What Is a REIT? Real Estate Investment Trusts Explained

Written by Jim Norris · NorrisAI AlphaLens · Updated August 2026

Quick answer: A Real Estate Investment Trust (REIT) is a company that owns income-producing real estate — shopping centers, apartment buildings, office towers, warehouses, data centers, hospitals — and is required by law to distribute at least 90% of its taxable income to shareholders as dividends. REITs let individual investors own a slice of large real estate portfolios and collect rental income without buying or managing property directly.

How REITs work

Congress created REITs in 1960 specifically to give ordinary investors access to large-scale, income-producing real estate. To qualify as a REIT, a company must:

• Invest at least 75% of total assets in real estate
• Derive at least 75% of gross income from real estate-related sources
• Distribute at least 90% of taxable income to shareholders as dividends
• Have at least 100 shareholders and be widely held

The 90% distribution requirement is why REITs typically yield much more than the average stock — they're legally required to pay out most of their income.

Types of REITs

Equity REITs own and operate properties — the most common type. They earn income primarily from rent. Sub-sectors include retail, residential, office, industrial, healthcare, data centers, and cell towers.

Mortgage REITs (mREITs) don't own properties — they own mortgages and mortgage-backed securities. They earn income from interest on loans. More complex and interest-rate sensitive than equity REITs.

Hybrid REITs combine both approaches.

Why REIT dividends are so high — and what to watch

The 90% distribution requirement forces REITs to pay most earnings as dividends, which is why yields of 4–8% are common. But there's a catch: because REITs distribute most earnings, they can't retain much capital for growth. They must regularly issue new shares or take on debt to fund expansion — which can dilute existing shareholders.

The key metric for REIT valuation is Funds From Operations (FFO) — not earnings. FFO adds back depreciation (a large non-cash charge for real estate companies) to give a more accurate picture of the cash a REIT actually generates. A REIT trading at 15x FFO is roughly equivalent to a stock trading at a 15 P/E.

Professor Jeremy Siegel of the Wharton School has documented that REITs have historically provided competitive total returns — combining dividend income with real estate appreciation — while also serving as a partial inflation hedge, since rents tend to rise with inflation over time. — Stocks for the Long Run, McGraw-Hill

REIT sectors with different characteristics

Data center REITs (Equinix, Digital Realty) — benefit from cloud computing growth; strong secular tailwind.

Industrial/logistics REITs (Prologis) — benefit from e-commerce growth; high demand for warehouse space near population centers.

Residential REITs (apartment, single-family) — more defensive; people always need housing.

Office REITs — structurally challenged by remote work trends; higher risk than pre-pandemic.

Retail/mall REITs — facing ongoing pressure from e-commerce; highly varied by quality of tenants and locations.

How interest rates affect REITs

REITs are sensitive to interest rates for two reasons: rising rates increase their borrowing costs (REITs carry significant debt), and rising bond yields make REIT dividends relatively less attractive to income-seeking investors. In rising rate environments, REIT prices often fall — though the underlying real estate value and rental income may be intact.

Howard Marks has noted that real estate is genuinely different from equities — it has location specificity, illiquidity, and income characteristics that diversify a portfolio in ways that pure equity exposure doesn't. REITs provide that diversification in a liquid, accessible form.

How AlphaLens analyzes REITs

REITs require modified versions of several AlphaLens frameworks. The Fair Value Stress Test uses FFO multiples rather than P/E. The Balance Sheet Deep Dive focuses on debt-to-equity and interest coverage given REITs' capital-intensive structures. The Macro Sensitivity Analysis captures interest rate exposure. The Dividend & Income Analysis checks FFO coverage of the dividend — the most critical sustainability metric for income-focused REIT investors.

Where to go deeper

For a detailed walkthrough of each research framework, see the complete guide to all 15 AlphaLens frameworks.

For definitions of investing terms, see the AlphaLens investing glossary.