REITs are the largest source of yield most Canadian investors will encounter, and almost every standard analytical tool gives the wrong answer on them. The metrics are different, the tax is different, and the account you hold them in matters more than for any other equity.
A real estate investment trust owns income-producing property and passes the rental income through to unitholders. In exchange for distributing the large majority of its income, it largely avoids tax at the entity level — the tax is paid by you instead. Most Canadian REITs are structured as trusts and pay distributions rather than dividends, which is not a naming quirk: it is why the tax treatment in the sections below is completely different from an eligible Canadian dividend.
The consequences of that structure define the asset class. REITs pay out most of their cash, so they retain little to grow with and routinely issue units or debt to fund acquisitions. They are highly sensitive to interest rates, both because property is bought with borrowed money and because their yield competes directly with bonds. And they are legally obliged to keep distributing even when it would be convenient not to.
Accounting rules require buildings to be depreciated over decades. In practice a well-maintained property in a good location frequently appreciates. So depreciation — an enormous non-cash charge — crushes reported earnings while the actual cash rent is unaffected.
The result is that REIT earnings figures are close to meaningless. A REIT can show a payout ratio of 250% on earnings and be entirely comfortable. Anyone applying a P/E ratio or an earnings payout ratio to a REIT is measuring the wrong thing.
Funds from operations reverses the depreciation distortion and removes one-off gains from selling buildings, which are not recurring income. Adjusted funds from operations goes further and subtracts the capital the REIT must actually spend keeping its properties leasable — roofs, elevators, tenant improvements, leasing commissions. AFFO is the closest available measure of genuinely distributable cash, and it is the denominator to use.
Typical AFFO payout ratios run 70–90%. Below 70% is conservative and unusual. Above 100% means the distribution exceeds distributable cash and is being funded by debt or unit issuance — the same red flag as a stock’s FCF payout exceeding 100%, and it precedes distribution cuts for the same reason.
| Metric | What it tells you | What to look for |
|---|---|---|
| Occupancy rate | Share of space leased | The trend matters more than the level; falling occupancy hits cash flow directly |
| Same-property NOI growth | Income growth from properties owned in both periods | The cleanest measure of organic growth — it strips out acquisitions |
| Weighted average lease term | Average years remaining on leases | Longer means more predictable income and slower repricing in either direction |
| Leasing spread | New rent versus expiring rent on renewals | Positive spreads mean market rents exceed in-place rents — future growth already contracted |
| Debt / gross book value | Leverage | Canadian REITs commonly run 40–50%; above 55% is elevated |
| Weighted average interest rate and maturities | Refinancing exposure | Large maturities in a higher-rate market squeeze the distribution |
| Price to NAV | Price versus estimated net asset value | Persistent discounts can indicate scepticism about the property valuations |
Same-property NOI growth deserves particular attention, because it is the metric a REIT cannot fake with acquisitions. A REIT growing FFO per unit purely by issuing units to buy more buildings is growing in size, not in value per unit — and if it is issuing units below net asset value to do it, existing unitholders are being diluted.
A REIT distribution is not one thing. It arrives as a mix of components, and the mix is only confirmed after year-end on a T3 slip — typically in March, which is why REIT investors in taxable accounts often cannot complete their return early.
| Component | Taxed as | Efficiency |
|---|---|---|
| Other income (rental income passed through) | 100% included at your full marginal rate | Poor — like interest, with no dividend tax credit |
| Capital gains (from property sales) | Half included | Good |
| Return of capital | Not taxed now; reduces your adjusted cost base | Tax-deferred, not tax-free |
| Foreign income (if the REIT holds foreign property) | 100% included, possibly with foreign withholding | Poor |
The important point for planning: REIT distributions receive no dividend tax credit. The largest component is usually fully taxable other income. A REIT yielding 6% in a taxable account can deliver a worse after-tax result than a Canadian dividend payer yielding 4%, which is precisely the kind of comparison the headline yield hides.
Return of capital is the component people most often misunderstand. It is not taxed in the year received — which sounds excellent — because it is treated as the REIT giving you back part of your own investment. Instead it reduces your adjusted cost base, so the tax arrives later, as a larger capital gain when you sell.
A high proportion of return of capital is also worth reading as information about the business. It can be benign — a natural consequence of large depreciation deductions reducing taxable income below cash income. Or it can mean the REIT is distributing more than it earns and returning your own capital in a literal sense. The AFFO payout ratio tells you which.
Because the largest component of a REIT distribution is fully taxable other income, REITs are among the strongest candidates for registered accounts.
| Type | Characteristics | Main risk |
|---|---|---|
| Industrial / logistics | Warehouses, distribution; strong demand from e-commerce | Overbuilding after a strong cycle |
| Residential / apartments | Short leases reprice quickly with inflation | Rent control and regulation |
| Retail | Wide range from grocery-anchored to enclosed malls | Tenant credit; structural decline in some formats |
| Office | Long leases; slow to reprice in either direction | Structural demand change; long leases delay the impact but do not prevent it |
| Healthcare / seniors | Demographically supported demand | Operator quality and regulation |
| Data centres / towers | Long contracts, high growth | Priced accordingly; heavy capital requirements |
Across all of them, interest rates are the dominant shared driver. Rising rates raise borrowing costs, compress property valuations through higher capitalisation rates, and make bond yields more competitive with REIT distributions — three separate pressures from one variable. This is why a portfolio of REITs, utilities and pipelines is not diversified, exactly as the risk course’s hidden-concentration section described.
Educational purposes only; not financial, investment or tax advice. Tax rules and rates change and depend on your province and circumstances — confirm your own numbers with the CRA and a qualified professional. Example companies and yields are illustrative. Always do your own research.