The 300% payout ratio that isn't
Run almost any REIT through a stock screener and look at the payout ratio column. You'll see numbers like 220%, 340%, sometimes a negative figure on a REIT that's been paying reliably for twenty years. By every rule you've learned about dividend stocks — including the coverage rules we've written about ourselves — these numbers scream unsustainable. Payout over 100% means the company pays out more than it earns; the arithmetic has a deadline; run.
Except REITs with "300%" payout ratios routinely sustain their distributions for decades, while the occasional REIT showing a tidy 85% turns around and cuts. The screener isn't lying about the division — dividends divided by earnings really does produce that number. The problem is that for a REIT, earnings is close to a meaningless input. Same formula, wrong ingredient.
This is worth understanding properly, because REITs are one of the biggest sources of honest high yield available to Canadian income investors, and the standard toolkit systematically misreads all of them — in both directions.
Why REIT earnings are noise
A REIT's income statement runs the buildings through accounting machinery that was never designed to answer "how much cash can this landlord distribute?" The distortion comes in two flavours, depending on the accounting regime.
The classic flavour is depreciation. Under cost-based accounting, a building gets written down on a schedule — a fixed charge against earnings every single year, as if the tower were a delivery van wearing out. Real buildings, maintained properly in real cities, don't lose value on a straight line; many appreciate for decades. But the accounting charge is enormous relative to a REIT's profits, so reported earnings come out artificially tiny — and dividing a normal distribution by artificially tiny earnings produces those 300% ratios. Nothing about the cash changed. Only the denominator got crushed.
Canadian REITs mostly report under IFRS with the opposite arrangement: investment properties carried at fair value, with the changes in appraised value flowing through net income. No steady depreciation drag — instead, earnings that swing wildly with property revaluations. A year of rising appraisals produces huge "earnings" the landlord never received as cash; a year of markdowns produces losses, or negative earnings, at a REIT whose rent collection didn't budge. That's where the negative payout ratios come from: real distributions divided by paper losses.
Either way, the earnings line is dominated by non-cash noise. Which means every metric built on it — EPS, P/E, and above all the payout ratio — inherits the noise. The screener column isn't conservative or aggressive. It's unrelated to the question you're asking.
FFO and AFFO, in plain English
The real estate industry solved this decades ago with its own earnings measure, and Canadian REITs publish it every quarter.
FFO — funds from operations — starts with net income and strips out the property noise: add back depreciation on real estate, remove fair-value gains and losses, remove gains or losses from selling buildings. What's left approximates the cash the operations generated — rent in, expenses out — which is the thing distributions are actually paid from.
AFFO — adjusted funds from operations — tightens it one turn further, deducting the recurring costs of staying in business that FFO ignores: maintenance capital, leasing commissions, tenant improvements. A landlord can't skip replacing roofs or re-leasing floors, so AFFO is the closest published number to truly distributable cash. It's also less standardized than FFO — REITs have some discretion in what they deduct — so treat it as the better number from a slightly less comparable ruler.
The payout ratio that actually means something is distributions ÷ FFO (or AFFO) per unit. On that basis, healthy Canadian REITs typically land somewhere in the 60–90% range. Under 80% of AFFO, there's genuine cushion. Pushing past 90%, the margin for error is thin. At or over 100% — every dollar of distributable cash going out the door — the distribution is running uncovered, and something eventually gives: occupancy recovers, or the payout does.
If that last scenario sounds specific, it should. Allied Properties spent years distributing roughly 100% of its available cash while calling the payout sustainable, and we walked through how that ended — a 60% cut, telegraphed for anyone reading the coverage instead of the reassurances. The FFO payout ratio was the tell, sitting in the MD&A the entire time. The GAAP ratio, meanwhile, had been meaningless for years — crying wolf at healthy REITs and somehow still understating the trouble at a stressed one.
Running the check yourself
The good news: this takes five minutes and the numbers are free.
Every Canadian REIT reports FFO and AFFO per unit in its quarterly MD&A and earnings release, usually in a highlights table on the first pages — REALPAC's standard definitions mean the figures are broadly comparable across the sector. Take the annualized distribution per unit (on the fund's distributions page), divide by annual FFO per unit, and you have the honest ratio. Do it again with AFFO if it's published; expect that one to run higher, since the denominator is smaller.
Three refinements that separate a real check from a ritual. Use a full year, not one quarter — leasing is lumpy. Check the direction across two or three years, because a ratio walking from 75% toward 95% is a trend with a destination, exactly the pattern the yield-trap checklist flags on any income investment. And read the ratio alongside occupancy and debt, because coverage at 85% with falling occupancy and heavy refinancing ahead is a very different holding than 85% with full buildings and a quiet maturity schedule. Allied's cut wasn't caused by the payout ratio alone — it was the ratio at 100% plus an occupancy miss plus debt at two and a half times market cap, three pressures with one release valve.
Where the tools get it wrong — including ours, briefly
Most screeners and data feeds compute payout ratio one way for every company on earth: dividends over EPS. It's cheap, it's automatable, and for REITs it's wrong in the ways described above — which means the tools most investors rely on are structurally blind on one of the highest-yielding sectors in the country. Some sites patch it with a REIT flag; plenty don't bother.
We'll be honest about our own history here, since transparency is the house style: when we first seeded Canadian REITs into DivSight's coverage, our payout scoring initially graded some of them against thresholds calibrated for ordinary corporate earnings — the machine version of the exact mistake this post is about. We caught it in our audit pass, rekeyed the scoring so the thresholds always match the denominator actually in use, and versioned the change like every methodology revision we make. The episode reinforced a principle we keep relearning: a number computed with the wrong lens isn't a rough approximation of the truth. It's noise wearing the truth's units.
So: when a REIT's payout ratio looks insane, the ratio is broken, not necessarily the REIT. Find the FFO number, run the honest division, read it next to occupancy and debt — or check how we've scored it, where the REIT-aware math is already done. Either way, never let a screener's 300% scare you out of a covered distribution, and never let a tidy-looking GAAP ratio talk you into an uncovered one. The units are identical. The meanings aren't even related.