With the stock market near all-time highs and interest rates near all-time lows, investors are looking outside of typical stocks for returns.
Real estate is one popular alternative, andEquity Residential(NYSE: EQR), Prologis Inc (NYSE: PLD) andVentas, Inc. (NYSE:VTR) are three of the best high-yield value Real Estate Investment Trusts (REITs) in the market today.
REIT Valuations Are Unique
Value investors know that the price-to-earnings ratio is the traditional starting point for determining whether or not a stock is cheap. REITs, however, require a bit more analysis.
Instead of measuring a REIT’s earnings per share, traders instead look for a metric called funds from operations (FFO). FFO is calculated using the following formula:
FFO = net income + depreciation + amortization – gains on sales of property
For most companies, assets depreciate in value overtime. For REITs, the opposite is often true — property values tend to increase over time. FFO corrects for this phenomenon. In addition, FFO smooths out the earnings fluctuations that happen as a result of the buying and selling of properties.
Real estate investors can consider a REIT’s FFO per share analogous to a stock’s EPS. In that respect, P/FFO per share is the REIT equivalent of P/E ratio.
The REIT Baselines
The iShares Dow Jones US Real Estate (ETF) (NYSE: IYR) is…
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