands of comparable transactions set observable cap rates. It's weakest for towers, data centres, and gaming, where the assets rarely trade and any cap rate is closer to an opinion than a market price. In those sectors, lean on AFFO multiples and contracted cash flow instead.

Financing

The balance sheet is half the analysis

A REIT retains at most 10% of taxable income. It funds everything else with debt and new equity, which makes it a permanent participant in capital markets and unusually exposed to their mood. Two REITs with identical buildings can deliver completely different shareholder outcomes based on how they financed them.

Net debt / EBITDAre

EBITDAre is Nareit's standardised definition, adding back gains, losses and impairments on depreciated property. Investment-grade REITs generally run 5.0–6.5×. Above 8× the equity becomes an option on cap rates rather than a claim on rent.

Fixed charge coverage

EBITDAre divided by interest plus preferred dividends plus scheduled amortisation. Above 3× is comfortable. Below 2× the lenders start driving.

Maturity ladder

Even, staggered maturities with no year carrying more than 15–20% of total debt. A single large tower maturing into a bad market is how otherwise sound REITs get forced into dilutive equity raises.

Secured versus unsecured

Unsecured bonds keep the property pool unencumbered and give flexibility in a crisis. A REIT financed entirely with property-level mortgages has less room to manoeuvre when one asset goes wrong.

The refinancing arithmetic nobody runs

A REIT that issued ten-year bonds at 3.2% in 2020 and refinances at 5.6% adds $2.4m of annual interest for every $100m rolled. Take the debt maturing in the next three years, multiply by the difference between the old coupon and today's market rate, and compare it to AFFO. On a highly levered balance sheet this single calculation can consume years of growth, and it's rarely in the headline guidance.

Reference

The analyst dashboard

Every number below appears in a quarterly supplemental package. Build the table once for any REIT you own and update it each quarter, and you'll see problems developing long before they reach a press release.

Metric	What it measures	What good looks like
FFO per share	Nareit-defined recurring earnings, per diluted share including OP units	Growing
AFFO / FAD per share	FFO after maintenance capex, leasing costs and straight-line rent	Growing faster than the dividend
AFFO payout ratio	Dividend ÷ AFFO per share	Under 85% for most sectors, under 90% for net lease
Same-store NOI growth	Organic NOI growth from properties owned 12+ months	Positive and above inflation
Occupancy and leased %	Occupied space now versus space under signed lease	Above 95%, with leased above occupied
Releasing spread	New rent versus expiring rent on the same space	Positive double digits in a healthy sector
Retention rate	Share of expiring square footage renewed	Above 70%, and rising is better than falling
WALT	Weighted average lease term remaining	Longer than the debt maturity profile
Tenant concentration	Top 10 tenants as a share of rent	Top tenant under 10%, top 10 under 40%
Net debt / EBITDAre	Leverage in cash-flow terms	5.0–6.5× for investment grade, above 8× is a warning
Fixed charge coverage	EBITDAre ÷ (interest + preferred + amortisation)	Above 3×
% fixed-rate debt	Protection against refinancing shocks	Above 85%
Weighted average debt maturity	Years until the average dollar of debt comes due	Above 5 years, with no cliff in any single year
Implied cap rate	NOI ÷ enterprise value	Compare to private-market transaction cap rates
Premium / discount to NAV	Share price versus estimated asset value per share	A persistent discount blocks accretive growth
Investment spread	Acquisition cap rate minus weighted average cost of capital	Positive, or external growth destroys value
Share count growth	Dilution from equity issuance	Only acceptable if per-share AFFO grows anyway
Dividend history	Cuts, freezes, and the CAGR of increases	No cut in the last cycle

Pricing

Seven ways to value a REIT, and when each one lies

Method	Best for	How to use it	Where it breaks
P / FFO	Quick sector comparison	Sector medians typically run 12–20×, towers and data centres higher, office and malls lower.	Ignores capex, so it flatters capex-heavy sectors.
P / AFFO	The default multiple	Compare to the REIT's own 5-year and 10-year range before comparing to peers.	Depends entirely on how honest the AFFO definition is.
AFFO yield vs 10-year Treasury	Is the whole sector cheap?	The historical spread is roughly 150–250bp. A thin spread means the sector is priced for perfection.	Spread averages shift with the rate regime.
Net asset value (NAV)	Asset-heavy REITs with observable comps	Forward NOI by segment ÷ market cap rate, plus other assets, minus debt and preferred.	One cap rate assumption moves the answer by 20%.
Implied cap rate	Public versus private pricing	EV ÷ NOI tells you what the market is paying for the portfolio versus what buildings trade for privately.	Needs a clean, forward-looking NOI figure.
Dividend discount / Gordon	Slow-growth net lease and healthcare	Value = next year's dividend ÷ (required return − growth).	Useless when growth is lumpy or the payout isn't covered.
EV / EBITDAre	Cross-capital-structure comparison	Nareit's standardised EBITDA definition makes REITs with different leverage comparable.	Says nothing about capex intensity.

Triangulate, don't pick

The useful discipline is to run P/AFFO against the company's own history, NAV against private-market cap rates, and the AFFO yield against the ten-year Treasury. When all three agree, you have a view. When they disagree, the disagreement is the interesting part: it usually means the market and the private property market are pricing different futures for rent.

Sector guide

Sector by sector — the differences that matter

Property type sets the rules of the game: how long the cash flow is contracted for, how much capital it takes to keep it, and what a normal payout ratio looks like. A 7% yield in gaming and a 7% yield in office describe two completely different situations.

Sector	Typical lease	Capex intensity	Normal AFFO payout	What actually drives it
Net lease (triple-net)	10–20 yrs	Very low	75–85%	Tenant pays taxes, insurance, and maintenance. Bond-like cash flow with 1–2% fixed escalators, so the real question is tenant credit and whether the acquisition spread over the cost of capital is still positive.
Industrial / logistics	3–7 yrs	Low	60–75%	E-commerce and supply-chain reshoring drive demand. The number that matters is the releasing spread: leases signed in 2019 rolling to today's market rent.
Residential (apartments)	1 yr	Moderate	60–75%	Leases reprice every year, which is inflation protection in a boom and pain in a supply glut. Watch new deliveries in the top five markets and bad debt.
Single-family rental	1–2 yrs	Moderate	60–75%	Same annual repricing, higher maintenance per unit, harder to scale operations. Turnover cost is the swing factor.
Manufactured housing	1 yr	Very low	55–70%	The REIT owns the land, the resident owns the home. Almost nobody moves a house, so turnover is minimal and pricing power is unusually durable.
Self-storage	Month-to-month	Very low	60–75%	Rents can be raised monthly on existing customers, which is remarkable pricing power. Demand tracks housing moves, so a frozen housing market hurts.
Data centres	5–15 yrs	High (growth)	60–80%	Power availability is the real moat now, not land. Watch contracted backlog, power costs pass-through, and how much capex is maintenance versus expansion.
Towers	5–10 yrs	Low	50–70%	Escalators are contractual, carriers are few, and incremental tenants on an existing tower cost almost nothing. Growth depends on carrier capex cycles.
Healthcare — medical office	5–10 yrs	Moderate	70–85%	Sticky tenants tied to hospital campuses. Retention above 80% is the health check.
Healthcare — senior housing	Operating (RIDEA)	High	70–85%	Under RIDEA the REIT takes the operating result, so labour costs and occupancy hit the income statement directly. Closer to running a business than collecting rent.
Healthcare — skilled nursing	10–15 yrs	Low	70–85%	Triple-net leases to operators funded by government reimbursement. The metric is the operator's rent coverage (EBITDARM / rent), not the REIT's own coverage.
Retail — grocery-anchored	5–10 yrs	Moderate	70–80%	The most resilient retail format. Grocery anchor drives footfall, small-shop rents drive the growth.
Retail — regional malls	5–10 yrs	Very high	60–75%	Heavy tenant improvement costs mean FFO badly overstates cash. Redevelopment optionality is real but capital-hungry.
Office	5–10 yrs	Very high	60–80%	Structurally impaired in commodity buildings, still functioning in trophy assets. Leasing capex can eat 25–40% of NOI, so look only at AFFO here.
Hotels	Nightly	High	40–60%	No leases at all. RevPAR is the revenue line and it reprices daily, making this the most cyclical corner of the sector.
Gaming	15–35 yrs	Very low	75–85%	Master leases with long terms and CPI-linked escalators, backed by regulated operators. Concentration in a handful of tenants is the trade-off.
Timber	n/a	Moderate	60–80%	Value is biological growth plus harvest timing plus land. Housing starts drive lumber prices, and the REIT can defer harvest when prices are bad.
Farmland	3–5 yrs	Low	70–85%	Crop rents plus land appreciation. Small, illiquid, and closely tied to commodity cycles and water rights.
Cold storage	3–7 yrs	High	60–75%	Energy-intensive and capex-heavy. Power costs and throughput volumes matter more than headline occupancy.

◆Analyst note

Note how capex intensity and lease length move together with the acceptable payout ratio. Net lease and gaming can safely distribute 80% of AFFO because their capital needs are near zero and their cash flow is contracted for a decade or more. Hotels cannot safely distribute 80% of anything, because next year's revenue is repriced every single night.

Different animal

Mortgage REITs are not equity REITs

A mortgage REIT buys mortgages or mortgage-backed securities, funds them mostly with short-term repurchase agreements, and keeps the spread. There are no buildings, no tenants, and no leases. FFO, AFFO, occupancy, and same-store NOI are all irrelevant here, and applying them is the most common analytical error in the sector.

What an agency mREIT earns

Net interest spread = asset yield − cost of repo funding − hedging cost, applied at 6–9× leverage

At 8× leverage, a one-point move in MBS prices relative to the hedge changes book value per share by roughly eight points. Book value volatility, not credit default, is the defining risk.

Type	What it holds	Main risk
Agency mREIT	MBS guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae	Almost no credit risk. Instead: interest rate duration, prepayment convexity, and the spread between MBS and Treasuries widening against the hedge.
Non-agency / credit mREIT	Non-guaranteed residential loans, RMBS, MSRs	Genuine credit losses, plus funding risk if repo lenders pull back in stress.
Commercial mREIT	Floating-rate loans on offices, hotels, multifamily transitional assets	Borrower default and extension. Watch the risk-rating migration table and loans on non-accrual.

How to actually judge one

Economic return, not dividend yield. Add the change in book value per share to dividends paid, divide by opening book value. A 14% dividend alongside a 16% book value decline is a 2% loss, not income.
Price to book, over time. mREITs are portfolios of marked securities, so book value per share is a real number. Compare the current P/B to the five-year range.
Book value per share over a decade. Many mortgage REITs have paid enormous dividends while book value fell for ten straight years. That is capital being returned and consumed, dressed as income.
The hedge book. Read the interest rate sensitivity table in Item 7A. It tells you what management thinks a 100bp move does to book value, using their own assumptions.

The highest yields in the market are here

Agency mortgage REIT yields of 13–16% are common, and they are not free money. They are the levered spread between short funding and long assets, and that spread can go negative. Own them only if you can explain what happens to book value when the curve inverts and MBS spreads widen at the same time.

Framework

A dividend safety framework that works

REIT dividend cuts are usually visible two to six quarters ahead if you're looking at the right things. Run these six checks in order, and stop at the first one that fails.

1. AFFO payout ratio, computed yourselfUnder 85%, or under 90% for net lease

2. Payout trend over eight quartersFlat or falling, not creeping toward 100%

3. Debt maturing in 24 months vs liquidityFully covered by cash, revolver and forward equity

4. Lease expiries in 24 monthsUnder 20% of rent, with positive expected spreads

5. Top tenant exposureNo single tenant above 10% of rent

6. Same-store NOI directionPositive, and not decelerating for four straight quarters

The taxable income floor

One useful asymmetry: because the 90% rule forces distribution of taxable income, a REIT that has been selling assets at a gain has to distribute those gains. That can produce a large special dividend that looks like strength and is really a legal obligation. Conversely, a REIT with heavy depreciation and few sales can have taxable income far below AFFO, giving it more freedom to hold cash back. Check the taxable income disclosure in the 10-K before reading anything into the payout level.

Forensics

Eight red flags worth walking away from

Signal	What it usually means
AFFO definition creep	Adjustments appear that weren't there two years ago, always increasing AFFO. Rebuild the number yourself from the cash flow statement.
Straight-line rent doing the heavy lifting	If non-cash rent is a large and rising share of revenue, reported growth is an accounting artefact of stepped leases, not cash.
Serial issuance below NAV	Selling shares at a discount to asset value to buy assets at market prices transfers wealth from existing holders to the seller. Watch share count against per-share AFFO.
Capitalised interest and 'development' capex	Reclassifying maintenance spending as development moves it out of AFFO. Compare capex per square foot against peers.
Same-store pool gerrymandering	Properties quietly leaving the comparable pool when they underperform. Check the pool size year over year.
External management with a gross-asset fee	Paying a manager on gross assets rewards buying anything with borrowed money. Check who the manager is and how they are paid.
The dividend exceeding AFFO for multiple years	A REIT can fund a gap for a few quarters with asset sales or debt. Multiple years means the payout is being financed, not earned.
A yield far above the sector	The market is usually pricing an expected cut, not offering free money. Find out what it knows before you buy the yield.

Process

The 12-step REIT workflow

This is the order to work in. Steps 2 and 3 are where most of the value is, and they're the ones most people skip.

Step	Action	Why
1	Identify the property type and sub-type	Sector determines lease length, capex intensity, and what 'normal' looks like. A 7% yield means opposite things in gaming and in office.
2	Download the quarterly supplemental	This is the document that matters, not the press release. Occupancy, same-store NOI, lease expiries, debt schedule, and the FFO/AFFO reconciliation all live here.
3	Rebuild AFFO yourself	Start from Nareit FFO, subtract recurring capex, tenant improvements, leasing commissions, and straight-line rent. Compare your number to theirs and understand the gap.
4	Test the payout	Dividend ÷ your AFFO. Then check it against taxable income, since the 90% rule sets a floor the REIT legally has to clear.
5	Read the lease expiry schedule	How much rent rolls in each of the next five years, and at what average rate versus market? This is where next year's growth is already visible.
6	Read the top-10 tenant table	Names, credit ratings, share of rent, and lease end dates. One distressed anchor can change the whole thesis.
7	Build the debt ladder	Maturity by year, fixed versus floating, secured versus unsecured, and the coupon on what's maturing versus today's market rate.
8	Compute the investment spread	Recent acquisition cap rates minus the current cost of debt and equity. If it's negative, external growth is destroying value and management should be shrinking.
9	Estimate NAV	Forward NOI by segment divided by defensible cap rates, plus development and cash, minus debt and preferred. Then compare to the share price.
10	Check the same-store trend over eight quarters	One quarter is noise. Two years of decelerating same-store NOI in a growing economy is a business problem.
11	Look at the ten-year dividend and share count record	Did they cut in 2009 or 2020? Did share count triple while AFFO per share went nowhere? History rhymes.
12	Write down what would make you wrong	A specific tenant bankruptcy, a cap rate level, a refinancing at a given coupon. If you can't name it, you don't understand the position.

“

Key takeaway

The quarterly supplemental package is the single most underused document in equity research. It contains the lease expiry schedule, the tenant table, the debt ladder, the same-store detail and the AFFO reconciliation, in about forty pages, and almost nobody outside the sector reads it.

International

REITs outside the United States

More than forty countries now run a REIT-style regime. The economics rhyme everywhere: no tax at the entity level in exchange for a mandatory payout. The details differ enough to change your after-tax return.

Country	Name	Distribution rule	Notes
United States	REIT	≥90% of taxable income	The deepest market by far, with more than 190 listed equity REITs and roughly $1.5 trillion of index market cap.
United Kingdom	UK REIT	≥90% of qualifying property income	Property income distributions are taxed as property income, with 20% withholding for most holders.
Spain	SOCIMI	Substantially all accounting profit, with 80% of income from qualifying activity	Very light corporate tax at fund level, popular for Iberian residential and hotel portfolios.
Portugal	SIGI	80% of rental profits within six months of year-end	Introduced in 2019 and still a small market compared to its Spanish equivalent.
France	SIIC	95% of rental income, 70% of capital gains	One of the oldest European regimes, listed on Euronext.
Netherlands	FBI	100% of distributable profit	Historically the model many European regimes copied, though the rules were tightened for direct property from 2025.
Japan	J-REIT	Over 90% of distributable profit	The largest Asian market, externally managed by sponsor asset managers as standard.
Singapore	S-REIT	≥90% for tax transparency	Heavy retail investor participation and a strong cross-border acquisition culture.
Australia	A-REIT	Effectively all taxable income	Trust-based structure, with stapled securities combining a passive trust and an operating company.

Two things to check on any non-US REIT

First, the withholding rate on distributions in your own tax treaty, which can be anywhere from zero to 30%. Second, whether the vehicle is externally managed by its listing sponsor, which is standard in Japan and Singapore and creates the fee conflicts described earlier.

Allocation

What REITs do in a portfolio

Income with contractual growth

Unlike a bond coupon, rent escalates. A portfolio of leases with 2.5% annual bumps produces a rising income stream, which is the main argument for owning property rather than lending against it.

Partial inflation protection

Short-lease sectors like apartments, hotels and self-storage reprice quickly, which helps in inflationary periods. Twenty-year net leases with 1.5% fixed bumps do the opposite, and become long-duration bonds in disguise.

Diversification that isn't absolute

REITs correlate more with equities than with private real estate over short horizons, because they trade on an exchange. Over multi-year periods the correlation to property fundamentals reasserts itself.

Tax placement matters

The ordinary income component is taxed at marginal rates. Where the choice exists, holding REITs in a tax-sheltered account and equities with qualified dividends in a taxable one usually improves the after-tax result.

One warning worth repeating: sector selection dominates. The dispersion between the best and worst REIT property sectors in a given year routinely exceeds 40 percentage points, which is far larger than the dispersion between companies within a sector. Deciding you want industrial exposure is a bigger decision than which industrial REIT you buy.

Questions

Frequently asked questions

Why do REITs pay such high dividends?＋

Because the law makes them. A REIT has to distribute at least 90% of its taxable income to keep its pass-through tax treatment, and there is a 4% excise tax if calendar-year distributions fall short of 85% of ordinary income plus 95% of capital gain net income. The high yield is a legal obligation, not a signal of generosity or of a bargain price.

Is FFO the same as free cash flow?＋

Should I ever use P/E on a REIT?＋

Do rising interest rates always hurt REITs?＋

What is a cap rate, in plain terms?＋

What's the difference between an equity REIT and a mortgage REIT?＋

Why is part of my REIT dividend labelled return of capital?＋

Are REITs better held in a tax-advantaged account?＋

What is an UPREIT and why should I care?＋

How many REITs should a portfolio hold?＋

Next lesson ◆

Business Development Companies

The other pass-through income structure. Same 90% distribution logic, completely different asset: private company loans instead of buildings.

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Educational disclaimer · This content is for educational and informational purposes only. It does not constitute investment advice, tax advice, legal advice, or a recommendation to buy or sell any security. Always conduct your own research before making investment decisions.

The complete guide to REITs

What a REIT actually is

How the law got here

The rulebook a REIT lives under

What counts as good rent

How REIT income gets taxed in your hands

If you are not a US taxpayer

Types, wrappers and structures

Equity REITs

Mortgage REITs

Hybrid

Listed, non-traded, private

Internal versus external management

UPREIT, OP units and the 721 exchange

Where the money actually comes from

Lease structures, and why they change everything

The three growth engines

Internal growth

External growth

Financial engineering

FFO, and the problem it solves

Nareit FFO versus Core FFO

AFFO — the number the dividend is actually paid from

The straight-line rent adjustment, explained

NAV, cap rates and the cost-of-capital flywheel

The balance sheet is half the analysis

Net debt / EBITDAre

Fixed charge coverage

Maturity ladder

Secured versus unsecured

The analyst dashboard

Seven ways to value a REIT, and when each one lies

Sector by sector — the differences that matter

Mortgage REITs are not equity REITs

How to actually judge one

A dividend safety framework that works

Eight red flags worth walking away from

The 12-step REIT workflow

REITs outside the United States

What REITs do in a portfolio

Income with contractual growth

Partial inflation protection

Diversification that isn't absolute

Tax placement matters

Frequently asked questions

Related academy pages

Business Development Companies