Investments in Real Estate through Publicly Traded Securities

Real estate investment trusts and other listed property companies let investors own diversified, professionally managed property portfolios with the liquidity of a share. Valuing them, however, requires property-specific tools: net asset value built from capitalised NOI, and cash-flow measures such as FFO and AFFO that correct the distortions depreciation creates in net income. This module describes the main listed real estate securities, works through NAV and FFO-based valuation step by step, and compares owning real estate through public securities with owning it privately.

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What you will learn

1. Describe the main types of publicly traded real estate securities, including REITs and real estate operating companies, and their advantages and disadvantages.

Equity REITs own property, mortgage REITs own real estate debt; both avoid corporate tax on distributed income if they meet asset, income and payout tests.
In the US a REIT must distribute at least 90% of its taxable income.
REOCs are taxable companies that can retain earnings, develop and diversify.
Advantages: liquidity, diversification, professional management, transparency, high stable income, no entity-level tax.
Disadvantages: stock-market volatility, limited retained earnings, lack of control, structural costs and dividend taxation.

2. Estimate and interpret net asset value per share for a REIT using capitalised NOI.

NAVPS = (capitalised forward NOI + other tangible assets - debt - other liabilities) / shares outstanding.
Remove non-cash (straight-line) rent and grow NOI to the next twelve months before capitalising.
Exclude goodwill, deferred financing costs and other intangibles that would not survive a property sale.
NAVPS is highly sensitive to the cap rate, and leverage magnifies the sensitivity.
Premiums may reflect management value creation; discounts may signal expected falls in property values or concerns about leverage and governance.

3. Calculate FFO and AFFO and value a REIT share using price multiples and discounted cash flow or dividend models.

FFO = net income + real estate depreciation - gains on property sales + losses + impairments of depreciable real estate.
AFFO = FFO - non-cash (straight-line) rent - recurring maintenance capex and leasing costs.
AFFO is closer to distributable cash flow but less standardised than FFO.
Apply P/FFO or P/AFFO multiples consistently: an AFFO multiple to AFFO, an FFO multiple to FFO.
Dividend discount and DCF models suit REITs because most income is paid out.

4. Compare investing in real estate through publicly traded securities with investing through private vehicles.

Public REITs offer daily liquidity, divisibility and diversification; private vehicles offer control but are illiquid and may gate redemptions.
REIT prices react immediately and are more volatile; private values are appraisal-based and smoothed.
Short-run REIT returns correlate with equities; long-run returns track property markets.
Direct ownership allows control of assets, leverage and timing; REIT investors delegate these decisions.
Costs, leverage and tax treatment differ and must be compared on a like-for-like basis.

Module at a glance

Equity REITs own property and mortgage REITs own real estate debt; REITs avoid entity-level tax by meeting asset, income and payout tests.
REOCs pay corporate tax but can retain earnings to fund development.
NAVPS = capitalised forward cash NOI + other tangible assets - debt and liabilities, divided by shares; exclude intangibles.
Premiums to NAV reflect expected value creation; discounts can reflect expected falls in values, leverage or governance concerns.
FFO adds back real estate depreciation and removes property-sale gains; AFFO also deducts straight-line rent and recurring capex.
Value REITs with matching multiples (P/FFO to FFO, P/AFFO to AFFO) and with dividend or DCF models.
Public REITs offer liquidity and access to specialised sectors; private vehicles offer control but smoother, lagged values and limited liquidity.

This free module has 4 lessons, 15 practice questions with full explanations.

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