CFA Level II Exam · Overview of Types of Real Estate Investment

REITs, REOCs and Publicly Traded Real Estate

Updated 7 October 2026 · Fact-checked

A REIT is a listed real estate company or trust that owns income-producing property and usually avoids corporate tax by paying out most of its income. A REOC is a listed real estate company that reinvests earnings and is taxed as a normal company. In the exam, match the vignette facts to the structure's tax, payout, growth and liquidity features.

Understand REITs and Publicly Traded Real Estate

Publicly traded real estate means you own shares or units of a listed company that holds property, instead of owning buildings directly. You get real estate exposure with the liquidity, small minimum size and transparency of a stock exchange listing.

A REIT (real estate investment trust) is a tax-advantaged vehicle. Rules differ by country, but a typical REIT must hold most of its assets in real estate, earn most of its income from property, and distribute a high share of taxable income to investors. In return, income that is distributed is generally not taxed at the REIT level. Investors are taxed on the distributions instead. This avoids the double taxation seen in ordinary companies.

A REOC (real estate operating company) is an ordinary company in the property business. It is not required to pay out income, so it can retain earnings, develop projects, trade properties and take on more activity such as services or development. It pays corporate tax on its profits. Because it keeps cash, it usually pays lower dividends and has more growth flexibility.

Compared with direct ownership, listed securities are far more liquid, need less capital, give diversification and professional management. But their prices move with the equity market, so they are more volatile in the short run and correlate with stocks more than appraisal-based direct property values do. Direct property values are smoothed by appraisals, which understates risk.

For valuation, the exam uses net asset value per share (NAV) and the premium or discount of price to NAV, and multiples such as P/FFO and P/AFFO. Listed prices can differ from NAV because of market sentiment, management quality, growth prospects and tax status. Some countries also have other tax-transparent or listed structures, so always follow the vignette's facts.

Key formulas to remember

Premium or discount to NAV: Premium (discount) = (Market price per share − NAV per share) ÷ NAV per share; Positive means the share trades above NAV. Negative means below NAV.
NAV per share: NAV per share = (Market value of assets − Liabilities) ÷ Shares outstanding; Use estimated market values of properties, not book values.
Funds from operations (FFO): FFO = Net income + Depreciation and amortization + Losses on property sales − Gains on property sales (and other one-off items); Depreciation is added back because property values often do not fall as book depreciation implies.
Adjusted FFO (AFFO): AFFO = FFO − Non-cash rent adjustments (straight-line rent) − Recurring maintenance capex and leasing costs; Closer to sustainable cash flow available for distribution.
P/FFO and P/AFFO: P/FFO = Price per share ÷ FFO per share; P/AFFO = Price per share ÷ AFFO per share; The real estate version of P/E. Lower multiple is cheaper, other things equal.

How to solve REITs and Publicly Traded Real Estate questions

Use this order for any item-set question on REITs, REOCs or listed real estate.

1Identify what is asked: structure comparison, tax, liquidity, valuation, or a calculation.
2Scan the vignette and exhibits for the key facts: legal form, payout, tax status, development activity, leverage, price and NAV data.
3Classify the entity: high mandated payout and no entity-level tax points to a REIT; retained earnings, development and corporate tax point to a REOC.
4For a calculation, pick the formula (NAV, premium or discount, FFO, AFFO, P/FFO) and list the inputs with their units and per-share basis.
5Check adjustments: add back depreciation, remove gains on sale, deduct straight-line rent and capex for AFFO.
6Compute carefully and check sign and direction for premium or discount.
7Match the result to the three options and pick the one consistent with the vignette, not general knowledge.

Quickest way: Tax, payout, growth: the three-word screen

When to use it: For qualitative REIT vs REOC or listed vs direct questions when time is short.

Ask: is income taxed at the entity level? Yes suggests a REOC, no for distributed income suggests a REIT.
Ask: must it pay out most income? Yes suggests a REIT.
Ask: does it develop or trade properties and retain cash? Yes suggests a REOC and higher growth, lower yield.
For a numeric premium or discount, compute price ÷ NAV − 1 and sanity check the sign.

Common mistakes in REITs and Publicly Traded Real Estate

Saying a REIT pays no tax at all.
Students remember tax-advantaged and overstate it.
Fix: Say distributed income is generally not taxed at the REIT level; investors are taxed on distributions. Rules vary by country, so use the vignette.
Treating a REOC as paying high dividends.
Both are listed property companies, so they get blurred.
Fix: A REOC has no payout requirement and retains earnings for growth, so yields tend to be lower.
Using book value of assets in NAV.
Balance sheet numbers are easy to find in an exhibit.
Fix: NAV uses estimated market values of the properties. Use the appraisal or cap-rate value if given.
Forgetting to add back depreciation in FFO or to subtract gains on sales.
Students copy the net income line and apply only one adjustment.
Fix: Add depreciation and losses, subtract gains, then for AFFO deduct straight-line rent and recurring capex.
Dividing the premium by price instead of NAV.
Premium feels like a price-based measure.
Fix: Premium or discount = (Price − NAV) ÷ NAV. NAV is the base.
Claiming listed real estate is less volatile than direct property because reported returns look smoother.
Appraisal-based index returns look stable.
Fix: Appraisal smoothing understates direct property risk. Listed prices are more volatile and correlate more with equities, especially short term.

Worked examples

Example 1

A listed property company has estimated market value of properties of $900 million, other assets of $50 million and liabilities of $350 million. It has 20 million shares and trades at $30. (1) What is NAV per share? (2) Does it trade at a premium or discount, and by how much?

Show the solution

Net assets = 900 + 50 − 350 = $600 million.
NAV per share = 600 ÷ 20 = $30.
Premium or discount = (30 − 30) ÷ 30 = 0%.

Answer: NAV per share is $30 and the shares trade at NAV, with no premium or discount.

Example 2

A REIT reports net income of $80 million, depreciation of $50 million, gains on property sales of $10 million, straight-line rent adjustments of $4 million and recurring capex and leasing costs of $16 million. It has 40 million shares at $20. (1) Compute FFO. (2) Compute AFFO. (3) Compute P/AFFO.

Show the solution

FFO = 80 + 50 − 10 = $120 million.
AFFO = 120 − 4 − 16 = $100 million.
AFFO per share = 100 ÷ 40 = $2.50.
P/AFFO = 20 ÷ 2.50 = 8.0.

Answer: FFO is $120 million, AFFO is $100 million and P/AFFO is 8.0 times.

Exam tips

Read the vignette for the tax and payout facts first; they decide the REIT or REOC label.
In FFO questions, write each adjustment with its sign before calculating.
Use per-share figures consistently when a multiple is asked.
Direct vs listed questions usually test liquidity, volatility, appraisal smoothing and minimum investment size.

REITs and Publicly Traded Real Estate in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

REITs and Publicly Traded Real Estate: frequently asked questions

What is the main difference between a REIT and a REOC?

A REIT is a tax-advantaged vehicle that generally must distribute most income and avoids entity-level tax on it. A REOC is taxed as a normal company and can retain earnings, develop and trade property.

Why is FFO used instead of net income for REITs?

Net income includes depreciation and one-off property sale gains, which do not reflect the recurring cash earning power of property. FFO adds back depreciation and removes sale gains.

How is listed real estate different from direct real estate?

Listed real estate is liquid, needs small amounts of capital and is priced daily, but moves with equity markets. Direct real estate is illiquid and lumpy, and its appraisal-based returns look smoother than true risk.

What does a discount to NAV mean?

The market price is below the estimated per-share value of the underlying net assets. It may signal undervaluation or reflect weaker growth, management or tax issues.