REIT Share Valuation Using NAV, Multiples, and DCF

A REIT share can be valued three different ways: net asset value, a price-to-FFO or P/AFFO multiple, and a discounted cash flow model. Level II asks you to calculate each estimate correctly and explain why they differ. The exam rewards candidates who interpret the gap between methods rather than average it away.

Key Takeaways

• NAV per share estimates value from the market value of underlying real estate assets, net of liabilities, divided by shares outstanding.

• Price-to-FFO and P/AFFO multiples value a share by multiplying a comparable peer multiple by the subject REIT's own per-share FFO or AFFO.

• A P/AFFO multiple must be paired with AFFO per share, not FFO per share, because the two measures apply different capital expenditure adjustments.

• DCF values common equity by discounting cash flows to equity at the cost of equity, or by discounting dividends under a stated payout assumption.

• Enterprise-level cash flows require WACC and a separate equity bridge, not the cost of equity.

• NAV, multiples, and DCF commonly produce different values because each method relies on distinct assumptions about growth, risk, and asset pricing.

What You Need to Know for CFA Level II

• The LOS requires you to calculate and interpret REIT share value using NAV, price-to-FFO, price-to-AFFO, and DCF, then reconcile differences among the methods.

• A per-share multiple must be applied to a per-share cash flow measure. Multiplying total company AFFO by a matching price-to-AFFO multiple estimates total common equity value. Divide by shares to obtain a per-share estimate.

• NAV per share, FFO, and AFFO are inputs built in their own dedicated notes. This note applies those finished outputs to three valuation approaches.

• DCF application requires matching cash flows and discount rates. Equity cash flows pair with the cost of equity. Enterprise cash flows pair with WACC.

• The exam tests reconciliation, meaning you explain why NAV, multiples, and DCF estimates diverge, not that you compute a blended average of the three.

Select consistent NAV and multiple inputs

Both NAV and the relative value multiples depend on choosing inputs that are genuinely comparable to the subject REIT.

NAV per share as an asset-based benchmark

NAV per share estimates share value from the market value of a REIT's real estate portfolio, plus other assets, minus liabilities, divided by shares outstanding. It represents what the underlying properties are worth today if sold at current market prices. The full NAV build, including capitalization rate selection and asset-level adjustments, belongs in its own dedicated note. Here, NAV per share serves as one of three completed benchmarks for a final share value estimate.

Price-to-FFO and P/AFFO multiples

Funds from operations (FFO) and adjusted funds from operations (AFFO) are supplemental REIT performance measures. Neither is identical to statutory operating cash flow. Both add back real estate depreciation to net income. AFFO goes further, subtracting recurring capital expenditures and non-cash rent adjustments, producing a closer estimate of sustainable cash available for distribution. Price-to-FFO and P/AFFO multiples apply a peer-derived multiple to the subject REIT's own per-share FFO or AFFO.

Select a peer multiple only from REITs with similar growth, leverage, property type, and accounting adjustment policies. A multiple built from a different property sector, or a REIT carrying materially different leverage, does not transfer cleanly to the subject REIT. The multiple and the per-share measure must also match. A P/AFFO multiple is applied to AFFO per share, not FFO per share, because AFFO already removes capital expenditure effects that FFO retains.

Why a multiple times a per-share measure produces a share value

A price multiple is itself a per-share price divided by a per-share measure, observed from comparable securities. Reapplying that ratio to the subject company's own per-share measure rescales the peer price relationship onto the subject security. The ratio can be applied consistently at either scale. A multiple times AFFO per share estimates share value; the same multiple times total common AFFO estimates total common equity value. Divide the latter by matching shares. The error is reporting a total equity amount as if it were a share price.

where:

• = estimated value per common share,

• = selected price-to-AFFO multiple,

• AFFO = total common equity AFFO on the stated basis, and

• S = matching common shares outstanding.

The same structure applies to FFO and its matching multiple.

Calculate DCF value and reconcile estimates

A DCF approach estimates REIT share value from explicit projected cash flows rather than from current market pricing of assets or peer multiples.

Discounting cash flows to common equity

A DCF approach to REIT share value discounts cash flows available to common equity holders at the cost of equity, . Common inputs are free cash flow to equity or dividends, together with a terminal value at the end of the explicit forecast period. Under a dividend-based approach, state a distribution assumption directly, since REIT dividends frequently exceed net income because of depreciation add-backs.

If the analyst instead starts from enterprise-level cash flow, the cash flow available to all capital providers, the correct discount rate is the weighted average cost of capital (WACC), not the cost of equity. The analyst then subtracts the market value of debt and other non-equity claims to produce equity value, known as an equity bridge. Mixing equity cash flows with WACC, or enterprise cash flows with the cost of equity, misprices the security because the discount rate no longer matches the risk and claim priority of the cash flow being discounted.

where:

• = total common equity value,

• = defined cash flow to common equity in period t,

• = cost of equity,

• N = number of forecast periods, and

• = common equity terminal value at period N.

Divide total common equity value by matching shares. If using per-share cash flows, keep every term on a per-share basis.

Reconciling NAV, multiple, and DCF estimates

NAV, relative value multiples, and DCF rarely produce identical share value estimates. NAV reflects current market pricing of the underlying real estate assets. Multiples reflect how the market currently prices comparable REITs' sustainable cash flow. DCF reflects the analyst's own explicit cash flow forecast, growth assumption, and discount rate. A difference among the three does not mean one method is wrong. Each method answers a related but distinct question. Identify which assumption, growth rate, capitalization rate, leverage, or peer comparability, drives the gap instead of averaging the three figures into one number.

Working Example

An analyst values a REIT using three approaches. The inputs below are on a consistent common-equity basis.

Step 1: Apply the P/AFFO multiple.

The estimate is $36.00 per share. The peer multiple must use a comparable AFFO definition, period, growth outlook, and leverage profile.

Step 2: Apply a constant-growth dividend DCF.

where:

• = next year's dividend per common share,

• = cost of common equity, and

• g = perpetual dividend growth, which must be below the cost of equity.

The estimate is $40.00 per share. Assume the dividend and perpetual growth are sustainable; AFFO is not automatically paid out in full.

Step 3: Reconcile the estimates.

The 36 multiple estimate, 38 NAV benchmark, and $40 dividend DCF estimate use different assumptions. Check the peer pricing, property cap rates, dividend forecast, and growth rate before choosing a value conclusion.

For sensitivity, lowering perpetual dividend growth to 2%, with the other DCF inputs fixed, produces about $33.33 per share. A one-percentage-point assumption change therefore materially alters the DCF estimate.

The three outputs do not reveal which assumption is correct. Reconciliation requires examining the evidence behind each method. A supported final judgment may weight reliable estimates; mechanically averaging them can hide inconsistent assumptions.

Common Exam Traps

Reporting total equity value as a share price

Keep the output scale explicit. Total common AFFO times the multiple gives total common equity value. AFFO per share times the multiple gives value per share. Either route works if the share-count conversion is completed.

Mixing equity cash flows with WACC

Cash flow to common equity must be discounted at the cost of equity. Discounting equity cash flow at WACC understates the required return and overstates share value, since WACC blends in the lower after-tax cost of debt.

Using FFO with a P/AFFO multiple

FFO and AFFO are not interchangeable inputs. A P/AFFO multiple was derived from peer AFFO and must be applied to the subject REIT's AFFO, not its FFO, since AFFO already reflects capital expenditure deductions that FFO does not.

Ignoring inconsistent peer adjustments

Peer REITs may calculate AFFO using different capital expenditure or straight-line rent adjustments. Applying a peer multiple without checking adjustment consistency transfers comparability errors directly into the subject valuation.

Practice Question

A REIT reports common equity AFFO of $12 million and has 4 million common shares outstanding. A comparable peer REIT trades at a P/AFFO multiple of 14.0×. Using the price price-to-AFFO approach, what is the estimated value per common share?

1. $42.00

2. $168.00

3. $0.21

FAQs About REIT Share Valuation Using NAV, Multiples, and DCF