How to evaluate a REIT ?

How to Evaluate REIT
How to Evaluate REIT

Evaluating REIT ( Real investment trusts ) REITs is similar to evaluating any stock or Index fund. So let’s say you got 20 different REITs to choose from and you want to choose one winner who is worthy for your investment here are few points you can consider .


The simple version is that net income and earnings per share don’t translate well to REITs. You can read a detailed description here. To provide a more accurate picture of how much money a REIT makes, funds from operations (FFO) makes some modifications.

FFO per share is typically reported together with the headline figures by REITs, making it simple to locate. Use the price-to-FFO (P/FFO) ratio rather than the conventional P/E multiple to determine if a REIT is inexpensive or costly in comparison to peers.

Price ($)
Market Cap ($B)EPS Growth (%)Revenue Growth (%)
Crown Castle International Corp. (CCI)187.5381.2646.217.3
Vornado Realty Trust (VNO)35.036.7600.016.4
Realty Income Corp. (O)68.0741.030.882.6
Top Growth REIT ETF

core FFO, adjusted FFO, or normalized FFO

Additionally, a lot of REITs publish company-specific FFO measures. These provide the most accurate view of the REIT’s profitability by adjusting for one-time items and non-standard income. These figures are frequently the ideal ones to use when determining a P/FFO ratio when they are available.


This method of contrasting a REIT’s leverage with others is the most helpful. Although many REITs immediately report it, it can still be calculated. Although there is no particular debt-to-EBITDA ratio to look for, it could be a warning indication if one REIT’s ratio is much higher than those of its competitors.

Credit score

The debt ratings of REITs are a decent indication of how financially stable companies are, albeit this isn’t actually a statistic. Additionally, a higher credit rating makes borrowing money by that REIT more affordable. To find REITs, look for investment-grade credit ratings. A greater valuation may be justified by higher ratings.

Rate of return

This represents the amount of money being distributed as dividends as a percentage of earnings. It aids in determining if a REIT’s dividend is sustainable. A REIT’s net income should not be used when comparing the dividend to FFO. Payout ratios for REITs are frequently higher than usual, averaging between 70 and 80 percent of FFO. However, if this figure comes too near (or exceeds) 100%, a dividend reduction may be forthcoming.

Is it on bargain price/ Cheap REITs ?

Value investors aim to buy a stock for less than the underlying assets of the company. After all, isn’t it in your best interest to purchase assets worth $100 for $90?

Sadly, it’s not always simple to estimate the worth of real estate assets. For instance, it would be surprising if any of the ten persons you questioned could give you an exact estimate of the worth of your home. For commercial properties, this is especially true.

Examining capitalization rates, sometimes known as “cap rates,” is one way for figuring out the worth of assets. The cash-on-cash return on a real estate asset is known as a cap rate. Your cap rate, for instance, would be 6% if you spent $1 million to buy a property that produces $60,000 in net income yearly.

We can determine an accurate estimate of a property’s value by working backward from market average cap rates.

Let’s assume that the typical Class A office building sells for a cap rate of 5%. We may determine the value of a certain property by taking the net income and dividing it by this rate. A Class A office building in this situation would be valued $2 million and produce an annual income of $100,000. So, we may approximate the value of a REIT’s assets by taking into account the overall revenue of the REIT and the typical cap rate for the core property type.

Since this is by no means a perfect method of valuation, I suggest “ballpark estimate.” The average cap rate does not completely apply to all of a REIT’s properties because every REIT’s property portfolio is likely to have a diversity of locations, conditions, and other factors. However, this can be a useful method for determining if a REIT is selling at a premium or a discount.

Her are the best Value ETFs :

Price ($)
Market Cap ($B)12-Month Trailing P/E Ratio
Annaly Capital Management Inc. (NLY)6.509.53.7
New Residential Investment Corp. (NRZ)
Apartment Income REIT Corp. (AIRC)44.547.09.5
Top Value REITs

Conclusion :

The most crucial lesson to learn from this debate is that there are many factors to take into account and that you should take them all into account. Making investing decisions based solely on one indicator is a bad idea.

For instance, a REIT may trade at a considerable discount to the value of its assets while also being excessively indebted and reliant on a healthy economy. The best strategy is to take a broad view and determine whether a REIT is trading at a discount to its risk profile and asset quality.