Securities Litigation Risks in REITs: Investor Due Diligence and Governance in a High-Stakes Era

The real estate investment trust (REIT) sector, long celebrated for its steady income streams and diversification benefits, has become a focal point for securities litigation in 2025. Recent high-profile cases, including the $362.5 million settlement involving General Electric Co. and the CTO Realty Growth scandal, underscore a troubling trend, according to an Expert Institute analysis. For investors, these developments demand a reevaluation of due diligence practices and a sharper focus on corporate governance frameworks.

A Surge in Litigation and Its Drivers

According to an EdgarIndex report, securities class actions (SCAs) against REITs rose by 14% in 2024 compared to historical averages. This surge is fueled by two key factors: the Cyan Inc. v. Beaver County Employees Retirement Fund ruling, which permits state court filings for federal securities claims, and the growing complexity of REIT financial metrics like Adjusted Funds from Operations (AFFO). The latter, a critical benchmark for REIT performance, has become a litigation hotspot. For instance, CTO Realty Growth faces allegations of manipulating AFFO to mask a dividend shortfall and tenant collapse. Such cases highlight how REITs' reliance on non-GAAP metrics can create opportunities for misrepresentation.

The financial toll of these lawsuits extends beyond settlements. That report notes directors' and officers' (D&O) insurance premiums have spiked, adding operational strain. Meanwhile, the GE securities fraud case-where opaque accounting inflated cash flows-reveals how cross-sector governance lapses can erode trust.

Governance Reforms and Investor Due Diligence

The 2025 litigation wave has forced REITs to confront governance weaknesses. The Wells Fargo $100 million derivative settlement, for example, emphasized the need for board-level accountability in risk management. Similarly, the Vanguard case, which involved undisclosed tax risks to retail investors, underscores the importance of transparency in retail-focused REITs.

For investors, due diligence must now include granular scrutiny of:
1. Dividend Sustainability: Assessing alignment between AFFO and actual cash flows.
2. Tenant Concentration: Identifying risks from overreliance on volatile industries.
3. Board Composition: Evaluating independence and expertise in financial oversight.

A Woodruff Sawyer analysis of the 2025 PLUS D&O Symposium notes the record $4.1 billion in securities class action settlements reflects investor demands for accountability. REITs with weak governance structures are particularly vulnerable.

The Path Forward

While litigation risks are rising, they also present opportunities for well-informed investors. REITs that proactively adopt transparent reporting standards-such as disclosing both GAAP and non-GAAP metrics-and invest in robust governance frameworks are likely to outperform. Conversely, those clinging to aggressive dividend strategies without commensurate financial discipline may face shareholder exits and liquidity crises, a risk highlighted in the EdgarIndex analysis.

The CTO Realty Growth case serves as a cautionary tale. By allegedly prioritizing short-term dividend yields over long-term tenant stability, the firm triggered a cascade of legal and financial repercussions. Investors must now ask: Are REITs' governance practices aligned with their stated financial goals?

Conclusion

The 2025 litigation landscape signals a paradigm shift in how REITs are evaluated. As courts increasingly scrutinize sector-specific metrics and governance practices, due diligence must evolve to match. Investors who integrate legal risk assessments into their analysis-leveraging tools like D&O insurance trends and litigation history databases-will be better positioned to navigate this high-stakes environment. In an era where transparency is non-negotiable, the REITs that thrive will be those that embrace accountability as a competitive advantage.