{"id":23734,"date":"2021-11-23T14:32:58","date_gmt":"2021-11-23T14:32:58","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=23734"},"modified":"2026-03-25T08:02:57","modified_gmt":"2026-03-25T08:02:57","slug":"reit-share-value-calculation-using-net-asset-value-p-ffo-p-affo-and-discounted-cash-flow-approaches","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/reit-share-value-calculation-using-net-asset-value-p-ffo-p-affo-and-discounted-cash-flow-approaches\/","title":{"rendered":"Calculating the Value of a REIT Share"},"content":{"rendered":"<p><script type=\"application\/ld+json\"><span data-mce-type=\"bookmark\" style=\"display: inline-block; width: 0px; overflow: hidden; line-height: 0;\" class=\"mce_SELRES_start\">\ufeff<\/span>\r\n{\r\n  \"@context\": \"https:\/\/schema.org\",\r\n  \"@type\": \"QAPage\",\r\n  \"mainEntity\": {\r\n    \"@type\": \"Question\",\r\n    \"name\": \"Using a price-to-FFO approach, what is the value of the investor\u2019s potential REIT investment per share?\",\r\n    \"text\": \"Consider the following selected REIT financial data concerning an investment in an industrial building at the end of 2013: Estimated 12-month cash NOI = $35,000,000; FFO = $30,000,000; Cash and equivalents = $20,000,000; Accounts receivable = $20,000,000; Non-cash rents = $4,000,000; Recurring maintenance-type capital expenditures = $8,000,000; Shares outstanding = 10,000,000; Expected annual dividend in 2014 = $6.00; Dividend growth rate in 2015 and 2016 = 7%; Dividend growth rate from 2017 to perpetuity = 5%; Assumed cap rate = 8%; Office subsector average price-to-FFO multiple = 12x; Office subsector average price-to-AFFO multiple = 20x; Cost of equity capital = 11%; Risk-free rate = 2%. The value of the investor\u2019s potential investment using a price-to-FFO approach is closest to:\\n\\nA. $25.75\\nB. $36.00\\nC. $30.00\",\r\n    \"answerCount\": 1,\r\n    \"acceptedAnswer\": {\r\n      \"@type\": \"Answer\",\r\n      \"text\": \"The correct answer is B. First, calculate FFO per share: FFO per share = $30,000,000 \/ 10,000,000 = $3.00. Then apply the office subsector average price-to-FFO multiple of 12x: Value per share = $3.00 \u00d7 12 = $36.00.\"\r\n    }\r\n  }\r\n}\r\n<\/script><\/p>\r\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/TiS1BrzLU4k\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><span data-mce-type=\"bookmark\" style=\"display: inline-block; width: 0px; overflow: hidden; line-height: 0;\" class=\"mce_SELRES_start\">\ufeff<\/span><span data-mce-type=\"bookmark\" style=\"display: inline-block; width: 0px; overflow: hidden; line-height: 0;\" class=\"mce_SELRES_start\">\ufeff<\/span><\/iframe><\/p>\r\n<p>An example is better suited here to help candidates understand the concept.<\/p>\r\n<h4>Example: Value of a REIT Share<\/h4>\r\n<p>Tysons Limited, a real estate asset management company, is keen on diversifying its portfolio through an office lease REIT investment.<\/p>\r\n<p>The company needs to value the potential investment as of the end of 2015 based on the data below:<\/p>\r\n<p>$$ {\\begin{array}{l|c} \\text{Estimated 12 months cash NOI} &amp; $70,000,000 \\\\ \\hline\\text{FFO}&amp;$60,000,000\\\\\\hline\\text{Cash and equivalents} &amp; $55,000,000 \\\\ \\hline \\text{Accounts receivable}&amp; $25,000,000 \\\\ \\hline\\text{Debt and other liabilities}&amp; $300,000,000 \\\\ \\hline\\text{Non-cash rents}&amp; $2,500,000 \\\\ \\hline\\text{Recurring maintenance-type capital expenditures}&amp; $10,000,000 \\\\ \\hline\\text{Shares outstanding}&amp; 10,000,000 \\text{ shares} \\\\ \\hline\\text{Expected annual dividend 2016}&amp;$5.00 \\\\\\hline\\text{Dividend growth rate in 2017 and 2018}&amp; 2\\text{%} \\\\ \\hline\\text{Dividend growth rate from 2019 to perpetuity}&amp;1 \\text{%} \\\\ \\hline\\text{Assumed cap rate }&amp; 7\\text{%} \\\\ \\hline\\text{Office subsector average price-to-FFO multiple}&amp; 10\\text{x} \\\\ \\hline\\text{Office subsector average price-to-AFFO multiple}&amp;14\\text{x} \\\\ \\hline\\text{Tysons Limited cost of equity capital}&amp; 9\\text{%} \\\\ \\hline\\text{Risk-free rate }&amp; 2\\text{%} \\end{array}}$$<\/p>\r\n<p>While using each of the approaches below, the amount of a REIT is <em>closest to:<\/em><\/p>\r\n<ol type=\"1\">\r\n\t<li>Approach 1: Net asset value.<\/li>\r\n\t<li>Approach 2: Price-to-FFO.<\/li>\r\n\t<li>Approach 3: Price-to-AFFO.<\/li>\r\n\t<li>Approach 4: Discounted cash flow.<\/li>\r\n<\/ol>\r\n<div style=\"text-align:center; margin: 25px 0;\">\r\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" style=\"display:inline-flex; align-items:center; justify-content:center; padding:10px 18px; border:2px solid #1a73e8; border-radius:999px; color:#1a73e8; text-decoration:none; font-weight:500; background-color:#f5f9ff; white-space:nowrap;\">\r\n    Value REITs using key valuation methods\r\n  <\/a>\r\n<\/div>\r\n<h4>Solution<\/h4>\r\n<h4>Approach 1: Net Asset Value<\/h4>\r\n<p><strong>Step 1: Calculate the Estimated Value of Operating the Real Estate as Follows:<\/strong><\/p>\r\n<p>$$ \\begin{align*} \\text{Estimated Operating Value} &amp; = \\frac{\\text{Estimated Cash NOI}}{\\text{Assumed Cap Rate}} \\\\ \\text{Estimated Operating Value} &amp;= \\frac{$70,000,000}{7\\%}= $1,000,000,000 \\end{align*} $$<\/p>\r\n<p><strong>Step 2: Calculate the Net Asset Value as Follows:<\/strong><\/p>\r\n<p>$$ {\\begin{array}{l|r} \\text{Estimated operating value} &amp; $1,000,000,000 \\\\ \\hline\\text{Add: Cash and equivalents} &amp; $55,000,000 \\\\ \\hline \\text{Add: Accounts receivable}&amp; $25,000,000 \\\\ \\hline\\text{Less: Debt and other liabilities}&amp;($300,000,000)\\\\ \\hline\\text{}&amp; \\bf $780,000,000\u00a0 \\end{array}}$$<\/p>\r\n<p><strong>Step 3: Calculate the NAV\/Share as Follows:<\/strong><\/p>\r\n<p>$$ \\begin{align*} \\frac {\\text{NAV}}{\\text{share}} &amp;= \\frac{\\text{NAV}}{\\text{Shares outstanding}} \\\\ \\frac {\\text{NAV}}{\\text{share}} &amp; = \\frac{$780,000,00}{10,000,000 \\text{ shares}}= $78.00 \\end{align*} $$<\/p>\r\n<h4>Approach 2: Price-to-FFO<\/h4>\r\n<p><strong>Step 1: Calculate the FFO per share:<\/strong><\/p>\r\n<p>$$ \\begin{align*} \\frac {\\text{FFO}}{\\text{share}}&amp;= \\frac{\\text{FFO}}{\\text{Shares outstanding}} \\\\ \\frac {\\text{FFO}}{\\text{share}} &amp; = \\frac{$60,000,000}{10,000,000}= $6.00 \\end{align*} $$<\/p>\r\n<p><strong>Step 2: Apply the office subsector average P\/FFO multiple of 10x yields:<\/strong><\/p>\r\n<p>$$ \\text{REIT share value}= ($6 \\times 10)= $60\\text{REIT share value}=($6 \\times 10)=$60 $$<\/p>\r\n<h4>Approach 3: Price-to-AFFO<\/h4>\r\n<p><strong>Step 1: Calculate the AFFO value:<\/strong><\/p>\r\n<p>$$ {\\begin{array}{l|r} \\text{FFO} &amp; $60,000,000 \\\\ \\hline\\text{Less: Non-cash rents) rent} &amp; ($2,500,000) \\\\ \\hline \\text{Less: Recurring maintenance-type capital expenditures }&amp; ($10,000,000) \\\\ \\hline\\text{}&amp; \\bf $47,500,000\u00a0 \\end{array}}$$<\/p>\r\n<p><strong>Step 2: Calculate AFFO per share:<\/strong><\/p>\r\n<p>$$ \\begin{align*} \\frac {\\text{AFO}}{\\text{share}} &amp;= \\frac{\\text{AFO}}{\\text{Shares Outstanding}} \\\\ \\frac {\\text{AFO}}{\\text{share}} &amp;= \\frac{$47,500,000}{10,000,000 \\text{ Shares}}= $4.75 \\end{align*} $$<\/p>\r\n<p><strong>Step 3: Apply the office subsector average P\/AFFO of 14x yields:<\/strong><\/p>\r\n<p>$$ \\text{REIT share value}= ($4.75 \\times 14)= $66.50 $$<\/p>\r\n<h4>Approach 4: Discounted Cash Flow<\/h4>\r\n<p><strong>Step 1: Calculate the annual dividend per share (DPS):<\/strong><\/p>\r\n<p>$$ DPS=\\text{Prior year DPS}+ \\left(\\frac{\\text{Prior}-\\text{year DPS}}{100\\%} \\times \\text{Growth Rate} \\right) $$<\/p>\r\n<p>$$ {\\begin{array}{l|c|c|c|c|c} \\textbf{Year}&amp;{\\textbf{2015} }&amp;{\\textbf{2016} }&amp;{\\textbf{2017} }&amp;{\\textbf{2018}}&amp;{\\textbf{2019}} \\\\ \\hline\\text{Dividend Per Share (DPS)} &amp; &amp; $5 &amp; $5.10 &amp; $5.20 &amp; $5.25 \\\\ \\hline {\\text{Terminal value at the} \\\\ \\text{end of 2018*}} &amp; &amp; &amp; &amp; $65.63 &amp; \\\\ \\hline \\text{Present Values} &amp; $63.57 &amp; 4.59 &amp; 4.29 &amp; 54.69 &amp;\\\\ \\end{array}}$$<\/p>\r\n<p><strong>Step 2: Determine the terminal value at the end of 2018:<\/strong><\/p>\r\n<p>$$\\text{Terminal value}= \\frac{$5.25}{(9\\%-1\\%)}= $65.63$$<\/p>\r\n<p>Calculate the value of a REIT per share by discounting the dividends at a rate of 9% as follows:<\/p>\r\n<p>$$ $4.59+$4.29+$54.69=$63.57$$<\/p>\r\n<p>REIT value per share = $ 63.57<\/p>\r\n<p><em><strong>Note: <\/strong><\/em>The resulting amount of a REIT share is likely to vary, sometimes significantly, depending on which approaches are used.<\/p>\r\n<blockquote>\r\n<h2>Question<\/h2>\r\n<p>Consider the following selected REIT financial data concerning an investment in an industrial building at the end of 2013:<\/p>\r\n<p>$$ {\\begin{array}{l|c} \\text{Estimated 12 months cash NOI} &amp; $35,000,000 \\\\ \\hline\\text{FFO}&amp;$30,000,000\\\\\\hline\\text{Cash and equivalents} &amp; $20,000,000 \\\\ \\hline \\text{Accounts receivable}&amp; $20,000,000 \\\\ \\hline\\text{Debt and other liabilities}&amp; $220,000,000 \\\\ \\hline\\text{Non-cash rents}&amp; $4,000,000 \\\\ \\hline {\\text{Recurring maintenance-type capital} \\\\ \\text{expenditures}}&amp; $8,000,000 \\\\ \\hline\\text{Shares outstanding}&amp; 10,000,000 \\text{ shares} \\\\ \\hline\\text{Expected annual dividend 2014}&amp;$6.00 \\\\\\hline\\text{Dividend growth rate in 2015 and 2016}&amp; 7\\% \\\\ \\hline {\\text{Dividend growth rate from 2017 to} \\\\ \\text{perpetuity}} &amp; 5\\% \\\\ \\hline\\text{Assumed cap rate }&amp; 8\\% \\\\ \\hline {\\text{Office subsector average price-to-FFO} \\\\ \\text{multiple}} &amp; {12x} \\\\ \\hline {\\text{Office subsector average price-to-AFFO} \\\\ \\text{multiple}} &amp; {20x} \\\\ \\hline\\text{Tysons Limited cost of equity capital}&amp; {11\\%} \\\\ \\hline\\text{Risk-free rate }&amp; {2\\%} \\end{array}}$$<\/p>\r\n<p>The value of the investor\u2019s potential investment using a price-to-FFO approach is <em>closest to<\/em>:<\/p>\r\n<ol style=\"list-style-type: upper-alpha;\">\r\n\t<li>$25.75.<\/li>\r\n\t<li>$36.<\/li>\r\n\t<li>$30.<\/li>\r\n<\/ol>\r\n<h4>Solution<\/h4>\r\n<p><strong>The correct answer is B.<\/strong><\/p>\r\n<p>This is computed as follows:<\/p>\r\n<p>$$ \\begin{align*} \\frac {\\text{FFO}}{\\text{share}} &amp;= \\frac{\\text{FFO}}{\\text{Shares outstanding}} \\\\ \\frac {\\text{FFO}}{\\text{share}} &amp;= \\frac{$30,000,000}{10,000,000 \\text{ Shares}}= $3.00 \\end{align*} $$<\/p>\r\n<p>Applying the office subsector average price-to-FFO:<\/p>\r\n<p>$$ \\text{REIT share value}= ($3.00 \\times 12)= $36 $$<\/p>\r\n<p><strong>A is incorrect.<\/strong>\u00a0The amount reflects the REIT per share value using the NAV approach.<\/p>\r\n<p><strong>C is incorrect.<\/strong>\u00a0The amount reflects the price-to-AFFO applying the office subsector, elaborated in the workings below.<\/p>\r\n<\/blockquote>\r\n<p>Reading 37: Investments in Real Estate Through Publicly Traded Securities<\/p>\r\n<p><em>LOS 37 (d) Calculate and interpret the value of a REIT share using the net asset value, relative value (price-to-FFO and price-to-AFFO), and discounted cash flow approaches.<\/em><\/p>\r\n<p><strong><\/strong><\/p>\r\n<div style=\"text-align:center; margin: 40px 0;\">\r\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" style=\"display:inline-flex; align-items:center; justify-content:center; padding:12px 20px; border-radius:999px; background-color:#1a73e8; color:#ffffff; text-decoration:none; font-weight:600;\">\r\n    Start Free Trial \u2192\r\n  <\/a>\r\n  \r\n<p style=\"font-size:15px; margin-top:12px; color:#555;\">\r\n    Learn how to estimate REIT value using net asset value, price-to-FFO, price-to-AFFO, and discounted cash flow approaches, and how these methods are applied in CFA Level II equity valuation questions.\r\n  <\/p>\r\n<\/div><!-- \/wp:post-content -->","protected":false},"excerpt":{"rendered":"<p>\ufeff\ufeff An example is better suited here to help candidates understand the concept. Example: Value of a REIT Share Tysons Limited, a real estate asset management company, is keen on diversifying its portfolio through an office lease REIT investment. The&#8230;<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[562,102],"tags":[],"class_list":["post-23734","post","type-post","status-publish","format-standard","hentry","category-alternative-investments","category-cfa-level-2","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>REIT Valuation Using NAV and FFO<\/title>\n<meta name=\"description\" content=\"Understand REIT valuation methods including NAV, FFO multiples, AFFO measures, and discounted cash flow analysis.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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