REIT valuation is different from valuing many ordinary operating companies because real estate accounting includes large noncash depreciation charges, while the market value of the underlying properties can change over time. If you are new to the structure, start with our explanation of what a Real Estate Investment Trust is. For most equity REITs, investors typically combine an asset-value method with operating-performance measures rather than relying on a single ratio.
Which Valuation Methods Are Most Common for REITs?
| Method | What It Measures | How It Is Used |
|---|---|---|
| Net Asset Value (NAV) | Estimated market value of the REIT’s assets minus debt and other liabilities | Compare NAV per share with the REIT’s share price or stated value |
| Price-to-FFO or Price-to-AFFO | Market price relative to recurring operating measures | Compare the REIT with similar REITs and its own historical valuation |
| Discounted Cash Flow (DCF) | Present value of projected future cash flows | Test assumptions about future income, growth, and required returns |
| Peer Comparisons | Valuation multiples of similar REITs | Determine whether a REIT appears expensive or inexpensive relative to comparable companies |
These methods answer different questions. NAV asks what the underlying real estate and other assets may be worth today. FFO and AFFO based multiples show what investors are paying relative to recurring operating results. DCF and peer comparisons provide additional ways to test those conclusions.
How Do NAV and Cap Rates Affect a REIT’s Value?
NAV generally begins with the estimated current market value of the REIT’s properties. Analysts may estimate property values by applying market capitalization rates to expected net operating income (NOI), then add other assets and subtract debt and other liabilities. The resulting net asset value can be divided by diluted shares outstanding to estimate NAV per share.
Hypothetical example: Assume a REIT’s property portfolio is expected to generate $20 million of annual NOI. At a 5% cap rate, that NOI implies a property value of approximately $400 million before accounting for other assets and liabilities. At a 6% cap rate, the same $20 million of NOI implies a value of approximately $333 million. This illustrates why changes in cap rate assumptions can materially affect estimated NAV.
Why Do Investors Use FFO and AFFO Instead of Relying on P/E?
GAAP net income includes depreciation and amortization of real estate, which can reduce reported earnings even though those accounting charges do not necessarily reflect changes in current property values. Funds from Operations, or FFO, starts with GAAP net income and makes adjustments for specified real estate depreciation, amortization, property-sale gains or losses, and other items included in Nareit’s definition.
Adjusted Funds from Operations, or AFFO, makes additional adjustments intended to better reflect recurring economics, such as normalized recurring capital expenditures and certain rent adjustments. AFFO does not have one standardized industry definition, so investors should review how each REIT calculates it.
For these reasons, price-to-FFO and price-to-AFFO can provide more useful comparisons for equity REITs than P/E alone. Investors should still evaluate the calculations together with GAAP financial statements. For a broader look at operating results, see our FAQ on evaluating REIT performance. Investors focused on dividend sustainability can also review how the REIT payout ratio is evaluated.
Does the Type of REIT Change the Valuation Approach?
Yes. Publicly traded equity REITs have observable market prices that can be compared with NAV, FFO, AFFO, and peer valuation multiples. Non-traded REITs do not have continuously quoted exchange prices, so determining current share value may depend more heavily on periodic valuation estimates and the REIT’s disclosed methodology. Mortgage REITs also require a different analytical approach because their primary assets are mortgages and mortgage-backed securities rather than operating real estate.
If you are comparing structures, our guide to publicly traded and non-traded REITs explains additional differences. No single calculation proves that a REIT is fairly valued. A complete analysis should also consider property type and quality, occupancy, lease terms, leverage, refinancing risk, expected growth, management, and comparisons with similar REITs.