The Price/FFO Metric: A Driving Force Of Outperformance | Seeking Alpha

The Price/FFO Metric: A Driving Force Of Outperformance | Seeking Alpha



Here is an old but excellent article about how to evaluate REIT stocks.  The author did a great job in explaining that REIT stocks should be evaluated by the price/FFO method rather than by the company's PE.  FFO means funds from operations.  As most people know, REITs are supposed to return 90% of their profits back to investors in the form of dividends.  



For simplification in determining the value of a REIT company, the author assumed that 100% of the money would be returned to investors, and this is indeed possible if the stock price appreciates during the year.  So, if the price/FFO of a company is 20, the investor could expect a 5% return.  If the price/FFO of a company is 10, the investor could expect a 10% return.  It so happens that the eight REIT stocks in this article all had super returns in the year September 2011 to September 2012.  Two stocks had a gain of 100% or more, and the rest of the stocks all had double-digit returns.  This shows the power of investing in REIT stocks although during most years you should be happy if the return is 10% or greater.  I am a steadfast believer that a portion of everyone's total portfolio should include some good REIT stocks.