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CFA Level II Exam · Investments in Real Estate through Publicly Traded Securities

Relative Valuation of REITs Using P/FFO and P/AFFO

Updated 7 October 2026 · Fact-checked

FFO is net income plus depreciation and amortization of real estate, plus losses and minus gains on property sales (and similar one-off items). AFFO adjusts FFO for straight-line rent and recurring capex. Value per share = a comparable P/FFO or P/AFFO multiple × the REIT's FFO or AFFO per share.

Understand Relative Valuation: P/FFO and P/AFFO

Net income is a poor measure of a REIT's earning power. Accounting depreciation is charged on buildings that often hold or gain value, so it pushes net income down. Gains and losses on property sales are lumpy and not part of recurring operations. P/E on REITs is therefore misleading.

Funds from operations (FFO) fixes this. You start with accounting net income, add back depreciation and amortization of real estate, and remove gains (or add back losses) from property sales and from items like impairments and debt restructuring. FFO is a better view of operating cash earnings, but it is not a true cash flow measure.

Adjusted funds from operations (AFFO) goes further to approximate sustainable, recurring cash flow. Its core adjustments are straight-line rent (a non-cash item) and the recurring capital spending needed to keep properties competitive, such as maintenance capex and leasing costs. Other non-cash items, such as amortization of financing costs or non-cash stock compensation, are added back only when the vignette specifies them. AFFO is also called funds available for distribution (FAD) or cash available for distribution. Definitions vary by company, so read the adjustments the vignette gives you.

For valuation, you divide price by FFO or AFFO per share to get P/FFO or P/AFFO. You then apply the multiple of comparable REITs, or the REIT's own history, to its FFO or AFFO per share to estimate value. P/AFFO is generally seen as the more reliable multiple because AFFO is closer to cash available to shareholders. Multiples should be compared among REITs with similar property types, quality, leverage, and growth.

Key formulas to remember

FFO
FFO = Net income + Depreciation and amortization (real estate) + Losses on property sales − Gains on property sales (± other non-recurring items such as impairments)
Gains are subtracted and losses added back. Only real-estate depreciation is added back as the exam normally frames it.
AFFO
AFFO = FFO − Non-cash straight-line rent (net increase) − Recurring maintenance-type capex and leasing costs ± Other non-cash items only if the vignette specifies them (e.g., amortization of financing costs, non-cash stock compensation)
Straight-line rent and recurring capex are the core deductions. Straight-line rent above cash rent is subtracted. If cash rent exceeds straight-line rent, the adjustment is added. Other non-cash add-backs, such as financing-cost amortization or stock compensation, apply only when the vignette gives them. Follow the signs in the vignette.
Price to FFO
P/FFO = Share price ÷ FFO per share
FFO per share = FFO ÷ weighted average shares outstanding.
Price to AFFO
P/AFFO = Share price ÷ AFFO per share
Preferred over P/FFO when recurring capex is material.
Value from multiple
Value per share = Comparable P/FFO (or P/AFFO) × FFO (or AFFO) per share
Use the matching multiple and metric. Never mix P/FFO with AFFO.

How to solve Relative Valuation: P/FFO and P/AFFO questions

Use this order for any REIT multiple question. Take every number from the vignette exhibits and keep metric and multiple matched.

  1. 1Identify what is asked: FFO, AFFO, a multiple, or a value per share.
  2. 2Start from net income in the income statement exhibit.
  3. 3Add back real-estate depreciation and amortization. Add losses and subtract gains on property sales and other non-recurring items.
  4. 4This gives FFO. Divide by shares to get FFO per share if a multiple is needed.
  5. 5For AFFO, make the core adjustments: subtract non-cash straight-line rent income (add if cash rent exceeds straight-line) and subtract recurring capex and leasing costs. Add or subtract other non-cash items, such as financing-cost amortization or stock compensation, only if the vignette specifies them.
  6. 6Compute P/FFO or P/AFFO as price ÷ per-share metric, or value = benchmark multiple × per-share metric.
  7. 7Check that the metric and multiple match, units are consistent, and the answer is reasonable against the options.

Quickest way: Sign-check ladder for FFO and AFFO

When to use it: Use when the vignette lists many adjustments and time is short.

  1. Write NI at the top, then list each item with a plus or minus beside it before calculating.
  2. Rule for FFO: depreciation +, gains −, losses +.
  3. Rule for AFFO: rental income that is non-cash −, capex that recurs −.
  4. Do the arithmetic once, in millions, then divide by shares.
  5. For a value question, multiply the multiple by the per-share figure and compare with the options.

Common mistakes in Relative Valuation: P/FFO and P/AFFO

  • Adding gains on property sales to net income when computing FFO.

    Students assume every add-back is positive.

    Fix: Gains are removed because they are non-recurring. Losses are added back.

  • Adding back all depreciation, including on non-real-estate assets, or ignoring the vignette's definition.

    Students memorize a formula without reading the exhibit.

    Fix: Add back depreciation and amortization of real estate as the vignette states, and use its specific items.

  • Adding straight-line rent in AFFO instead of subtracting it.

    Straight-line rent sounds like extra income.

    Fix: Straight-line rent is revenue recognized above cash received in the early years, so you subtract the non-cash portion to move toward cash.

  • Forgetting to deduct recurring capex and leasing costs in AFFO.

    Capex is not on the income statement.

    Fix: Look for maintenance capex, tenant improvements, and leasing commissions in the notes or cash flow exhibit and subtract them.

  • Applying a P/FFO multiple to AFFO, or vice versa.

    The two multiples are similar in name.

    Fix: Match the multiple to the metric. A P/AFFO multiple is applied only to AFFO per share.

  • Using total FFO instead of per-share FFO to estimate share value.

    Students stop after computing FFO.

    Fix: Divide by shares outstanding before multiplying by the multiple, or compute total value and then divide by shares.

Worked examples

Example 1

A REIT reports net income of $120 million, real estate depreciation and amortization of $85 million, a gain on sale of property of $18 million, and 50 million weighted average shares. Peers trade at an average P/FFO of 14.0. (1) Compute FFO. (2) Compute FFO per share. (3) Estimate the value per share using the peer multiple.

Show the solution
  1. FFO = 120 + 85 − 18 = $187 million.
  2. FFO per share = 187 ÷ 50 = $3.74.
  3. Value per share = 14.0 × 3.74 = $52.36.

Answer: FFO is $187 million, FFO per share is $3.74, and the estimated value is $52.36 per share.

Example 2

Using a REIT's FFO of $187 million, the vignette notes straight-line rent revenue exceeded cash rent by $9 million, recurring maintenance capex and leasing costs of $26 million, and 50 million shares. The share price is $48. Peers trade at P/AFFO of 15.5. (1) Compute AFFO. (2) Compute the REIT's P/AFFO. (3) State whether the REIT looks cheap or expensive versus peers on this measure.

Show the solution
  1. AFFO = 187 − 9 − 26 = $152 million.
  2. AFFO per share = 152 ÷ 50 = $3.04.
  3. P/AFFO = 48 ÷ 3.04 = 15.79 (rounded).
  4. Compare with peers: 15.79 is above 15.5.

Answer: AFFO is $152 million. P/AFFO is about 15.8, slightly above the peer 15.5, so the REIT looks modestly expensive on this measure, before considering growth, leverage and asset quality differences.

Exam tips

  • Read the exhibit for the exact adjustments. The vignette usually lists them, so your job is signs and arithmetic.
  • Questions often ask which measure is better for valuation. The answer is usually AFFO, because it accounts for recurring capex and non-cash rent.
  • Know why P/E is not used for REITs: depreciation distorts earnings and property sale gains are non-recurring.
  • When a choice asks about the limits of the multiples, remember that FFO and AFFO definitions vary by company and that multiples ignore differences in growth, leverage and asset quality.
  • With no penalty for wrong answers, always answer, but compute FFO per share before eliminating options.

Relative Valuation: P/FFO and P/AFFO: frequently asked questions

What is the difference between P/FFO and P/AFFO?

P/FFO divides price by funds from operations per share. P/AFFO divides price by adjusted FFO per share, which also reflects straight-line rent and recurring capex. P/AFFO is generally closer to sustainable cash flow.

Why is straight-line rent subtracted to get AFFO?

Straight-line rent spreads total contract rent evenly over the lease term. Early in a lease, revenue recognized is higher than cash received. AFFO removes this non-cash excess to approximate cash earnings.

Why do we add back depreciation for REITs?

Real estate often holds or increases value, so accounting depreciation understates earnings power. Adding it back gives a better measure of operating performance. Capex needed to maintain properties is then deducted in AFFO.

Can I use P/FFO to compare REITs of different property types?

Use caution. Property type, quality, lease length, growth prospects and leverage all affect the appropriate multiple. Compare with similar REITs and adjust your judgment for differences.