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What Is The Payout Ratio Of A REIT?

The payout ratio of a Real Estate Investment Trust (REIT) refers to the percentage of its earnings that are distributed to shareholders in the form of dividends. It is a crucial metric for investors assessing a REIT’s financial health, sustainability, and ability to maintain or grow dividends over time. REITs must distribute at least 90% of their taxable income as dividends to maintain their tax-advantaged status.

Formula for Payout Ratio in a REIT

Unlike regular companies that use net income for the payout ratio, REITs typically use Funds from Operations (FFO) or Adjusted Funds from Operations (AFFO) as a more accurate measure of cash flow available for distributions.

  1. FFO Payout Ratio

    Payout Ratio = (Dividends per Share / FFO per Share) × 100

    • FFO adjusts net income by adding back depreciation and amortization (which are non-cash expenses) and removing gains from property sales.
  2. AFFO Payout Ratio (More Conservative Approach)

    Payout Ratio = (Dividends per Share / AFFO per Share) × 100

    • AFFO further adjusts FFO by subtracting recurring capital expenditures (CapEx) and other non-cash adjustments to better reflect actual cash available for dividends.

What Is a Good Payout Ratio for a REIT?

  • 60% – 80% based on AFFO is considered a healthy and sustainable range.
  • A payout ratio above 90% may indicate that the REIT is paying out too much and may struggle to maintain dividends.
  • A very low payout ratio (below 50%) may mean the REIT is reinvesting a significant portion of earnings instead of distributing them.