REIT

A REIT is a company whose business is owning income-producing property — apartments, malls, warehouses, cell towers, data centres — and passing the rent through to shareholders.

The special part is the deal REITs strike with tax authorities: in most countries a REIT pays little or no corporate tax as long as it distributes the bulk of its taxable income (in the US, at least 90%) as dividends. That is why REITs are known for high, steady payouts.

Buying a REIT share gives you property exposure with none of the landlord work: no tenants calling at midnight, instant diversification across hundreds of buildings, and the ability to sell in seconds rather than months.

The metrics that matter

• FFO (Funds From Operations): net income + depreciation − gains on sales. Property depreciation is an accounting fiction (buildings often appreciate), so FFO, not earnings, is the REIT world's profit measure. AFFO further deducts recurring capex.
• NAV: appraised value of the properties minus debt — shares trade at premiums or discounts to it.
• Cap rate: a building's net operating income divided by its value — the property market's yield.
• Leverage: REITs typically run 30–50% debt-to-assets, so financing costs matter.

Sectors behave differently

Logistics and data-centre REITs ride e-commerce and cloud demand; office REITs fight remote work; regulated residential differs from hotels, which reprice nightly. "REITs" is a wrapper, not a single bet.

Rates sensitivity

REITs borrow heavily and their dividends compete with bond yields, so rising rates hit them twice: financing gets dearer and investors demand higher yields (lower prices). Long leases with fixed rents make some REITs behave like long-duration bonds.

Valuation approaches

NAV approach: value each property by capitalising stabilised net operating income at market cap rates, then adjust for debt:

Dividend/AFFO discount: treat the share as a growing income stream, \(P = \dfrac{\text{AFFO}_1 \cdot b}{r - g}\) with payout ratio \(b\); \(g\) is driven by contractual rent escalators, re-leasing spreads and development yield spreads over cap rates.

Implied cap rate

Reverse-engineer what the equity market says buildings are worth:

Comparing \(c_{\text{implied}}\) to private-market cap rates identifies public/private arbitrage — the driver of take-private waves when REITs trade cheap.

Risk model

REIT returns load on equity beta, term-structure level (duration ~ lease length adjusted for leverage), credit spreads (via refinancing), and a property-sector factor. Leverage amplifies asset moves: with loan-to-value \(L\), equity NAV volatility ≈ asset volatility / (1 − \(L\)).