Here are five key ways to value REITs

Article Excerpt

Real estate investment trusts (“REITs”) have different valuation measures than, say, industrial companies or banks. Here we look at five popular methods to compare the valuations of REITs. The net asset value (NAV) approach Most REITs regularly value their real estate portfolios, either internally or by appointing an external valuer. Investors can use the market value of the property portfolio and deduct all debt to arrive at the net asset value of the REIT. Dividing the net asset value by the number of units in issue provides the net asset value per unit. Most Canadian REITs trade at between 80% and 110% of their net asset values. Funds from operations Funds from operations (“FFO”) is the most common method of valuing REITs. FFO can also be described as the cash flow generated by the REIT’s property portfolio. This simply means that non-cash items such as depreciation and deferred taxes are added back to net profit. Any one-off gains or losses from the sale of properties are…

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