REIT Investing:What REITs Are and How to Analyze Them

If you have just completed the previous page on dividend stocks, you already understand how it is possible to generate regular income without selling your investments.

Within our cash-flow-oriented investment strategy, we go further by exploring an asset class used widely by both individual investors and institutional funds to generate stable income: Real Estate Investment Trusts, or REITs.

REITs allow you to invest in property without buying a building, taking out a mortgage or dealing with tenants, repairs or administrative work. In essence, they are the most accessible and simplest way to obtain passive income from the property market.

What is a REIT?

Its business model consists mainly of receiving recurring income from rent on these properties.

One of the main characteristics of US REITs is their legal framework: to retain this status, they must distribute at least 90% of their annual taxable income to shareholders in the form of dividends.

This distribution requirement is precisely one of the reasons why REITs are so popular with investors seeking to generate regular passive income and cash flow.

How does a REIT work?

The way a REIT works is relatively simple.

The company begins by acquiring and managing a property portfolio. These properties generate income mainly through rent paid by their tenants. A significant share of the income produced is then distributed to shareholders as dividends.

Property portfolio

→

Rent from tenants

→

Dividends to shareholders

From the investor’s perspective, the process is simple: you buy shares in the REIT on the stock exchange and receive dividends from its property portfolio, without having to buy or manage any property yourself.

Comparable property-company structures exist in other countries:

SIIC · France

SIR · Belgium

FPI / REITs · Canada

REITs · United States (reference market)

However, the transparency, regulation and variety of sectors make US REITs the most robust and straightforward option for international investors. This guide therefore focuses on them.

Advantages and disadvantages of REIT investing

Advantages

Access to property with little capital

You can start with less than USD 100 and immediately gain exposure to several quality property assets.

High liquidity

Unlike a physical property, you can sell your shares in a matter of minutes.

Immediate diversification

A single REIT may own dozens of properties in different regions.

Attractive and frequent dividends

Most pay between 4% and 8% per year, and some REITs even pay dividends every month.

Fully delegated management

You do not need to deal with tenants, repairs, contracts or maintenance. Professional property teams handle all the management.

Disadvantages

Sensitivity to interest rates

REITs often use debt to finance their assets and growth. Rising rates can therefore increase their financing costs and affect their valuation.

Stock-market volatility

Even when the underlying property assets are relatively stable, the share price can fluctuate significantly on the stock exchange.

Dependence on the management team

Poor management can affect acquisitions, debt, occupancy, income and, ultimately, dividends.

Taxation

Dividends from US REITs are subject to 30% withholding tax, which may be reduced to 15% if you complete Form W-8BEN correctly and your country has a tax treaty.

Types of REIT by economic sector

REITs can be classified according to the type of property assets in which they invest.

This classification is fundamental because each sector behaves differently in terms of risk, return and economic sensitivity.

The table below provides a simplified classification based on the official FTSE Nareit structure, adapted to help you understand quickly how each type of REIT works.

REIT category	What it includes	Well-known examples
🏠 Residential	Apartment buildings, single-family rental homes, manufactured-home parks…	EQR · AVB · MAA
🛒 Retail	Open-air or essential shopping centres and large enclosed shopping centres…	REG · FRT · KIM · SPG · MAC
🏭 Industrial / Logistics	Distribution centres, logistics warehouses, ecommerce infrastructure, cold-storage facilities…	PLD · REXR · EGP
🏢 Offices	Urban offices, suburban buildings and specialised properties…	BXP · KRC · DEA
🏥 Healthcare	Hospitals, clinics, senior housing, specialised centres…	WELL · VTR · ARE
🏨 Hospitality	Urban hotels, resorts and tourist accommodation…	HST · PK
⚡ Specialised	Data centres, telecommunications towers, self-storage, gaming, forests, farmland…	DLR · AMT · PSA · VICI

How do you analyse a REIT?

To analyse a REIT, we will apply the same fundamental-analysis principle used for traditional dividend stocks. Our analysis is divided into three parts: quantitative analysis, valuation and qualitative analysis.

Quantitative analysis: REIT-specific ratios

Here, we assess the figures that genuinely matter for a REIT. Unlike a traditional company, REITs use particular measures because the depreciation of property assets has a significant impact on their accounts.

Buildings are depreciated each year for accounting purposes, even though a property may in practice retain or even increase its value. This depreciation reduces net income without necessarily representing a real cash outflow. On its own, that measure therefore does not accurately reflect the REIT’s ability to generate cash flow.

FFO (Funds From Operations)

Definition: operating profit adjusted for depreciation and non-recurring items.

Formula

Depreciation

Equivalent for a traditional company: adjusted net income.

Interpretation: FFO corrects the effect of accounting depreciation, which artificially reduces the net income of property companies. It provides a first estimate of the REIT’s real profitability, but does not yet reflect the cash flow available to the investor.

AFFO (Adjusted Funds From Operations)

Definition: the actual cash flow available for distributing dividends to shareholders.

Formula

CAPEX, or Capital Expenditures, means the investments made by a company in long-term assets to maintain, improve or develop its operations. For a REIT, these are mainly the expenses required to maintain its property assets and keep them in working condition.

Equivalent for a traditional company: Free Cash Flow (FCF).

Interpretation: AFFO is the most important measure for a REIT investor because it reflects the money actually available after maintaining the assets. Unlike FFO, it accounts for the spending needed to preserve the property portfolio.

AFFO-based payout ratio

Definition: the percentage of AFFO per share distributed as a dividend.

Formula

Equivalent for a traditional company: Free-Cash-Flow-based payout ratio.

Indicative range

≤ 80% → Healthy

Interpretation: a moderate payout ratio indicates that the dividend is sustainable. If it is too high, the REIT may have difficulty maintaining or increasing its payments over time.

Occupancy rate

Definition: the percentage of available assets that are rented or occupied.

Formula

Retail, industrial or office REITs

Indicative range

It varies considerably by sector.

Above 95% → Excellent

90% to 95% → Healthy

85% to 90% → Monitor

Below 85% → May indicate weakness

Interpretation: a high occupancy rate generally reflects strong demand for the assets and a good ability to generate income. A persistent decline may reveal problems related to location, asset quality, management or demand.

This ratio should always be compared with REITs in the same sector and the company’s own history because normal occupancy levels can vary considerably between asset types.

Debt-to-Assets

Definition: the ratio of the REIT’s total debt to the total assets on its balance sheet.

Use: it provides a quick, objective measure of leverage using available financial data.

Formula

Interpretation: low ratio = more conservative financial structure; high ratio = greater dependence on debt.

≤ 35% → Conservative structure

35% to 50% → Acceptable leverage

Above 50% → Greater dependence on debt

Net Debt / EBITDAre

Definition: this measure compares the REIT’s level of debt with the earnings generated by its property operations.

It uses EBITDAre, a measure that seeks to determine what the business produces before accounting for interest on debt, taxes and accounting charges such as property depreciation.

Formula

Equivalent for a traditional company: Net Debt / EBITDA.

Indicative range

≤ 4× → Conservative structure

4× to 6× → Healthy level

6× to 7× → High leverage

Above 7× → Increased financial risk

Interpretation: this ratio indicates how many times net debt represents the EBITDAre generated by the REIT.

For example, Net Debt / EBITDAre of 5× means that net debt is approximately five times the EBITDAre generated in one year.

The lower the ratio, the lower the level of debt generally is. The higher it is, the greater the financial risk.

Credit Rating

Definition: an assessment of the REIT’s ability to meet its financial obligations, produced by agencies such as S&P, Moody’s or Fitch.

Indicative range

Investment Grade (BBB or above) → Good credit quality

High Yield (BB+ or below) → Increased credit risk

Interpretation: a good rating makes it easier to obtain financing on better terms and reduces refinancing risk.

Dividend Growth

Definition: measures the year-on-year increase in the dividend paid by the REIT.

Formula

Equivalent for a traditional company: Dividend Growth.

Indicative range

Above 5% → Strong growth

3% to 5% → Healthy growth

1% to 3% → Moderate growth

0% to 1% → Low growth

Below 0% → Dividend reduction

Interpretation: regular dividend growth gradually increases the income received by the investor.

For it to be sustainable, it must be supported by AFFO growth and a healthy payout ratio.

How do you value a REIT?

At this stage, we seek to determine whether a REIT is trading at a reasonable, high or potentially undervalued price relative to the earnings it generates.

For this purpose, we will mainly use measures based on FFO and AFFO.

These ratios should always be compared with:

• The REIT’s own historical average.
• Other comparable REITs in the same sector or subsector.

P/FFO (Price / Funds From Operations)

Definition: indicates how much you pay for each dollar of FFO generated per share.

FFO adjusts net income to reflect a REIT’s earnings more accurately, mainly by correcting the effect of property depreciation.

Formula

Equivalent for a traditional company: comparable to the P/E ratio.

Interpretation: P/FFO is one of the most widely used multiples for valuing REITs.

Low P/FFO → Potentially more attractive valuation

High P/FFO → Potentially more demanding valuation

However, FFO does not deduct some recurring expenditure required to maintain the assets. When the REIT also reports AFFO, we can use P/AFFO to supplement the valuation.

P/AFFO (Price / Adjusted Funds From Operations)

Definition: indicates how much you pay for each dollar of AFFO generated per share.

Formula

Equivalent for a traditional company: comparable to P/FCF (Price / Free Cash Flow).

Interpretation: P/AFFO makes it possible to assess whether a REIT trades cheaply or expensively relative to the cash available to shareholders after the recurring expenditure required to maintain its assets.

Average P/AFFO multiple by sector for US REITs, indicative values

US REIT sector	Indicative average P/AFFO
Self-storage	Around 14× to 18×
Data centres	Around 20× to 30×
Healthcare / Life sciences	Around 13× to 18×
Industrial / Logistics	Around 13× to 18×
Multifamily residential	Around 14× to 18×
Retail (specialised / open-air centres)	Around 12× to 17×
Offices	Around 7× to 12×
Hospitality	Around 8× to 11×

AFFO Yield

Definition: the implicit return generated by the REIT relative to its current share price.

It indicates how much AFFO the company generates for each dollar invested and is generally expressed as a percentage.

Formula

Equivalent for a traditional company: Free Cash Flow Yield.

Interpretation: AFFO Yield makes it possible to compare the implicit return of different REITs, sectors or investment options. It is the mathematical inverse of P/AFFO.

A higher AFFO Yield may indicate a more attractive valuation.

Analyse REITs with HRStock.io

Analysing a REIT requires you to combine particular measures such as FFO, AFFO, the payout ratio, occupancy, debt and valuation, which are not always clearly available in general-purpose tools.

HRStock.io

Turn data into a clearer decision.

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• Financial history
• Essential indicators
• Company comparison

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Designed to analyse companies from a long-term perspective.

Qualitative analysis of a REIT

Qualitative analysis aims to assess the quality of the REIT beyond the figures. Here, we seek to understand the long-term strength, predictability and resilience of its business model.

The main question is simple: can this REIT maintain and increase its income through different economic cycles?

Business model

The first step is to understand how the REIT makes money.

Not all property income offers the same stability. Some REITs depend on long-term leases, while others are more exposed to frequent renewals, changing demand or economic cycles.

A simple and predictable model provides better visibility over future income and makes the dividend more sustainable.

Tenant quality and concentration

A REIT’s stability depends largely on the occupants of its properties and their ability to pay rent regularly.

We must also check how dependent the REIT is on its largest tenants. Even high-quality companies can represent a risk when they account for too large a share of revenue.

As a general rule, a diversified base of financially strong tenants provides greater resilience.

Lease duration and type

The duration of leases determines how long the REIT can rely on its current income. Long contracts provide better predictability and reduce vacancy and renegotiation risks.

The weighted average remaining lease term, generally called WALE or WALT, measures this visibility.

It is also important to understand how property expenses are allocated between the REIT and the tenant:

Lease type	Allocation of expenses
Gross Lease	The owner bears most property-related expenses, including taxes, insurance, maintenance and repairs. The REIT is therefore exposed to possible increases in these costs.
Modified Gross Lease	Expenses are divided between the owner and tenant according to the terms of the agreement. For example, the tenant may pay part of the maintenance or charges related to common areas.
Full-Service Lease	The rent also includes some services, such as electricity, cleaning or air conditioning. This type of lease, common in some office buildings, leaves a larger share of operating costs with the owner.
Net Lease	In addition to the rent, the tenant bears part of the main property-related expenses. There are three forms.

Single Net (N) · taxes

→

Double Net (NN) · + insurance

→

Triple Net (NNN) · + maintenance

As the lease places more expenses on the tenant, the REIT becomes less exposed to changes in these costs. Triple Net (NNN) leases therefore provide the owner with greater predictability.

As a general rule, the more expenses the tenant bears, the lower the REIT’s operating risk. For this reason, REITs with predominantly Triple Net leases are often particularly valued by investors seeking recurring income.

Portfolio profile

Qualitative analysis also involves assessing the property portfolio as a whole.

Geographical diversification, location quality, the age of the assets and their long-term appeal directly influence the REIT’s ability to maintain high occupancy rates and generate income.

Well-located, high-quality assets that are difficult to replace generally withstand changes in the cycle more effectively.

Management and skin in the game

The quality of the management team is an important part of qualitative analysis.

Good management is distinguished by discipline in acquisitions, prudent debt management, effective capital allocation and consistent decisions over time.

We can also examine skin in the game, meaning the ownership stake held in the company by the managers themselves. When they own a significant share of the capital, their interests may be more closely aligned with those of shareholders.

Moats in REITs

A moat refers to competitive advantages that make a REIT’s position difficult to reproduce.

These advantages may come from prime locations, assets that are difficult to build or replace, significant scale, strong tenant relationships or a dominant position in particular markets.

The harder the assets and competitive position are to reproduce, the stronger the moat may be.

Sector and subsector analysis of a REIT

Sector analysis of REITs is not about predicting the macroeconomy, but understanding how a type of asset generates income and what can genuinely put that income at risk.

The essential question

It is not “What will happen in the economy?”, but “What does this sector need in order to keep collecting rent in five or ten years?”

Every REIT sector meets a particular economic need. The first step is to understand that need and determine whether it can continue over the long term.

For example:

• Industrial and logistics → commerce and supply chains
• Data centres → digitisation, cloud services and artificial intelligence
• Essential retail → everyday consumption
• Offices → changing working habits
• Healthcare → an ageing population

Essential question: could this demand disappear, change or strengthen over time?

A good REIT sector continues operating when the economy slows.

It is useful to review its historical behaviour:

• Did occupancy remain stable during previous crises?
• Were dividends maintained or reduced?
• Did tenants continue to pay their rent?

The objective is to verify whether the sector’s income model has demonstrated its ability to withstand and recover from difficult periods.

Within the same sector, subsectors can behave in completely different ways.

For example:

• Neighbourhood shopping centres → large enclosed shopping centres
• Traditional offices → specialised life-science properties
• Urban apartment buildings → single-family rental homes

It is therefore not enough to analyse a sector in general. We need to determine precisely which subsector we are evaluating.

Essential question: what exact type of assets does this REIT own, and how does that subsector behave?

When prices fall but fundamentals, income and dividends remain strong, valuation-related opportunities may arise.

How do you invest in REITs?

After selecting and analysing a REIT, you can buy its shares through a broker, exactly as you would a traditional stock.

If you are not yet familiar with the process, you can read our step-by-step tutorial on using Interactive Brokers and executing a trade.

The next stage of the Cashflow journey

You now know how REITs work, which measures to use when analysing them and which aspects to assess before investing.

Throughout the Cashflow journey, our objective is to explore different sectors and asset types in order to diversify our sources of income progressively.

On the next page, we will move on to BDCs, or Business Development Companies, which finance small and medium-sized businesses, mainly in the United States, and distribute a significant share of their profits to shareholders.

When you are ready, continue with the next part of the journey: how to invest in BDCs.

Continue to the next part of the journey: How to invest in BDCs

→

• What REITs are
• Types of REIT
• How to analyse a REIT
• Quantitative analysis
• REIT valuation
• Qualitative analysis
• Sector analysis
• How to invest in REITs
• Next stage