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Comparing Non-Traded REITs Through MFFO Payout Ratios

by Kemp H. Hanley

Dividends matter in the REIT world. Fortunately for REIT investors, we do not have to get caught up in the dividend policy debate as to whether or not residual earnings are best reinvested or paid out to shareholders. REITs are different than traditional stocks because REITs must pay out at least 90% of taxable income.

In the traded REIT world, dividend growth is critical to achieving total returns and a useful metric to look at when analyzing REIT performance. Dividend trends may be a predictive indicator for stock price appreciation; when a dividend is increased, the price of a stock typically rises to reflect the increased value of the investment. Conversely, the market takes a negative view of a dividend cut.

In the non-traded REIT world distributions are just as important, however because Mr. Market is not at play, distribution trends are not a predictive indicator of share price. Nonetheless, the safety, or sustainability, of the distribution is important whether the REIT is traded or non-traded. One of the best ways to examine whether a distribution is safe is to determine whether the company is paying a distribution beyond its operational earnings power and therefore having to look outside of its core earnings to cover the distribution. For non-traded REITs, it is typical for a company to pay distributions from offering proceeds or other sources the early stages as it builds its portfolio. However, as the company matures, we like to see the company trend toward a distribution that is organically covered.

A common metric used for non-traded REITs is the modified funds from operations (MFFO) payout ratio, articulated by the Investment Program Association’s Practice Guideline 2010-10. For our purposes here, I am not going to get into the nuances and limitations of MFFO, other than to note that it is a non-GAAP measure and calculation of it is not completely standardized. However, it still has value on a comparative basis, as a healthy MFFO payout ratio can be useful in determining distribution sustainability.

With the help of S&P Global’s non-traded REIT Database, I ran a MFFO payout ratio analysis using all non-traded REITs that report MFFO. I further refined my universe to only include those non-traded REITs that have at least two full years of operations as of the end of the 2nd quarter 2017. This resulted in a population of 39 non-traded REITs. In looking at the trailing four quarter average, the results of this analysis are as follows:


MFFO Payout

Average MFFO Payout Ratio:


Median MFFO Payout Ratio:



63.3% - 881.7%

Top 5


Sterling Real Estate Trust


KBS Strategic Opportunity REIT, Inc.


KBS Real Estate Investment Trust III, Inc.


Griffin Capital Essential Asset REIT, Inc.


KBS Real Estate Investment Trust II, Inc.


Bottom 5


American Realty Capital New York City REIT, Inc.


Resource Real Estate Opportunity REIT II, Inc.




KBS Strategic Opportunity REIT II, Inc


Resource Real Estate Opportunity REIT, Inc.



As evidenced by the median MFFO payout ratio, getting comfortable with the sustainability of the dividend is not always easily achieved with non-traded REITs. At FactRight, we also take note of trends where possible. Using the average of the MFFO payout ratio for the previous four quarter period against the average of the most recent four quarter period, the following five non-traded REITs get an honorable mention for most improved identifiable trend:    


Year 1 Avg.

Year 2 Avg.

% Change

American Realty Capital Healthcare Trust III, Inc.




Griffin-American Healthcare REIT III, Inc.




Lightstone Value Plus Real Estate Investment Trust, Inc.




Phillips Edison Grocery Center REIT II, Inc.




NorthStar Healthcare Income, Inc.





MFFO payout is just one of a number of metrics to look at when determining the performance of a non-traded REIT and conclusions as to sustainability and long-term performance cannot be made by it alone. However, it can be useful, particularly when compared to its peers.

For more peer comparisons regarding multifamily, healthcare, and hospitality REITs (covering key metrics, financial ratios, and debt maturity schedules), see the FactRight Report Center.

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