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EP #162 | Navigating the World of REITs with Brad Thomas, aka mr REIT
Dividend Talk
Understanding REITs: Metrics, Requirements, and Payout Ratios
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REITs use funds from operations (FFO) as a metric to determine earnings per share. FFO is calculated by adding net income, rental income, depreciation, and amortization, and subtracting gains on sale. Adjusted funds from operations (AFFO) further adjusts FFO by subtracting straight line rents and recurring capex, and adding compensation, lease, tangibles, and deferred financing costs. Payout ratios for REITs are based on FFO. The REIT law requires companies to pay at least 90% of their taxable income, not FFO. They also have to own or lease 75% of their portfolio as real estate. Companies can lease properties instead of owning them, as long as at least 75% of their asset base consists of real estate under lease.
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