I’ve spent years watching REITs move from steady dividend machines to distressed assets — and often the warning signs were sitting in the financials long before the market’s price action screamed “sell.” If you want to spot trouble early, you need to look past the headline dividend yield and dig into a handful of ratios and metrics that reveal credit strain, cash-flow weakness, and operational stress. Below I walk through the indicators I watch first, why they matter, practical thresholds, and how to combine them into an early-warning framework you can use on any equity REIT or private real estate vehicle.
Why ratios beat headlines
Market prices are noisy and can be slow to reflect deterioration — or they can overshoot on fear. Ratios distilled from financial statements are objective and comparable across companies and cycles. They tell you whether the business can cover interest and dividends, whether assets are financed sensibly, and whether operations are generating cash to sustain growth and maintenance. In short, ratios show the fundamentals; prices show sentiment.
Key financial ratios I monitor
Below are the ratios I check on every REIT before making a buy, hold, or sell decision. I also include what a deteriorating trend looks like and practical red flags.
FFO / AFFO per share and trend: Funds from Operations (FFO) and Adjusted FFO (AFFO) are REIT-specific cash measures that strip out depreciation and add back certain non-cash items. I watch the trajectory more than the absolute number. A falling AFFO per share for two consecutive quarters while the dividend remains unchanged is an immediate concern. Red flag: AFFO/share declining faster than EPS or dividend growth.Dividend Payout Ratio (Dividend/AFFO): Traditional payout ratios don’t work for REITs unless you use AFFO. A payout ratio consistently above 90–100% is a warning sign unless the REIT has a clear strategy to reduce the payout. Red flag: payout ratio rising above 100% or funded by asset sales.Interest Coverage Ratio (EBITDA / Interest Expense): Measures ability to meet interest payments. For REITs, use EBITDAR or EBITDAx (depending on available disclosures). Healthy REITs typically have coverage > 3x. Red flag: coverage falling below 2x or trending downward quarter-to-quarter.Fixed-Charge Coverage Ratio: Similar to interest coverage but includes lease expenses — important for triple-net or retail-heavy REITs. Low fixed-charge coverage indicates inability to meet contractual obligations without refinancing.Net Debt / EBITDA (or Net Debt / AFFO): Leverage metric adjusted for cash flows. A rising ratio signals increasing leverage or weakening cash generation. Red flag: rapid increase (20–30% YoY) or levels above industry peers; absolute danger levels vary by property type but > 8–10x requires scrutiny.Loan-to-Value (LTV): Debt as a share of property value. LTV > 60–65% starts to be risky for many property types; for development-heavy REITs, acceptable LTV can be higher with strong sponsors. Red flag: LTV tick-up coupled with falling valuations or NAV write-downs.Weighted Average Debt Maturity / Near-Term Maturities: A REIT can look fine until a large chunk of debt comes due. I examine the portion of debt maturing in the next 12–24 months. Red flag: >30% of debt maturing within 18 months without committed financing or a strong liquidity cushion.Liquidity Ratios (Cash + Revolver Availability / Short-Term Debt): Simple but crucial. If a REIT’s available liquidity covers less than 1x of near-term maturities or operating needs, it becomes highly vulnerable to market dislocations.Occupancy / Same-Store NOI Growth: Operational metrics matter. Falling occupancy or negative same-store Net Operating Income (NOI) growth for two quarters indicates demand or leasing problems. Red flag: accelerating negative same-store NOI with rising tenant concessions.Capital Expenditure (Capex) vs. Maintenance Capex: Heavy growth capex funded by debt is a risk if cash flows wane. Watch AFFO minus maintenance capex; a negative number suggests dividends are being sustained by non-recurring sources.Rental/Lease Expiry Concentration: If a few tenants or leases represent a large share of revenue and are up for renewal in the near future, a REIT is exposed to concentrated rollover risk.Valuation Gap (Market Cap vs. NAV): A large and widening discount to NAV can be both a signal and a cause of distress — signaling investor concerns about asset quality or leverage.How I interpret the numbers — practical thresholds and context
Numbers mean nothing without context. Property type, geographic focus, and the REIT’s business model matter. A mortgage REIT naturally has more interest-rate sensitivity than an industrial REIT. Still, there are practical thresholds I use as alarms:
Payout ratio (Dividend/AFFO) > 100%: Immediate red flag unless management has an obvious plan (asset sales, capital raise) and you can verify execution ability.Interest coverage < 2x: Vulnerability to rising rates or small revenue shocks.Net debt / AFFO rising rapidly (20–30% YoY): Borrowing to pay dividends is unsustainable.Liquidity cover < 1x (available cash + revolver < near-term debt + expected cash burn): High refinancing risk.Near-term debt > 30% of total debt without committed refinancing or strong liquidity: Refi risk is elevated.Combining ratios into a simple early-warning score
Rather than reacting to a single ratio, I prefer a composite approach. Below is a lightweight scoring approach I use when screening 10–15 REITs quickly. Assign 1 point for each red flag present:
Payout ratio > 100%Interest coverage < 2xNet debt / AFFO increased > 20% YoYNear-term maturities > 30% without liquidity coverSame-store NOI negative for 2 consecutive quartersScore interpretation:
0–1 point: Continue watching; fundamentals largely intact.2–3 points: Elevated risk — dig deeper, review management commentary and upcoming maturities.4–5 points: High risk — consider trimming positions or hedging exposure.Where to get reliable data and what to watch in earnings calls
For consistent metrics I rely on: Nareit filings, company 10-Q/10-K, Bloomberg/Refinitiv for standardized ratios, and S&P Global Market Intelligence for credit metrics. For smaller or private REITs, Moody’s reports and local regulators can be useful.
In earnings calls, listen for:
Changes to dividend policy or language about “protecting liquidity.”Details on lease rollovers and tenant concessions.Updates on refinancing — committed facilities vs. intent to refinance.Management’s commentary on capex and whether maintenance capex is being deferred.Real-world example of the signals working together
I remember reviewing a mid-cap retail REIT where the stock held up for months on a high yield. On the surface: strong assets, experienced management. But the ratios told a different story — AFFO per share had been declining three quarters in a row, payout ratio was creeping above 95%, interest coverage slipped below 2.5x, and roughly 40% of debt was maturing within 18 months. Management kept the dividend steady and pointed to “asset sales” as a plan, but the market started to discount the NAV sharply when those sales missed guidance and refinancing became more expensive. The composite early-warning score would have flagged this REIT before the price collapse.
Practical next steps for investors
If you own REITs or are evaluating new ones, here’s a quick checklist you can apply each quarter:
Update AFFO/FFO per share and calculate payout ratio.Check interest and fixed-charge coverage.Review debt maturity schedule and available liquidity.Compare net-debt-to-AFFO to last year and peers.Scan same-store NOI and occupancy for trends.Read the MD&A and earnings call transcript for refinancing or covenant risk.For portfolio protection, consider diversifying across property types (industrial, residential, healthcare tend to be less cyclical than retail and lodging), using covered-call strategies on high-yield REITs, or buying credit protection via REIT-focused bond funds or ETFs if you’re concerned about sector-wide credit stress. Tools I use regularly include Bloomberg for quick screens, the company 10-Q/10-K for primary disclosure, and specialized REIT analytics providers like Reorg or Green Street for NAV sensitivity.
Monitoring these ratios does not guarantee you’ll avoid every downturn, but it shifts you from reactive to proactive. When enough of these metrics roll against a REIT, the odds of painful equity dilution, dividend cuts, or distress increase materially — and that’s when informed, timely decisions matter most.
