How it is worked out
Net income plus the depreciation of real estate, less gains (or plus losses) on property sales, as Nareit defines it. P/FFO is the price divided by FFO per share.
How to read it
- On the books a building loses value every year, while in practice it often keeps it. So a REIT's net income looks smaller than it is, and FFO adds the depreciation back.
- It does not take off the money needed to keep the properties up. Many REITs also report AFFO, which does.
- In our analyses a REIT is valued on P/FFO, beside a DCF and multiples. Mortgage REITs, which hold loans, are valued on a book-value method, or not at all when their record of returns is missing.
Example
Net income of $200m, $300m of property depreciation and a $50m gain on selling a building: FFO of $450m.