Debt is the business model — so "less" isn't the test
Start with the part that makes REIT leverage different from everyone else's: a REIT is structurally required to run on borrowed money.
The bargain at the centre of the structure — distribute essentially all taxable income, escape corporate tax — means a REIT retains almost nothing. Every dollar sent to unitholders is a dollar that can't buy the next building or replace the next roof, so growth and much of the capital program run on external financing forever. That's not recklessness; it's the design. A REIT with no debt is leaving cheap, tax-efficient capital unused against assets that were practically invented to be borrowed against.
So the useful question was never "does it have debt" — they all do, typically around 40 to 50 percent of asset value in Canada, often with a hard ceiling written into the REIT's own declaration of trust. The useful questions are how much, at what cost, due when — because when a distribution dies, the coverage math usually pulls the trigger, but the debt loaded the gun.
The three numbers, in the order they warn you
Every Canadian REIT publishes its leverage picture quarterly. Three measures do nearly all the work, and they escalate.
Debt to assets (often stated as debt to gross book value) is the headline: what fraction of the portfolio is financed with borrowing. The Canadian comfort zone historically runs 40-something percent; pushing toward 55–60 means the cushion between asset values and obligations is thinning. It's the right first look and the weakest predictor on its own, for a reason we'll get to below — its denominator moves.
Net debt to EBITDA asks a sharper question: how many years of the REIT's actual earnings power would it take to retire the debt? Somewhere in the 6–8x range is normal territory for Canadian REITs; double digits is heavy, full stop. This ratio is harder to flatter than debt-to-assets because the denominator is cash generation rather than appraisals — and a REIT sitting near 10x has quietly promised its next several years of earnings to lenders before unitholders see growth from them.
Interest coverage — operating earnings against interest expense — is the one almost nobody checks, and it's the metric closest to your distribution. Interest is paid before anything reaches unitholders; the distribution lives on what's left. Coverage around 3x or better means the payout has room even if rates drift. Coverage sliding toward 2x means interest and distributions are fighting over the same shrinking remainder — and interest always wins, because interest is a contract and your distribution is a policy.
The escalation matters: debt-to-assets tells you the posture, net-debt-to-EBITDA tells you the burden, and interest coverage tells you how close the fire is to the payout. Read all three; weight them in reverse order of how often they're quoted.
The maturity wall: when the problem has a date on it
A REIT's debt load is not one number — it's a schedule, and the schedule is where solvent-looking REITs get hurt.
Real estate debt mostly doesn't amortize away; it matures and gets refinanced. Well-run REITs ladder those maturities — a manageable slice due each year — so no single refinancing happens at a bad moment's rates. The dangerous shape is the wall: a fat cluster of debt maturing inside a year or two. When a wall meets a high-rate environment, the arithmetic is mechanical and public years in advance: debt carrying yesterday's coupon rolls into today's, interest expense steps up, and every basis point comes straight out of the cash pool that FFO measures and distributions draw from. Nothing operational has to go wrong. The buildings can be full. The payout still shrinks from the expense side — the same refinancing squeeze that shapes even a giant like Enbridge's dividend math, minus the giant's balance sheet.
The schedule is disclosed every quarter: weighted average term to maturity, average interest rate, and the year-by-year maturity table. Two REITs with identical debt-to-assets can carry completely different risk purely on that table's shape — which is why the ratio alone never settled anything.
The trap in the denominator
One more wrinkle, specific to how Canadian REITs report, and it explains how leverage "gets worse" without a dollar being borrowed.
Debt-to-assets divides by appraised portfolio value — and under fair-value accounting, that denominator breathes. When interest rates rise or a property sector falls from favour, appraisal values mark down, and the ratio deteriorates while the mortgage balance sits perfectly still. The office correction ran this exact play: same debt, shrinking denominator, leverage ratios climbing quarter after quarter with no new borrowing anywhere. It works in reverse too, which is the subtler danger — in boom years, rising appraisals flatter the ratio and make an aggressive borrower look conservative right at the top.
The defence is the same as the last section's: prefer the measures anchored to cash (net debt to EBITDA, interest coverage) over the one anchored to appraisals, and treat a leverage ratio that improved purely through valuation gains as weather, not seamanship.
Allied, one more time — the debt half of the story
Our post-cut analysis of Allied Properties focused on the coverage failure: a payout consuming roughly all available cash while occupancy slid. Here's the same collapse read through the leverage lens, because Allied fails every test in this post, in order.
Debt stood near $4.7 billion at the end of 2025 — roughly two and a half times what the entire REIT was worth in the market. Net debt to EBITDA ran into double digits against a sector norm several turns lower, and management's own deleveraging targets kept receding. And with the payout consuming everything the buildings generated, there was no internal cash to work the debt down — leaving asset sales into a soft office market as the main lever, which is precisely the disposition program the eventual cut was announced alongside. The distribution didn't die of one wound. Coverage at 100% meant no cushion; leverage at those levels meant the cushion was needed; and the maturity schedule meant the need had dates on it. When a payout is uncovered and the balance sheet is heavy, the cut isn't a risk. It's scheduling.
That's the general lesson for reading any REIT: coverage and leverage multiply each other. A 95% payout ratio at 6x leverage is tight but survivable; the same payout at 10x is a yield trap with a countdown.
The five-minute leverage check
All of it, as a repeatable routine on any Canadian REIT's quarterly package: find debt-to-assets and note the posture; find net debt-to-EBITDA and flag anything approaching double digits; find interest coverage and want daylight above 2x; scan the maturity table for walls inside two years, priced below today's rates; and read the leverage trend against what appraisals did, so you know whether the ratio moved or just its denominator.
Then read it all next to the payout ratio, because that multiplication is the whole game. It's how our scoring treats the sector — REIT-aware coverage and balance-sheet factors graded together, across every REIT we cover — and it's why two REITs with the same yield can deserve opposite verdicts. Debt never cut a distribution by itself. It just decides how little else has to go wrong.