Real Estate Investment Trust

REIT status is conditional. Jurisdictions that grant it typically impose an asset test (the bulk of assets must be real property, mortgages on real property, cash or government securities), an income test (most gross income must derive from rents, mortgage interest or property gains), a shareholder-dispersion requirement, and above all a distribution requirement obliging the vehicle to pay out the large majority of taxable income each year.

The consequence is structural, not cosmetic. Because retained earnings are minimal, a REIT cannot fund acquisitions or development from internal cash flow the way an industrial company can. Growth must be financed by issuing new equity or raising debt, which makes REITs unusually sensitive to the cost and availability of external capital. Credit tightening therefore hits the business model directly, not merely the valuation multiple.

Equity REITs own buildings and collect rent; their economics turn on occupancy, lease escalations, releasing spreads and property operating costs. Mortgage REITs hold real estate debt or mortgage-backed securities and earn the spread between funding cost and asset yield, usually with substantial leverage. The two behave differently: an mREIT is closer to a levered fixed-income vehicle, exposed to yield-curve shape, prepayment and credit risk, while an equity REIT carries direct property and tenant risk.

Access also varies. Exchange-listed REITs offer daily liquidity, transparent pricing and continuous mark-to-market. Non-traded and private vehicles report appraisal-based values, which smooth returns and understate measured volatility and correlation with equities. The underlying assets may be identical; the reported risk statistics are not.

Analysis starts with net operating income: rental and other property revenue less property operating expenses, before depreciation, interest, corporate overhead and taxes. Dividing forward NOI by a market capitalisation rate gives an estimate of property value; adding cash, receivables and non-rental assets, then subtracting debt and other liabilities, gives net asset value, which divided by shares outstanding gives NAV per share.

The income-based route adjusts accounting profit. Funds from operations takes net income, adds back real estate depreciation and amortisation, and removes gains or losses on property disposals. Adjusted funds from operations then subtracts recurring maintenance capital expenditure, leasing commissions and non-cash straight-line rent adjustments, producing the closest proxy for distributable cash and the better anchor for dividend sustainability.

A candidate should be able to move confidently between the three valuation routes: NAV per share, a price-to-FFO or price-to-AFFO multiple applied to a per-share earnings measure, and a discounted dividend or cash flow model. Comparable-multiple work requires attention to sector, lease length, leverage and geography, since a triple-net-lease REIT and a hotel REIT do not deserve the same multiple.

Equally testable is the risk narrative. Leverage amplifies both property returns and refinancing risk; rising rates raise discount rates, funding costs and capitalisation rates simultaneously. Portfolio arguments should be framed in terms of imperfect, time-varying correlation and the illiquidity and appraisal effects that distinguish private property from listed vehicles, rather than any claim of independence from equity markets.