- 1REITs must distribute 90% of taxable income, creating high dividend yields
- 2Property type matters enormously — data centers and industrial REITs outperform traditional office
- 3Net Asset Value (NAV) and Funds From Operations (FFO) are the key REIT metrics
- 4Interest rate sensitivity means REITs require careful timing and factor analysis
#What Are REITs?
Real Estate Investment Trusts (REITs) are companies that own, operate, or finance income-producing real estate. They're required to distribute at least 90% of taxable income as dividends, creating above-average yields.
Property Types
| Property Type | Growth Outlook | Yield Range | Examples |
|---|---|---|---|
| Data Centers | Strong (AI demand) | 2-3% | Equinix, Digital Realty |
| Industrial/Warehouse | Strong (e-commerce) | 2-4% | Prologis, Rexford |
| Residential (Apartments) | Moderate | 3-4% | AvalonBay, Equity Residential |
| Healthcare Facilities | Moderate | 4-6% | Welltower, Ventas |
| Self-Storage | Moderate | 3-5% | Public Storage, Extra Space |
| Retail (Necessity) | Stable | 4-6% | Realty Income, NNN REIT |
| Office | Weak (remote work) | 5-8% | Vornado, Boston Properties |
| Cell Towers | Strong | 2-3% | American Tower, Crown Castle |
#Key REIT Metrics
Standard financial metrics don't work well for REITs because depreciation distorts earnings. Use these instead:
| Metric | What It Measures | Why REIT-Specific |
|---|---|---|
| FFO (Funds From Operations) | Cash earnings | Adds back depreciation |
| AFFO (Adjusted FFO) | Sustainable cash earnings | Subtracts maintenance capex |
| P/FFO | Valuation (replaces P/E) | Based on FFO, not net income |
| NAV (Net Asset Value) | Property portfolio value | Discount/premium to asset value |
| Occupancy Rate | Demand strength | Higher = stronger demand |
| Same-Property NOI Growth | Organic growth | Pricing power indicator |
#Interest Rate Impact on REITs
REITs are the most rate-sensitive equity sector:
- Rising rates: Generally negative (higher borrowing costs, bond competition for income)
- Falling rates: Generally positive (cheaper debt, REITs more attractive vs. bonds)
- Peak rates: Often the best time to buy REITs (maximum pessimism, maximum yield)
Our momentum factor captures rate-driven rotations into and out of REITs.
#How Our Model Evaluates REITs
Value
REITs trading at discounts to estimated NAV represent genuine value opportunities. Our value factor identifies REITs where the stock price implies property values below private market comparables.
Profitability
REITs with high occupancy rates, strong rental growth, and operational efficiency score well. The best REITs generate above-average FFO margins.
Stability
Necessity retail, residential, and healthcare REITs score highest. Office and hotel REITs have more volatile cash flows and score lower.
#Building a REIT Allocation
- 1Target 5-10% of equity portfolio in REITs
- 2Diversify by property type — Don't concentrate in one property sector
- 3Use our rankings to find the highest-quality names in each property type
- 4Consider tax placement — REIT dividends are taxed as ordinary income; hold in tax-advantaged accounts when possible
Last updated: February 10, 2026