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A little clarity for your next decision.
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Investor WorkspaceA little clarity for your next decision.
By Jerry Baker
REIT terms describe several different things: what you own, how a property earns money, how the company measures results, and how you can receive cash or exit. This glossary explains those terms with short definitions and practical examples. It also identifies pairs that are easy to confuse, such as FFO and cash flow, NAV and sale price, or dividend yield and total return.
I would not try to memorize every abbreviation before reviewing an investment. Start with the question you need answered. If you want to know whether a payment can continue, look at earnings, cash, and debt. If you want to know how to sell, look at liquidity and the actual share terms.
The examples below are invented to explain the math. They are not current yields, valuations, or forecasts for any investment. A definition helps you ask a better question; it does not establish that a product fits your needs.
For each number in an offering, ask who defined it, which period it covers, what it leaves out, and whether it is historical or projected. The same label can conceal different calculations.
A REIT is a company that owns real estate or real-estate-related assets and meets a set of tax requirements. A share investment gives you ownership in the company, not direct control over a chosen building. The company's assets might be properties, mortgages, or a mix. [1]
An equity REIT mainly owns real estate. Its business depends on the properties, tenants, rents, expenses, capital needs, and financing. “Equity” describes ownership of assets; it does not mean the company has no debt.
A mortgage REIT mainly invests in real estate loans or mortgage securities. Credit losses, funding costs, prepayments, and interest-rate changes can affect results. It is not simply an equity REIT with a larger mortgage on its buildings. Look at the assets and borrowing terms.
A hybrid uses both property ownership and mortgage-related investments. The mix can change. Ask what share of the portfolio and earnings comes from each business rather than treating the word as a fixed balance.
Its shares trade on a securities exchange. A market price can change during the trading day. Being able to place a sell order does not protect the price, guarantee a buyer at your preferred value, or remove market risk.
This REIT is SEC-registered but its shares are not listed on a national exchange. “Public” describes registration, not a promise of daily liquidity. Review the issuer's reports and any limited repurchase program. [2]
A private offering relies on an exemption from registration. Its information and transfer rights differ from those of an exchange-listed security. Many offerings limit buyers to accredited investors, but the specific exemption and documents control.
These are market descriptions often used for programs without a fixed liquidation date and with recurring net asset value estimates. They do not create a separate guarantee under tax law. Valuation frequency, fees, and exit rules must be checked in the current documents.
NOI generally measures property revenue less property operating expenses, before debt service and certain other costs. Issuer definitions can differ. Do not assume NOI is the cash left for shareholders after corporate costs, interest, and capital spending.
For a simple example, $900,000 of collected property revenue minus $350,000 of operating costs gives $550,000 of NOI. If the company then has loan payments and other costs, the amount available to distribute will be lower.
This compares a defined set of properties over two periods. It tries to separate operating changes from buying or selling assets. Check which properties are included, which are removed, and whether the calculation is based on cash rent or accounting rent.
Occupancy may refer to space in use, while a leased figure may include signed leases that have not started. Companies define these measures differently. A signed lease for a future tenant does not mean rent is being collected today.
A leasing spread compares new or renewed rent with an earlier rent. Cash and straight-line versions can differ. A favorable spread on a small batch of leases may not describe the entire portfolio or cover the cost of preparing space for those tenants.
Accounting can recognize rent across a lease term in a way that differs from current cash receipts. Free rent and scheduled increases can produce a gap. When reading a cash-flow measure, check how the company adjusts for that gap.
Capex is spending on long-lived assets or improvements. Recurring upkeep, tenant improvements, and expansion projects may be grouped differently in company reports. The SEC encourages clear discussion of non-traded REIT cash needs and measures used to describe performance. [3]
I would ask for the actual spending schedule behind a broad estimate. A roof replacement affects cash even if the income statement spreads its cost across many years.
Net income is an accounting result under generally accepted accounting principles. It includes items such as depreciation and gains or losses. It should be read with the balance sheet, cash-flow statement, and notes rather than replaced by one adjusted number. [4]
Nareit FFO is a supplemental performance measure. It adjusts GAAP net income for real estate depreciation and amortization and specified gains, losses, and impairments. The full definition matters; it is more detailed than “add depreciation back.” [5]
For a simplified example with no other adjustments, $12 million net income plus $8 million real estate depreciation minus $3 million property-sale gain gives $17 million FFO. This is not automatically $17 million in a bank account.
AFFO starts with an earnings measure and makes further adjustments. It often addresses recurring capital costs and noncash rent. There is no single standard definition across issuers, so read the company's reconciliation. [6]
Suppose an issuer begins with $17 million FFO, subtracts $2 million recurring capital spending and $1 million noncash rent, then adds another $500,000 adjustment. Its AFFO is $14.5 million. Ask what that last adjustment is before comparing it with a peer.
This shows how an adjusted measure connects to the most comparable GAAP measure. It lets readers inspect what management added or removed. SEC guidance warns that a measure can be misleading despite detailed disclosure, including when adjustments change the accounting substance. [7]
This is the operating section of the cash-flow statement. It differs from net income and from FFO. Timing changes in receivables and payables can affect it. It also does not deduct every investing cash use, such as property purchases.
A total divided by the relevant share count. Total earnings can rise while the amount per share falls if more shares are issued. Confirm whether a report uses average shares, ending shares, or another denominator.
For example, $10 million spread over 5 million shares is $2 per share. If earnings rise to $12 million while shares rise to 8 million, the result is $1.50 per share. Company growth alone did not produce growth for each share.
This is a payment or allocation to investors under the security's terms. Its source and tax character may differ. A payment might be supported by operations, asset sales, borrowing, or other funding. Receiving cash does not by itself show whether wealth increased.
This compares a payment with a stated price or value. Check whether the numerator is a trailing total, a current payment multiplied by a year, or a forecast. Also check whether the denominator is current price, original price, or NAV.
A hypothetical $1.20 annual payment divided by a $20 share price is 6%. If the price falls to $15 and the payment stays unchanged, the quoted yield becomes 8%. The larger percentage did not come from a larger payment.
A payout ratio divides distributions by a defined earnings or cash measure. A ratio using FFO is not interchangeable with one using AFFO. Neither proves the next payment is safe, especially if the denominator excludes important cash costs.
Using the earlier invented AFFO of $14.5 million, $11.6 million of distributions gives an 80% payout ratio. That leaves a numerical margin within that definition. It does not answer every debt, capital, or liquidity question.
Total return includes income and the change in investment value, with the treatment of reinvestment, fees, and taxes specified. It is broader than cash yield. A price estimate may also differ from the cash available on an actual sale.
Start with $100, receive $6, and end with shares worth $92. The simple result before costs and tax is a $2 loss, or negative 2%, despite receiving a 6% cash payment.
IRR is a rate calculated from the amounts and timing of cash flows. An early distribution can affect it differently from the same amount paid years later. For unusual cash patterns, interpretation can be difficult. Always review the dollars and dates behind the percentage.
This divides total proceeds by invested equity under a stated convention. Receiving $150,000 from a $100,000 investment gives 1.5 times. It does not tell you whether that took three years or twelve, or how much came from income rather than sale proceeds.
NAV estimates asset value less debt and other liabilities, often shown per share. Property values may rely on appraisals and assumptions. It is an estimate, not a guarantee that an investor can sell all shares at that amount. [8]
In a simple example, $100 million in assets minus $40 million in liabilities leaves $60 million. With 6 million shares, NAV is $10 per share. Changing the asset estimate or liability figure changes the answer.
Book value comes from the accounting balance sheet. It is not the same as a current market appraisal. Historical cost, depreciation, and other accounting rules affect it. Neither book value nor NAV should be substituted for tax basis on an investor's return.
A $9 market price against a $10 NAV estimate is a 10% discount. It may reflect risk, expectations, stale values, or other factors. It does not guarantee a bargain. The NAV estimate could change before any gap closes.
A cap rate relates property NOI to property value. In a simple direct-capitalization calculation, $500,000 NOI divided by a 5% cap rate implies $10 million value. At 6%, the same NOI implies about $8.33 million. This method has assumptions and is not a full appraisal.
The example shows why value can fall even when current NOI stays flat. It also shows why a property cap rate should not be confused with the shareholder's cash distribution rate.
LTV compares debt with a specified asset value. $6 million debt against $10 million value is 60%. If value falls to $8 million with debt unchanged, LTV rises to 75%. Ask whether the stated value is cost, appraisal, or another measure.
Leverage uses borrowing to fund assets. It can magnify changes in equity value and adds payment obligations. A shareholder may face company-level leverage even without personally signing a property loan.
DSCR compares a lender-defined income or cash measure with required debt service. $600,000 divided by $480,000 is 1.25 times. Loan definitions, reserves, and payment terms matter. A ratio above one is not a guarantee against default. [9]
Maturity is when a debt obligation comes due. Refinancing risk is the risk that a replacement loan is unavailable or costly. A property can be operating well and still face a large cash need when a loan matures.
A fixed-rate loan holds its stated interest rate for the agreed term. A floating rate changes with a reference rate and spread. A hedge may reduce certain rate risks, but its amount, term, cost, and counterparty matter. It does not remove the loan's principal obligation.
A program through which an issuer may buy back shares under stated rules. It is different from exchange trading. Read the current limits, notice dates, price adjustments, and discretion to suspend requests. There is no universal percentage cap for all REITs.
Proration reduces accepted requests according to a stated method when demand exceeds capacity. A queue is a process for pending requests, if the program provides one. Do not assume a rejected request stays in line; some terms require a new request.
A period or restriction that limits transfers or redemption rights. Its end does not necessarily create a liquid market. A separate cap, approval requirement, or suspension can still apply afterward.
An internally managed REIT employs its management team within the company structure. An externally managed REIT uses a separate adviser under an agreement. Review expenses, incentives, conflicts, and termination terms. Neither label alone proves better performance.
A class may have distinct fees, eligibility, voting, or distribution terms. Two investors in the same portfolio can receive different net results because they own different classes. Compare the exact class, not just the company name.
One basis point is one hundredth of a percentage point. A change from 5% to 5.5% is 50 basis points. It is also a 10% increase relative to the starting rate. Those descriptions answer different math questions and should not be swapped.
This divides share price by FFO per share for a stated period. A $30 share price divided by $2 of annual FFO is 15 times. Check whether the earnings are historical or projected. A low multiple can reflect risk or weak growth expectations, not just a low price.
Dilution describes a reduction in an existing holder's share of ownership or another per-share measure. New shares can raise capital for growth, but the new assets must support the larger share count. Ask what changes for each existing share after the transaction.
A covenant is a promise or restriction in a loan agreement. It may require a financial ratio, limit additional borrowing, or restrict payments. The exact contract defines the test and consequences. A company's ability to pay shareholders can depend on more than having cash on hand.
A trailing measure uses a past period. A forward measure uses an estimate of a future period. Comparing one company's past result with another's forecast mixes evidence and expectation. Put both on the same time basis before drawing a conclusion.
When a table uses any of these terms, write the formula next to one sample row. That small step can expose a changed denominator, a missing fee, or a forecast presented as a fact. It also makes the discussion easier for a family member who has not spent weeks reading the offering.
This is a REIT tax requirement tied to a defined taxable-income calculation, generally excluding net capital gain and subject to adjustments. It is not a 90% investor return, nor a requirement to distribute 90% of all cash. Meeting it does not eliminate every possible corporate tax. [10]
These are different shareholder tax categories. Form 1099-DIV reports totals and subsets; adding every box can double count the same payment. The final tax result depends on the category and the investor's circumstances. [11]
This term relates to Section 199A and is different from a qualified dividend taxed at preferential capital-gain rates. Eligible REIT dividends may support a deduction, subject to limits and holding-period rules. Do not apply it to every distribution. [12]
Return of capital generally reduces share basis until basis reaches zero; later amounts can create gain. Basis is the tax record used to calculate gain or loss, not current account value. A cash payment labeled return of capital is not necessarily a permanent tax exemption. [13]
An UPREIT uses an operating partnership beneath the REIT. OP units are partnership interests, not the REIT's corporate shares. Direct partners generally receive partnership tax reporting. Redemption rights and control depend on the documents, not the abbreviation. [14]
This provision generally provides nonrecognition for property contributed to a partnership for an interest, subject to exceptions and related rules. A qualifying direct contribution need not first pass through a DST. Later events can create tax. [15]
A qualifying exchange concerns real property held for investment or business use. Ordinary REIT shares and partnership interests are excluded from replacement real property. Real estate exposure alone does not establish eligibility. [16]
No. Its definition varies, and it may exclude costs or timing effects important to the investor. Read the reconciliation and actual cash statement.
No. NAV is an estimate. Program terms, adjustments, limits, and available liquidity determine whether and how a request can be paid.
No. Yield can rise because price fell, and distributions can accompany a loss in value. Compare both income and ending value.
No. They represent different legal interests with different tax reporting and rights. A later exchange or redemption can have tax consequences.
No. Use these definitions to find the right sections and ask better questions. The actual documents define the investment's rights, fees, risks, and methods.
Educational information, not an offer or a personal tax, legal, or investment recommendation. Examples are hypothetical and omit stated adjustments. Tax treatment depends on your facts and current law. Review your transaction with your CPA, attorney, and qualified intermediary. Real estate investments can lose value and may be illiquid.
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