REIT Analysis Language and Terminology

Most people look at a REIT, see a yield they like, and buy it. And that's what I did at the start of my journey. That's not entirely wrong, but it's incomplete. The yield tells you what you're getting paid today. It tells you nothing about whether that payment is safe, growing, or quietly eroding.

The terms in this post are the ones analysts and serious investors use to answer those questions. You don't need a finance degree to understand them. You just need someone to explain them plainly, once, with context for why each one matters.

That's what this post is.

Start with the income metrics

FFO - Funds From Operations
FFO is the REIT equivalent of earnings per share. Standard net income is misleading for REITs because it subtracts depreciation on real estate - and unlike a machine that wears out, real estate tends to hold or appreciate in value over time. FFO adds that depreciation back, along with gains or losses on property sales, to give a cleaner picture of recurring cash generation. This is the number you compare against the distribution to judge whether it's being covered. If FFO per unit is $1.00 and the distribution is $0.70, the payout ratio is 70% - there's a real cushion. If FFO per unit is $0.65 and the distribution is $0.70, you have a problem.

AFFO - Adjusted Funds From Operations
FFO with more deductions. AFFO strips out straight-line rent adjustments and subtracts capital expenditures needed to maintain the properties - roof replacements, parking lot resurfacing, HVAC systems. These are real cash costs that FFO ignores. AFFO is a more conservative and more honest measure of what a REIT can actually sustain paying out over the long run. When evaluating distribution safety, AFFO payout ratio is the number I trust more than FFO payout ratio. The gap between the two tells you how capital-intensive the portfolio is.

Payout Ratio
Distributions paid ÷ FFO (or AFFO). This is the single most important number for evaluating distribution safety. A payout ratio above 100% means the REIT is paying out more than it earns - that's unsustainable and usually a red flag. A ratio in the 70–85% range on AFFO is generally healthy for Canadian REITs. Above 90% isn't necessarily dangerous, but it leaves little room for error - any dip in occupancy, a lease that doesn't renew, or an interest rate increase on debt maturing can push it into uncomfortable territory fast. Watch the trend over multiple years, not just the most recent quarter.

Distribution
The income payment a REIT makes to unitholders. Not called a "dividend" because REITs are income trusts structured differently from corporations. Functionally similar, but the tax treatment is more complex. REIT distributions typically consist of a mix of other income, eligible dividends, capital gains, and return of capital - each taxed at a different rate in a non-registered account. In a TFSA, none of that matters. You collect it all tax-free, which is one reason REITs are particularly well-suited to that account type.

Then check the balance sheet

Debt to Aggregate Assets
Total debt divided by total assets. This is the standard Canadian REIT leverage metric. Most well-run Canadian REITs target the low-to-mid 40% range. Below 40% is conservative; above 50% starts to attract scrutiny. High leverage amplifies both gains and losses - it can boost returns when times are good and accelerate pain when they aren't. More importantly, it creates refinancing risk. When debt matures and needs to be rolled over, a highly leveraged REIT has less flexibility if credit markets tighten or rates are elevated.

Interest Coverage Ratio
Operating income divided by interest expense. Measures how comfortably a REIT can service its debt out of operations. A ratio of 3.0x means the REIT earns three dollars in operating income for every dollar of interest it owes. The higher the better. A ratio falling toward 2.0x or below deserves serious scrutiny - it suggests the REIT is earning barely enough to cover its borrowing costs, which makes distributions vulnerable to any operational hiccup.

DBRS Rating
DBRS Morningstar is a Canadian credit rating agency. An investment-grade rating (BBB or higher) means institutional lenders are comfortable extending credit at reasonable rates. This matters because a REIT's cost of borrowing directly affects FFO. If a REIT loses its investment-grade rating - which typically happens through a combination of rising leverage and deteriorating fundamentals - it will pay significantly more to refinance its debt. That cost gets subtracted from income available for distributions.

NAV - Net Asset Value
The estimated value of a REIT's properties minus its liabilities, expressed per unit. Think of it as what each unit would theoretically be worth if the REIT liquidated everything and paid off its debts. REITs trade at a premium or discount to NAV depending on market sentiment, growth expectations, and interest rate environment. When a REIT trades at a significant discount to NAV, it can signal a buying opportunity - or the market pricing in risk around rising cap rates, weakening fundamentals, or refinancing pressure. The discount alone is not a thesis. You need to understand why it exists.

Understand the property fundamentals

Occupancy Rate
The percentage of leasable space that is currently leased and generating rent. This is one of the most direct indicators of portfolio health. A REIT at 98% occupancy has almost no empty space; a REIT at 88% has meaningful vacancy dragging on income. Watch for the distinction between "in-place" occupancy (space currently occupied and paying rent) and "committed" occupancy (space leased but where the tenant hasn't yet taken possession). Both matter, but in-place is the one generating cash today. When occupancy drops below 93–94% in a major portfolio, it warrants a close look at why.

In-Place Rent vs. Market Rent
In-place rent is what tenants are actually paying right now under existing leases. Market rent is what similar space would command on a new lease signed today. When market rent is meaningfully higher than in-place rent, the REIT has embedded rent-growth potential - as leases expire and renew at current rates, income rises even without acquiring a single new property. This "mark-to-market" opportunity is often cited in industrial and urban retail REITs where rents have risen faster than lease escalation clauses. Pay attention to the lease expiry schedule: when do existing leases roll, and at what in-place rates?

Cap Rate - Capitalization Rate
Net operating income divided by property value. Cap rates are how commercial real estate is priced. A lower cap rate means a higher valuation relative to income - typically reflecting higher-quality or lower-risk assets. Rising cap rates compress NAV: if investors demand a higher return from a property type, the implied value of those properties falls, even if rent hasn't changed at all. This is exactly what happened across Canadian REITs in 2023–2024 as interest rates rose. Understanding cap rate direction helps you assess whether NAV is stable, expanding, or at risk.

GLA - Gross Leasable Area
Total floor space available for lease, measured in square feet or square metres. Used to compare portfolio scale and calculate per-square-foot metrics like rent and NOI. Useful for understanding how concentrated a portfolio is and how much vacancy in absolute terms a given occupancy percentage represents.

WALE - Weighted Average Lease Expiry
The average time remaining across all leases, weighted by rent or GLA. A longer WALE means more income is locked in for more years - lower near-term rollover risk. A shorter WALE means leases are coming up for renewal soon, which is either a vulnerability (tenants leaving, creating vacancy) or an opportunity (renewing at higher market rents). Always read WALE alongside the in-place vs. market rent comparison. Short WALE + rents well below market = potential upside. Short WALE + weak market fundamentals = genuine risk.

Know the corporate actions

NCIB - Normal Course Issuer Bid
A TSX-approved program that allows a company to repurchase its own units on the open market. When a REIT trades at a meaningful discount to NAV, buying back units at that discount is mathematically accretive - you're acquiring a dollar's worth of assets for less than a dollar, which benefits remaining unitholders. An active NCIB is often a management signal that they believe the unit price is undervalued. It's not a guarantee, but it indicates a degree of confidence and an alignment of interests. Watch whether the REIT is actually exercising the bid, not just having it approved.

AIF - Annual Information Form
A mandatory disclosure filing for TSX-listed companies, similar in function to the US 10-K. The AIF contains detailed information about a REIT's business, properties, tenants, risk factors, and governance structure. When doing your own REIT analysis, the AIF and the annual earnings press release are your two primary source documents. Everything else — analyst reports, news articles, investment forums - should be read after you've formed your own view from the primary sources.

Putting it together: the order of analysis

When I look at a new REIT, I run through these in roughly this sequence. First, is the distribution covered? FFO payout ratio, then AFFO payout ratio, then trend. Second, is the balance sheet manageable? Debt-to-assets, interest coverage, credit rating. Third, are the properties performing? Occupancy, in-place vs. market rent, lease expiry profile. Fourth, is management doing intelligent things with capital? NCIB activity, acquisition pricing relative to NAV, development pipeline discipline.

No single metric tells the whole story. A REIT with a 65% FFO payout ratio but 88% occupancy and deteriorating market rents is not as safe as it looks. A REIT with a 90% AFFO payout ratio but 98.5% occupancy, rising market rents, and a decade of uninterrupted distributions is not as fragile as it looks either. The numbers give you the questions to ask. The answers come from understanding the context behind them.

Build the freedom before you need it.

Disclosure: This post is for informational and educational purposes only and does not constitute investment advice. I am not a licensed financial advisor. Do your own diligence before making any investment decisions.