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How To Analyze REITs

Real Estate Investment Trusts (Reits) are generally hailed as a desirable investment for income seekers. It gives investors a way to acquire ownership of a variety of properties at affordable prices.
April 18, 2024

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What Is a REIT?

A business that owns, manages, or funds buildings that generate revenue is known as a real estate investment trust (REIT).

90% of a REIT's profits are required by law to be paid out as dividends to shareholders.

REITs might be viewed as an alternative to buying a residential investment property given the continually escalating cost of real estate while also earning you money.

Types Of REITs

REITs come in two different forms.

Equity REITs frequently focus on owning particular building types, such as apartments, local malls, office buildings, or lodging/resort facilities.

Mortgage REITs are the other main form of REIT.

These REITs don't often own or manage real estate, but they do offer loans backed by real estate. The analysis of mortgage REITs must be specific.

They are financial institutions that utilise a variety of hedging tools to control their exposure to interest rate risk.

A small number of Hybrid REITs conduct real estate operations and mortgage loan transactions. 

What Are The Criteria To Qualify As REITs?

  • There should be at least 100 shareholders. These investors cannot possess more than 50% of the shares.
  • Minimum 75% of its assets should be invested in real estate, cash, or treasuries.
  • The gross income (at least 75%)  should arrive from real estate investments and opportunities.
  • Dividends to the investors have to be paid up to 90% of the company's taxable income.
  •  REITs must be managed by a Board of Directors and Trustees

Assessing REITs

When evaluating a REIT, you should take into account the quality of the company's real estate holdings, the state of its overall operations, and the management team.

Cube will show you how to complete all of these tasks and assist you in selecting profitable REIT investments for your portfolio.

Few Tips- 

  • The minimum amount of income that real estate investment trusts (REITs) must distribute as shareholder dividends is 90%.
  • For REITs, book value ratios are meaningless. Better metrics are calculations like net asset value.
  • For REITs, top-down and bottom-up analytics should be used. Population growth and job creation are top-down influences. Rent and operating funds are examples of bottom-up factors.

Funds From Operations (FFO)

Funds From Operation or FFO is a statistic that REIT investors use to get a comprehensive view of the earnings made. 

FFO subtracts gains or losses from the sale of real estate and add depreciation and amortization costs back to net income.

Price to FFO

Once you have the REIT's FFO per share, you may multiply its price by that amount. This valuation statistic is used to evaluate a REIT's worth in relation to its competitors.

You may require the FFO per share for 12 months. To obtain the FFO per share for the entire year, consult the most recent annual report.

Once you have the annual FFO per share, all you have to do is divide the share price by the FFO per share.

After that, repeat the process for the REIT's competitors and determine the average price to FFO multiple for each.

Adjusted Funds From Operations (AFFO)

Adjusted FFO furthers the adjustments to a REIT’s FFO. It is usually a more appropriate measure of a company’s performance. There may be slight variations in every company’s calculations though. You can consult a Cube Wealth Coach or download the Cube Wealth App.

It is uncommon to compare the price to AFFO of one REIT to another as the AFFO computation varies amongst REITs. Instead, REIT investors will frequently use this number to examine a REIT's performance over time and search for changes in AFFO and AFFO per share.

Net Asset Value 

A REIT's net asset value or NAV is determined by deducting liabilities from the fair market value of the company's assets. REIT's worth should be determined by the current market value of its assets, and that its stock market shares should be valued correspondingly hence, NAV is calculated. 

Some formulas to calculate Net Asset Value-

1. Real estate value + cash + other assets (tangible) = total asset value

2. Total asset value - liabilities = Net Asset Value

3. NAV / shares outstanding = Net Asset Value per share

Dividend Discount Model (DDM)

The dividend discount model or DDM is based on the idea that a REIT's current value is equal to the discounted present value of its future dividend payments.

For larger REITs that have consistently increased their dividends over an extended period of time, this strategy is helpful.

Discounted Cash Flow

The discounted cash flow model uses a discount rate to calculate the present value of a REIT's future free cash flow.

Top Down & Bottom Up Analysis 

You may have heard of top-down vs. bottom-up analysis when choosing stocks.

Top-down analysis begins with an economic viewpoint and focuses on themes or industries. From the top-down perspective, anything that affects the supply and demand for real estate can have an impact on REITs. You can consult a Cube Wealth Coach or download the Cube Wealth App.

Bottom-up analysis concentrates on a company's core competencies. It is obvious that top-down and bottom-up analyses are necessary for REIT equities. 


To benefit from the tax advantages of having the classification of a REIT, real estate companies must pay out significant dividends.

Investors must be aware of the accounting distortions brought on by depreciation and pay close attention to macroeconomic factors while analyzing a REIT.


1. What are the types of REITs?

Three different forms of REITs exist:

Equities REITs - The majority of REITs are equity REITs, which own and operate properties that generate income. 

Mortgage REITs - They offer loans backed by real estate

Hybrid REITs - conduct real estate operations and mortgage loan transactions

2. What should be the duration of holding REITs?

REITs are usually long-term investments. Mostly, they can take up to 10 years to occur.

3. Which REIT in India is the best?

India's first REIT was introduced in April 2019 by Embassy Office Parks REIT (Embassy), which is supported by Blackstone Group. Next in line is Mindspace REIT 

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