You can't grow that much if you invest only 10% of what's left after dividends
REITs are designed to be pass-through entities to allow smaller investors to indirectly invest in real estate. They are not designed to be a growth fund, but to provide periodic dividends to unitholders.
Also, they are required to distribute 90% of taxable income. They are allowed to count depreciation as a deductible expense since they hold long-term assets, even if the market value of those assets appreciates over time. Therefore, they can grow by using internal cash flow after dividends (since much of it is essentially untaxed due to depreciation and other non-cash expenses) and by using new investments, either through unitholders reinvesting their dividends or by new unit holders.
- Assets held by the REIT can appreciate.
- Taxable income is income after expenses, so 10% of taxable income can be reinvested, this can provide growth as well.
- Pre-tax income can be used to cover losses. The losses offset income when calculating 'taxable income'. Income used to shore up those losses maintains the value. Growth of other assets within the trust then shows as growth overall.
REIT often rely on borrowing money in the capital market in order to invest in new real estate and grow further. This is also the reason REIT stocks are sensitive to the interest rate. When the interest rate goes up, REIT stock price goes down because it becomes more expensive (high interest rate) for a REIT to borrow money and invest further.