REITs (Real Estate Investment Trusts) are legally required to distribute 90%+ of taxable income as dividends. However, they require different analysis – do not use Net Income, as large non-cash depreciation expenses make it artificially low.
Use these metrics instead:
- FFO (Funds From Operations): Net Income + Depreciation − Property Sale Gains. Reveals true operational cash flow.
- AFFO (Adjusted FFO): FFO minus recurring capital expenditures. The most accurate dividend sustainability indicator.
- P/FFO Ratio: The REIT equivalent of P/E. Fair value is typically 15–20× FFO.