Daniel, while some investors focus on the most important multiple for a REIT is price/FFO, where FFO = funds from operations, which is a non-GAAP number peculiar to REITS; it is nearly the same thing as cash flow from operations in GAAP accounting. FFO is the cash that is available for paying dividends, and what is left over from that is available for funding growth. You can find it mentioned in the SEC filings for the REIT.
Like a regular stock that has growth, a REIT will have a FFO growth rate, as the firm raises rents and develops or acquires more property. A big part of what you get, when you buy a REIT, is not just the yield, but also the growth. That growth in FFO allows the REIT to raise dividends in the future. This distinguishes it from true fixed-income investing.
It's not hard to find REITs that have a 7% yield and a 7% FFO growth rate, giving you an expected total return of about 14%. If you think about it, this might be more attractive than buying a REIT with a 14% yield. If you look only at yields, you can get thrown off.
The yield basically reflects how the risk that the market see in the FFO and dividend. If the firm has good steady growth, a strong balance sheet, experienced management, and it operates in a sector that isn't getting overbuilt, then it might trade at a high price and therefore a low yield. |
