REIT Glossary of Terms

FFO — funds from operations — is the REIT industry's primary measure of recurring earnings. It starts with net income and adds back real estate depreciation and amortization, then subtracts gains on property sales. The reason for these adjustments is that standard net income is misleading for REITs: real estate depreciation is a large non-cash charge that makes net income look artificially low even though the properties may be holding or gaining value, and gains on property sales aren't recurring operating income. By adding back depreciation and removing one-time gains, FFO better reflects the recurring cash a REIT generates from operating its real estate, which is why it's the headline earnings number for REITs and why valuation multiples like price-to-FFO are used instead of the price-to-earnings ratio. So FFO answers 'how much does this REIT earn from operating its properties on a recurring basis?' more accurately than net income does. It's the starting point for analyzing REIT performance and the foundation for AFFO.

AFFO — adjusted funds from operations — refines FFO to better approximate the cash a REIT actually has available to pay distributions. It starts with FFO and subtracts recurring capital expenditures (the routine spending needed to maintain properties in rentable condition) and normalizes items like straight-line rent (which spreads contractual rent evenly over a lease and can differ from cash collected). By netting out maintenance capex, AFFO captures a cost that FFO ignores but that is essential to keeping the properties earning, making AFFO a more conservative and often more realistic measure of distributable cash than FFO. Because of this, AFFO is widely viewed as the best proxy for the cash available to pay dividends, and comparing the distribution to AFFO (the AFFO payout ratio) is the key test of whether a REIT's dividend is sustainable. So AFFO answers 'how much cash can this REIT really afford to pay out after maintaining its properties?' It's central to judging REIT dividend safety.

NAV — net asset value — estimates the per-share value of a REIT's real estate and other assets, net of its liabilities. Where FFO and AFFO measure what a REIT earns, NAV measures what its assets are worth: you estimate the market value of the REIT's properties (often using appraisals or capitalization rates applied to property income), add other assets, subtract debt and other liabilities, and divide by the number of shares. NAV is especially central to non-traded and NAV REITs, which are priced periodically at NAV rather than continuously by a market. For publicly traded REITs, the share price can trade above NAV (a premium) or below it (a discount), and comparing price to NAV is one way to judge whether a REIT is cheap or expensive. Keep in mind that NAV is an estimate that depends on valuation assumptions and can lag actual market conditions. So NAV answers 'what is the underlying real estate worth per share?' — a different and complementary question from what FFO and AFFO measure.

The difference is whether the REIT owns real estate or finances it. An equity REIT — the most common type — owns and operates income-producing properties such as apartments, warehouses, offices, retail centers, healthcare facilities, or data centers, and earns income mainly from the rent its tenants pay, plus potential property appreciation over time. When most people picture a REIT, they're picturing an equity REIT. A mortgage REIT (mREIT) doesn't own property; instead, it finances real estate by holding mortgages and mortgage-backed securities, earning money from the interest those loans generate. Its profit comes largely from the spread between the interest it earns on its assets and its own cost of borrowing, which makes mortgage REITs highly sensitive to interest rates and often higher-yielding but higher-risk. A hybrid REIT combines both, owning some property and holding some mortgage debt. So equity REITs own and rent property, mortgage REITs lend against it, and each carries a distinct risk-return profile worth understanding before investing.

Dividend yield for a REIT is the annual distribution per share divided by the current share price, expressed as a percentage — it tells you the income return you'd earn on the REIT at its current price. For example, a REIT paying $2 per share annually at a $40 price has a 5% yield. Because REITs are required to distribute most of their taxable income, their yields tend to run higher than the broad stock market, which is a major part of their appeal to income-oriented investors. But yield must be read carefully rather than chased: a very high yield can reflect a share price that has fallen because the market expects trouble — declining rents, an unsustainable payout, or balance-sheet stress — rather than a genuine bargain (the classic 'yield trap'). To judge whether a yield is reliable, look at the payout ratio against AFFO. So dividend yield measures the income return, but it should always be evaluated alongside sustainability rather than taken as a simple 'higher is better' figure.

A REIT payout ratio measures the share of a REIT's earnings or cash flow that it pays out as distributions. For ordinary companies, the payout ratio compares dividends to net income, but for REITs the most meaningful version compares the distribution to FFO or, better, to AFFO, because AFFO approximates the cash actually available to pay dividends after maintaining the properties. A payout ratio comfortably below 100% of AFFO suggests the distribution is funded by genuine cash flow and has room to be maintained or grown, which is a sign of a healthier dividend. A ratio at or above 100% of AFFO means the REIT is paying out more than it generates, which is often a warning sign that precedes a dividend cut. Note that REITs must distribute at least 90% of taxable income, but taxable income differs from FFO and AFFO, so a high regulatory payout doesn't necessarily mean an unsustainable one. So the AFFO payout ratio is the key gauge of whether a REIT's distribution is sustainable.

An UPREIT — umbrella partnership REIT — is a common REIT structure in which the REIT doesn't own its properties directly. Instead, the REIT owns its real estate through an operating partnership (OP), serving as the general partner of that partnership while the partnership actually holds the properties. This structure exists largely to enable tax-deferred contributions of real estate into the REIT. A property owner can contribute real estate to the operating partnership in exchange for OP units (operating partnership units) rather than cash, which generally lets them defer the capital-gains tax they would owe on an outright sale — a transaction known as a 721 exchange or UPREIT transaction. The OP units can typically be converted into REIT shares (or redeemed) later, often triggering tax at that point. The UPREIT structure is the mechanism behind the 1031-into-DST-then-721-into-REIT path that lets exchangers ultimately reach a REIT while preserving tax deferral. So an UPREIT is a REIT that holds property through an operating partnership to enable tax-deferred property contributions.

OP units — operating partnership units — are ownership interests in the operating partnership that an UPREIT uses to hold its real estate. When a property owner contributes real estate to the operating partnership, they can receive OP units in exchange instead of cash or REIT shares. This is significant because the contribution can generally be structured to defer the capital-gains tax the owner would otherwise owe on a sale, under a 721 exchange (also called an UPREIT transaction). The OP units typically entitle the holder to distributions comparable to REIT dividends and can usually be converted into REIT shares (or redeemed) later, often triggering tax at the point of conversion or sale. OP units are the practical mechanism that lets owners of appreciated real estate move into a diversified, professionally managed REIT structure without an immediate tax bill, and they're the final step in the DST-to-721 path used by some 1031 exchangers. So OP units are partnership interests received for contributed property that defer tax and can later convert to REIT shares. Confirm the specifics with your tax advisor.

A non-traded REIT is a Real Estate Investment Trust that is registered with the SEC but not listed on a stock exchange. Like a publicly traded REIT, it owns or finances income-producing real estate and follows the same core REIT rules, including distributing at least 90% of its taxable income, but its shares don't trade daily on an exchange. Instead, a non-traded REIT is priced periodically at net asset value (NAV) rather than continuously by the market, and it offers only limited liquidity through a redemption program that is often capped (commonly around 5% of shares per year) and can be reduced or suspended at the REIT's discretion. Non-traded REITs are offered through broker-dealers and generally require accredited or otherwise suitable investors after a suitability review. They have historically carried higher upfront fees than listed REITs and are designed for longer-term investors comfortable with illiquidity. So a non-traded REIT is the unlisted, illiquid, periodically NAV-priced counterpart to a publicly traded REIT, accessed through an advisor rather than bought on an exchange.

A NAV REIT is a modern type of non-traded REIT that is valued frequently — often monthly — at net asset value (NAV), with offerings and redemptions transacted at that NAV. NAV REITs were designed to address some criticisms of older non-traded REITs: they offer more frequent valuation than the periodic valuations of traditional non-traded REITs, they typically have a perpetual (open-ended) life rather than a fixed liquidation timeline, and they often carry lower or more transparent fee structures. Investors generally buy and redeem shares at the prevailing NAV, subject to redemption limits. Despite these improvements, NAV REITs remain illiquid relative to publicly traded REITs — redemptions are still capped and can be limited or suspended, particularly during market stress — and they're offered through broker-dealers to accredited or otherwise suitable investors after a suitability review. So a NAV REIT is a frequently valued, perpetual-life, often lower-fee modern version of the non-traded REIT, but it's still an illiquid, advisor-accessed vehicle, not a daily-traded one. Review the structure, fees, and redemption terms before investing.

Most REIT dividends are taxed as ordinary income rather than at the lower qualified-dividend rates, because the REIT itself paid no corporate tax on the income before distributing it. However, a significant break applies: a 20% deduction under Section 199A applies to qualified REIT dividends, which lowers the effective top federal rate on those dividends, and this deduction was made permanent by the 2025 OBBBA legislation. In addition, not all REIT distributions are ordinary income — some may be classified as return of capital (which reduces your cost basis rather than being currently taxed) or as capital-gain distributions (taxed at capital-gains rates). The REIT reports the breakdown of ordinary, capital-gain, and return-of-capital amounts to you on Form 1099-DIV each year. The exact treatment depends on your situation and the character of the distributions. Baker 1031 does not provide tax advice, so verify the current rules and your specific treatment with your tax advisor. So REIT dividends are mostly ordinary income with a 20% deduction, plus possible capital-gain and return-of-capital components.

REIT shares can't be used in a 1031 exchange because a 1031 exchange requires the exchange of like-kind real property held for investment or business use, and a REIT share is a security — an interest in a company — not real property. The IRS treats a share of stock differently from a direct interest in real estate, so selling investment property and reinvesting directly into REIT shares wouldn't qualify for tax deferral. There is, however, an indirect path that involves REITs: you can 1031 into a Delaware Statutory Trust (DST), which is structured to be treated as like-kind real property, and the DST's property may later be acquired by a REIT through a 721 (UPREIT) exchange. That converts your interest into operating-partnership (OP) units, which can eventually convert to REIT shares, all while preserving your tax deferral. So a direct 1031 into a REIT isn't possible because shares aren't real property, but the DST-then-721 path is the bridge that lets exchangers ultimately reach a REIT with deferral intact. Confirm specifics with your tax advisor.

The 90% distribution rule requires a REIT to distribute at least 90% of its taxable income to shareholders each year as dividends in order to qualify as a REIT and avoid corporate-level income tax. In practice, most REITs distribute close to 100% of their taxable income to eliminate corporate tax entirely. This rule is the defining feature of the REIT structure and the source of REITs' characteristically high yields, because a REIT is required to pass most of its earnings through to shareholders rather than retaining them. The trade-off is that REITs can't easily fund growth from retained earnings, so they often raise new capital by issuing shares or debt to acquire or develop properties. The 90% rule is one of several REIT qualification tests, alongside the 75% asset test, the 75% income test, the 100-shareholder requirement, and the 5/50 rule. So the 90% distribution rule both produces REITs' high dividends and shapes how they grow, making it central to understanding why REITs are prized for income. It's a cornerstone of the REIT vocabulary.

The Section 199A deduction is a 20% deduction that applies to qualified REIT dividends, reducing the effective federal tax rate an investor pays on most REIT ordinary dividends. Because REITs pay no corporate tax, their ordinary dividends are generally taxed as ordinary income at the investor's marginal rate rather than at the lower qualified-dividend rates that apply to many corporate dividends. The 199A deduction softens this by letting investors deduct 20% of qualified REIT dividends, which lowers the effective top federal rate on those dividends to roughly 29.6% (the top ordinary rate reduced by the deduction). This deduction was made permanent by the 2025 OBBBA legislation, removing the prior scheduled expiration. The deduction applies specifically to the ordinary-income portion of REIT dividends, not to capital-gain distributions or return of capital. So the 199A deduction is a meaningful tax benefit that makes REIT ordinary dividends more tax-efficient than they would otherwise be. Because tax rules are technical and depend on your situation, verify the current rules with your tax advisor.

We help investors learn the language of REITs — the earnings and value metrics (FFO, AFFO, NAV), the equity-versus-mortgage distinction, the payout ratio and yield, the UPREIT and OP-unit structure, and the non-traded and NAV REIT vehicles — so the jargon stops getting in the way of understanding what a REIT is and whether one fits your goals. REIT and non-traded-REIT interests are offered through the broker-dealer, Aurora Securities, Inc. (member FINRA/SIPC), and any recommendation follows a suitability review; non-traded and private REITs typically require accredited or otherwise suitable investors, while publicly traded REITs trade through ordinary brokerage. We explain what each term means in practice — how to read FFO and AFFO, what a payout ratio signals, how UPREIT and OP units enable tax-deferred contributions, and how non-traded and NAV REITs differ from listed ones. Baker 1031 does not provide tax or legal advice — your CPA and attorney handle your situation, including 199A, 1099-DIV, and 721/1031 strategies. We never promise yields or returns; past performance doesn't guarantee future results. Our role is to make REIT terminology clear so you can invest knowledgeably and only when suitable.