A REIT's payout ratio reads above 100% because it is being measured against earnings, and earnings are the one number a property company cannot be judged by. Accounting insists that buildings wear out on a fixed schedule. Well-located real estate frequently does the opposite. That single mismatch produces a charge worth a large slice of reported profit that costs nobody a cent — and it is why the ratio your screener shows is not a warning, it is a category error.
The number you want is the AFFO payout ratio. Here is what it is, why it is not standardised, and how to read it without being fooled in the other direction.
Depreciation, and the profit that was never lost
Buy an office building and the accounts require you to write its value down over a few decades, charging a slice against profit every year. For a machine that genuinely wears out, this is exactly right. For a warehouse in a location that is getting scarcer, it describes a loss that is not happening — and in many cases the opposite of what is happening.
Because property is the whole balance sheet of a REIT, that charge is not a detail. It can consume most of reported profit. The rent still arrives, the mortgage is still paid, the dividend still clears — and the income statement shows a company barely making money. The cash is real; the profit is an artefact.
A payout ratio over 100% at a REIT is not the company overpaying. It is the accounting under-reporting.
FFO, AFFO, and the difference between them
One undoes the accounting. The other subtracts what the buildings really cost.
| Measure | What it does | What it is good for |
|---|---|---|
| Net income / EPS | Charges depreciation, includes gains on property sales | Almost nothing, for a REIT. Do not compute a payout ratio from it. |
| FFO | Adds property depreciation back, removes gains on sales | Comparing REITs to each other and to their own past. The industry's standard profit measure. |
| AFFO | FFO minus recurring maintenance capex, leasing commissions, tenant improvements and the straight-line rent adjustment | Judging the dividend. Closest thing to the cash the payout comes from. |
The gap between FFO and AFFO is where the honest work lives. A building does not stay rentable by itself: roofs, lifts, fit-outs for incoming tenants, commissions to the agents who found them. None of it shows up as depreciation, all of it is cash out the door, and all of it has to happen before a single euro can be paid to shareholders.
The straight-line adjustment is the other half. Accounting spreads the rent from a stepped lease evenly across its life, so a REIT with escalating rents books more revenue than it actually collected in the early years. Useful for comparing periods. Useless for paying a dividend, which requires the money to have arrived.
AFFO is not a standard, it is a judgement
Which means the company computing it has an interest in the answer
Because no rulebook defines AFFO, each REIT decides what counts as recurring. A company can classify a large slice of maintenance as "redevelopment", move it out of AFFO, and report a more comfortable payout ratio without a single thing changing on the ground.
Three defences, none complicated:
A definition that is consistent over time still tells you the direction of travel, even if it is generous. A definition that quietly changed in a year when the ratio would otherwise have looked bad is telling you something louder.
A comfortable AFFO payout is not comfortable if the company is issuing shares every quarter to fund the buildings that generate it. Dividend cover per share is the only version that matters to you.
Weighted average lease term, occupancy, and how concentrated the rent is in a few tenants. A 75% payout on ten-year leases to investment-grade tenants is a different animal from 75% on leases expiring next year.
REITs must distribute most of their income, so they cannot fund growth out of retained profit — they issue shares or borrow. That makes the maturity schedule as important to the dividend as the payout ratio is. A REIT with 70% AFFO cover and a wall of debt refinancing into higher rates is in more danger than one at 85% with nothing due for years. The cut, when it comes, usually comes from the balance sheet.
Six REITs, same questions asked of each
Net lease, gaming, life science, industrial — different buildings, identical checklist
The point of the checklist is that it travels. A net-lease REIT collecting rent from shops, a landlord to casinos, one leasing laboratories and one leasing warehouses all get read the same way: what does the cash cover, what does the lease guarantee, and when is the debt due.
Business, moat, management, the numbers, valuation and an honest verdict.
What to do with this on Monday
Take the REIT you own with the scariest-looking payout ratio and recompute it against AFFO. Most of the time the alarm disappears and you have learned that your screener was measuring the wrong thing. Occasionally it does not disappear — and you have found the one that was worth checking.
Then look at the debt maturities, because that is where the cut is actually scheduled. The payout ratio tells you whether the dividend fits inside this year's cash. The maturity schedule tells you which year the company will need that cash for something else.
Frequently asked
Why is a REIT's payout ratio over 100% of earnings?
Because accounting depreciates buildings and the market usually does not. Depreciation is a large non-cash charge that crushes reported earnings without consuming a cent, so dividends paid out of real cash routinely exceed the reported profit. For a REIT, an EPS payout ratio above 100% is normal and carries almost no information.
What is the difference between FFO and AFFO?
FFO adds property depreciation back to net income and strips out gains on property sales — it undoes the accounting distortion. AFFO goes further and subtracts the money the portfolio genuinely consumes to stay standing: recurring maintenance capital expenditure, leasing commissions, tenant improvements, and the straight-line rent adjustment. FFO is the cleaned-up profit; AFFO is closer to the cash a dividend can actually be paid from.
What is a safe AFFO payout ratio?
As a rough anchor, comfortably under about 85% for a REIT with long leases and creditworthy tenants; tighter for anything with short leases or cyclical demand. But there is no standard definition of AFFO — each company computes it slightly differently — so the ratio is most useful compared against the same REIT's own history and its direct peers, not read as an absolute.
Why do REITs have to pay out so much?
It is the bargain that defines the structure. In the United States a REIT avoids corporate tax on income it distributes, provided it pays out at least 90% of its taxable income to shareholders. The high yield is the price of that exemption — and it is also why REITs must return to the market for capital in order to grow, which makes them unusually sensitive to interest rates and to their own share price.