Which industry-specific multiple is commonly used for Real Estate Investment Trusts (REITs)?

Which industry-specific multiple is commonly used for Real Estate Investment Trusts (REITs)?

• A. Price / AFFO
• B. EV / EBITDAR
• C. Price / FFO
• D. P / MCFE

Answer: (C)

When valuing REITs, cash-flow-based measures trump net income because real estate depreciation is a non-cash expense that can distort earnings. Funds From Operations (FFO) fixes this by adding back real estate depreciation and excluding gains or losses on property sales, giving a clearer view of ongoing cash flow from operations. Analysts typically use Price to FFO, i.e., price per share divided by FFO per share, as the standard industry multiple for REITs to compare valuations across companies. AFFO refines FFO further by adjusting for normalized recurring capex and other items, but the broad, widely used benchmark remains Price to FFO. Other multiples like EV/EBITDAR or Price to AFFO exist, but they’re not as universally applied for REIT valuation, and Price to MCFE isn’t a standard measure in this context.

When valuing REITs, cash-flow-based measures trump net income because real estate depreciation is a non-cash expense that can distort earnings. Funds From Operations (FFO) fixes this by adding back real estate depreciation and excluding gains or losses on property sales, giving a clearer view of ongoing cash flow from operations. Analysts typically use Price to FFO, i.e., price per share divided by FFO per share, as the standard industry multiple for REITs to compare valuations across companies. AFFO refines FFO further by adjusting for normalized recurring capex and other items, but the broad, widely used benchmark remains Price to FFO. Other multiples like EV/EBITDAR or Price to AFFO exist, but they’re not as universally applied for REIT valuation, and Price to MCFE isn’t a standard measure in this context.