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REITs & real estate

REIT REIT

A REIT is a company or trust that owns, operates or finances income-producing real estate and must pass most of its taxable income out to investors.

Published by Quintessentia Network Inc. · Updated 17 July 2026 · Sources & disclosures
Formula
No formula

What it is

A real estate investment trust (REIT) is a pooled vehicle that owns, operates or finances income-producing property — apartments, warehouses, offices, malls, data centres, cell towers — and lets people buy a slice of that property income instead of buying a building outright. Equity REITs own the buildings and collect rent; mortgage REITs hold mortgages or mortgage-backed debt and collect interest. Most REITs people meet are listed and trade like a stock, but non-traded and private REITs also exist and can be very hard to sell. In exchange for special tax treatment, a REIT has to meet legal tests on what it owns, where its income comes from, and how much of that income it pays out. Because most earnings leave the business as distributions, REITs generally fund growth by issuing new units or borrowing rather than by retaining profits.

Why it matters

Labelling a company a REIT changes how its numbers read. For an equity REIT, accounting rules charge depreciation against buildings that are often not losing value, so net income and EPS understate the cash the property portfolio actually produces — which is why REITs report FFO and AFFO alongside net income. Because the payout rule leaves little retained cash, REITs lean on new unit issuance and debt to grow, so dilution and leverage show up quickly in per-unit figures. A REIT is also not a bond substitute: distributions can be cut or suspended, occupancy and property values can fall, unit prices can drop, and much of the payout is commonly taxed at ordinary income rates rather than at the lower rates dividends can attract.

How it's calculated

REIT is a legal and tax status, so it is tested, not calculated. Qualification is checked against statutory tests: most assets must be real estate, mortgages, cash or government securities; most gross income must come from rents, mortgage interest or property sales; and the vehicle must distribute the large majority of its taxable income each year (US rules set that floor at 90% of REIT taxable income). In the US the status is elected on the entity's tax return, not in the annual report. The figures analysts compute for a REIT — FFO, AFFO, net operating income, cap rate, occupancy and same-property NOI growth — come from the quarterly report and the supplemental disclosure package.

Cross-border note. US REITs are corporations or trusts that elect REIT status under the Internal Revenue Code. Most Canadian REITs are instead mutual fund trusts under the Income Tax Act and must meet the REIT conditions to escape the SIFT (specified investment flow-through) entity tax. Canadians hold "units" and receive "distributions" reported on a T3 slip; US REIT payouts are dividends reported on a 1099-DIV.

FAQ

Is owning a REIT the same as owning a rental property?
Not really. A unit in a listed REIT is a share of a professionally managed portfolio of properties that trades on an exchange — no tenants to call, no mortgage in the holder's name. The trade-offs: no say over which buildings get bought or sold, a management team paid out of the rents, and a unit price that moves daily with the stock market even when the buildings have not changed. Non-traded REITs skip the daily price swings but can be very hard to sell.
Why do REITs report FFO instead of just net income?
Accounting rules force a REIT to depreciate its buildings, dragging down net income even when the properties held their value. FFO (funds from operations) starts at net income, adds real-estate depreciation and amortization back, and strips out gains or losses on property sales. AFFO then deducts the recurring capital spending a building needs to keep earning rent. Neither is a GAAP measure: Nareit defines FFO, but companies adjust it and AFFO has no agreed definition.
Does the payout rule make REIT distributions guaranteed?
No. The rule says a REIT must distribute most of its taxable income to keep its tax status — it does not say the income will be there. If tenants leave, rents fall, or interest costs rise, taxable income falls and the distribution can be cut or suspended. A REIT can also pay part of a distribution as return of capital, which hands back invested money rather than profit and lowers the cost base. Distributions are not interest payments and carry no promise of continuing.
Related terms
Funds From OperationsAdjusted Funds From OperationsCapitalization RateNet Operating IncomeDividend YieldNet Income
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