Equity REITs are primarily valued through three metrics. The most simplistic metric is the dividend yield. Some investors will be content to look at the dividend yield and stop doing research. I don’t like that strategy. Dividend growth is very important and the current yield is also important. However, we need to focus on a more complete valuation.
The second technique is to focus on AFFO (adjusted funds from operations) yields or FFO (fund from operations) yields. That is a very reasonable strategy. The thing investors must remember is to normalize the data. Frequently, AFFO is a very viable metric for normalizing the data. Normalizing the values is important. The definition for FFO comes from NAREIT (National Association of Real Estate Investment Trust). Their definition is very reasonable. Their method is basically adding back depreciation and the gain or loss on property sales.
However, that definition doesn’t adjust for several non-recurring factors. For instance, the charge on extinguishment of debt can distort the FFO value for the year in which the debt is extinguished. We want to normalize for that value.
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