Real Estate Investment Trust

A real estate investment trust (REIT) is a company that owns, operates or finances income-producing real estate and meets the applicable qualification rules. REITs can give investors exposure to real estate through shares, but different structures and business models create different risks.

Two important REIT business models

Equity REITs own or operate properties. Mortgage REITs finance real estate through loans or mortgage-related investments. Rental operations and lending operations do not produce earnings in the same way. Nareit’s REIT overview explains these broad categories and the structure.

A U.S. REIT generally must distribute at least 90% of its taxable income to shareholders annually, subject to the applicable rules. That is not 90% of rental revenue, property value or an automatically interchangeable adjusted earnings figure. The requirement does not guarantee a particular dividend yield.

A REIT example

Imagine two hypothetical companies, each with $100 million of assets. One owns warehouses and collects rent. The other holds loans secured by properties and collects interest. Calling both REITs does not make their operating statements interchangeable.

For the warehouse owner, lease terms, occupancy and property costs help explain results. For the lender, loan yields, funding costs and borrower repayments help explain results. A comparison should first identify the business model, then the earnings measure and risks relevant to it.

Shares and underlying property

Not every REIT trades on a stock exchange. Publicly listed, non-traded and private structures differ in liquidity and disclosure arrangements. Read the product’s actual documents rather than assuming the word REIT means shares can always be sold quickly.

Even for listed shares, a liquid trading market does not make the underlying properties instantly saleable. The market price can change for reasons beyond the latest rental collection, including financing expectations and the return investors demand.

Dividend analysis

Use the earnings measure the company identifies as supporting its dividend. FFO, AFFO and other reported measures require their own definitions and reconciliations. Do not impose the same metric on every REIT simply because the legal label matches.

The four-quarter earnings estimate described here combines two reported actual quarters with two following quarters of independent analyst consensus. Property quality, financing and liquidity support the analysis of earning power; the REIT designation alone does not establish dividend support.

This article is for education and information, not individualized investment, tax, or legal advice.