CFA Level II – Public Real Estate (REITs) Formula Sheet

CFA Level II – Public Real Estate (REITs) Formula Sheet 1. NAV Valuation NAV: Market Value of Assets ? Market Value of Liabilities NAV per Share: NAV / Shares Outstanding Premium / (Discount) to NAV: (Market Price ? NAV per Share) / NAV per Share • Positive = Premium, Negative = Discount 2. REIT Cash Flow Measures FFO (Funds From Operations): Net Income + Real Estate Depreciation & Amortization ? Gains on Property Sales • Depreciation is added back because real estate often appreciates rather than depreciates economically. AFFO (Adjusted Funds From Operations): FFO ? Recurring Capital Expenditures ? Straight-line Rent Adjustments ? Leasing Costs ± Other Recurring Adjustments • AFFO approximates sustainable cash available for distribution. Payout Ratio: Dividends / AFFO (or FFO, if AFFO unavailable) 3. Valuation Multiples P/FFO: Market Price per Share / FFO per Share P/AFFO: Market Price per Share / AFFO per Share FFO Yield: FFO per Share / Market Price per Share AFFO Yield: AFFO per Share / Market Price per Share Dividend Yield: Annual Dividend per Share / Market Price per Share 4. Cap Rate Relationships Capitalization Rate: NOI / Property Value Property Value: NOI / Cap Rate Relationship: ? NOI ? ? Property Value ? Cap Rate ? ? Property Value ? Cap Rate ? ? Property Value 5. Exam Relationships Metric Interpretation FFO Operating performance of a REIT AFFO Sustainable distributable cash flow NAV Underlying asset value P/NAV > 1 REIT trades at premium P/NAV < 1 REIT trades at discount AFFO > FFO? Never. AFFO is usually lower because recurring capex is deducted. 6. CFA Memory Traps Net income is NOT the preferred REIT performance metric. Use FFO instead of earnings because depreciation distorts accounting profit. AFFO is generally the best proxy for sustainable cash available for dividends. NAV valuation focuses on underlying real estate assets, while P/FFO and P/AFFO are market multiples.