Before buying REIT units, read the latest balance sheet, income statement and cash-flow statement, then test the issuer’s FFO or AFFO claims against their GAAP reconciliations. Check property performance, debt maturities and liquidity, and whether distributions are supported by cash after recurring needs. No single ratio or pass/fail threshold works across every REIT sector.
Start with the three GAAP financial statements
Use the latest annual or quarterly filing, not only an investor presentation. An issuer’s supplement can make the information easier to scan, but it is company reporting rather than a universal template. For example, Realty Income’s SEC-filed Q1 2026 supplement includes consolidated balance sheets and income statements, operating schedules, FFO and AFFO measures, debt summaries and maturities, and financial and coverage ratios (Realty Income Q1 2026 supplemental data).
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- Balance sheet: Note total debt, cash and other available liquidity, and how the capital structure is changing.
- Income statement: Track revenue, property expenses, interest expense and GAAP net income. Look for changes that need explanation in the notes or management discussion.
- Cash-flow statement: Compare cash generated by operations with distributions, recurring property spending and debt payments. Accounting earnings and supplemental earnings measures are not the same as cash available to meet these demands.
Continue into management’s discussion, debt footnotes, risk disclosures and supplemental schedules. The details behind a headline ratio—such as its definition, period and included obligations—matter as much as the number.
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Bridge GAAP earnings to FFO and AFFO
Use FFO as a supplement, not a substitute
Funds from operations (FFO) is a supplemental non-GAAP measure intended to adjust GAAP net income for certain real-estate-specific items. It can help readers examine operating trends, but it should be considered alongside GAAP results rather than replacing them. Franklin Street Properties’ 2025 financial exhibit discusses FFO and its limitations (Franklin Street Properties 2025 financial exhibit).
Inspect each issuer’s AFFO calculation
Adjusted FFO (AFFO) is not calculated uniformly across REITs. Issuers may adjust FFO for items such as straight-line rent, stock-based compensation, amortization of financing costs or recurring capital spending; the exact choices differ. Read the reconciliation line by line and ask whether adjustments are consistent over time and whether significant exclusions make the reported trend look stronger.
Farmland Partners’ 2025 Form 10-K cautions that FFO and AFFO are not alternatives to GAAP net income or earnings per share, measures of liquidity, or necessarily indicative of funds available for cash needs and distributions (Farmland Partners 2025 Form 10-K). The company’s definitions and reconciliations are specific to that issuer; apply the same scrutiny to the REIT you are evaluating.
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Check property operations and portfolio changes
Operating schedules help show whether the properties themselves are performing well. Review the measures the issuer reports and their time periods:
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- Revenue, rent and property expenses: Identify what is driving changes, rather than assuming higher reported revenue means stronger underlying performance.
- Occupancy and lease expirations: Consider whether vacant space or upcoming lease expirations could affect future rent. Occupancy is dated and should be read using the issuer’s definition.
- Tenant or client concentration: Consider how much performance depends on a small number of tenants or customers.
- Same-store net operating income (NOI): Where disclosed, compare properties held across the periods to distinguish like-for-like performance from portfolio growth.
- Acquisitions and dispositions: Separate changes from properties bought or sold from growth in the properties already owned.
Company schedules can also include indicators such as rent recapture. Realty Income’s 2026 proxy materials, for example, report occupancy, rent recapture and fixed-charge coverage figures; they are company- and period-specific, not general benchmarks (Realty Income 2026 proxy statement).
Assess debt, maturities and liquidity
Debt deserves more than a glance at total borrowings. Review the maturity schedule for concentrations that could require refinancing, interest-rate disclosures for fixed versus floating exposure, and liquidity and covenant disclosures for the issuer’s capacity to meet obligations. Examine coverage ratios in context: definitions differ, and a ratio should be interpreted in light of the REIT’s financing structure.
Debt maturities, available liquidity and covenant headroom can change between reporting dates. Global Net Lease’s 2025 annual report discusses FFO/AFFO limitations and covenant matters (Global Net Lease 2025 annual report). Use the latest filing for the issuer you are considering; older schedules can no longer reflect current financing conditions.
Test whether distributions fit the cash demands
Compare distributions with operating cash flow and the REIT’s stated payout measure, but do not treat FFO or AFFO alone as cash in hand for dividends. Put the distribution alongside recurring property needs, debt payments and other ongoing cash demands. Then inspect the issuer’s AFFO or adjusted-FFO reconciliation to see what it includes or excludes. Company filings explicitly warn that these measures are not necessarily indicative of cash available for distributions.
Compare the REIT with the right peers
Begin with the REIT’s own prior periods, then compare it with peers whose businesses are genuinely similar. Property sector, geography, lease structure, capital intensity and portfolio changes can all affect the meaning of an operating or financial metric. Also check whether peer companies define FFO, AFFO, coverage or same-store NOI in comparable ways before drawing conclusions.
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- For operations, compare occupancy, rent trends, same-store NOI, lease expirations and tenant concentration.
- For earnings quality, compare GAAP net income and cash flow with FFO/AFFO and examine the size and consistency of adjustments.
- For balance-sheet risk, compare debt burden, maturity concentration, rate exposure, liquidity and covenant disclosures.
- For distributions, consider recurring property spending and debt service alongside the payout measure’s definition.
The cited filings do not establish a universal safe threshold for occupancy, leverage, payout or coverage. A figure is useful only with its period, issuer definition and a relevant comparison.
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