Is the distribution actually income or are they handing me back my own money

You're reading the sentence correctly, and it is legal and disclosed for exactly that reason. A REIT that has raised money but hasn't yet deployed it all, or that owns properties in a lease-up phase, may not generate enough operating cash to cover the distribution it has announced. Sponsors sometimes cover the gap from offering proceeds or a credit line rather than cut the distribution. The disclosure exists so you can check whether it's happening.

How to check: find the statement of cash flows and compare cash from operations to total distributions paid. Many sponsors also report a figure like funds from operations or adjusted FFO and show distribution coverage as a percentage. Below 100% coverage over several periods means something other than operations is paying you.

"Return of capital" is a separate idea, and it's a tax characterization. When a distribution exceeds the REIT's taxable earnings, part of it gets classified as a return of your own invested capital. That portion generally isn't taxed as ordinary income in the year received, and it reduces your cost basis, so more gain shows up when you eventually sell. That's a genuine deferral, not a trick, and it's a normal feature of real estate vehicles because depreciation lowers taxable income. How it lands on your return depends on your situation and a CPA should look at it.

The two things overlap in a way that confuses people. A distribution can be tax-classified as return of capital while still being fully funded by operations, and a distribution can be economically funded by new money while being taxed as ordinary income. Look at the cash flow statement for the first question and your 1099-DIV for the second.

I went and found the coverage line in one of these after reading a similar thread and it was around 70% for a couple of quarters during a ramp-up period. Not sure whether that's normal for a fund still deploying or a warning sign. Genuinely unclear to me.

@juniper during initial deployment it's common. What I'd want to know is how long. If coverage is still under 100% three or four years in, when the portfolio should be stabilized, the distribution rate was set for marketing rather than for what the assets produce. @thicket the other place to look is whether the stated rate has ever been cut. A sponsor that trimmed a distribution once, on the record, tells you more about how they'll behave than a sponsor with an unbroken streak funded by a credit facility.