What is P/FFO?
The P/FFO Multiple is a REIT valuation ratio that compares the market price of a REIT and its funds from operations (FFO).
How to Calculate P/FFO?
- Price → The “Price” component of the P/FFO ratio refers to the current market price, or share price, of the REIT as of the latest closing date.
- FFO → The “FFO” component is the funds from operations (FFO) of the REIT, expressed on a per-share basis so that the numerator and denominator align.
The market price of a REIT is readily available via online resources like Bloomberg, whereas the FFO must be manually calculated.
FFO stands for “Funds from Operations” and is a non-GAAP financial measure widely recognized in the REIT market.
In practice, FFO is a standardized metric used to analyze the operating performance of REITs – designed by Nareit – because traditional GAAP metrics like net income fall short of reflecting the true performance of a REIT.
Hence, FFO is instead used by most practitioners because the metric is more reliable in portraying the “actual” performance of REITs.
While REITs report their FFO in the supplementary sections of their financial reports and non-GAAP filings (e.g. investor presentations), the recommended approach is to arrive at FFO using your own calculations.
Why? Calculating the FFO of a REIT manually – instead of relying on the figures provided by the REIT’s management team – leads to a better understanding of the REIT’s operating performance and the adjustments applied to the metric.
Once the depreciation is added back to net income, other adjustments include subtracting the gain on asset sales and adding back one-time items, such as asset impairments.
The formula to calculate the P/FFO multiple is the ratio between the market price and funds from operations (FFO) on a per-share basis.
The FFO per Share metric can be determined using the following formula.
The FFO input can be the current funds from operations (FFO) of the REIT – the FFO in the trailing twelve months (“TTM”) – or on an estimated, forward-basis (i.e. next twelve months, “NTM”).
We’ll now move to a modeling exercise, which you can access by filling out the form below.
REIT P/FFO Calculation Example
Suppose in the fiscal year ending 2022, a publicly-traded REIT reportedly generated $400k in funds from operations (FFO) per its non-GAAP filings.
- Current Market Price = $20.00
- Funds from Operations (FFO) – 2022A = $400k
- % FFO Growth = 4.0% YoY
- Funds from Operations (FFO) – 2023E = $400k × (1 + 4.0%) = $416k
If the REIT has a total of 250k shares (or units) in circulation, what is the P/FFO of the REIT on a trailing and forward basis?
- Number of Shares Outstanding = 250k
- FFO per Share – 2022A = $400k ÷ 250k = $1.60
- FFO per Share – 2023E = $416k ÷ 250k = $1.66
- P/FFO Multiple – 2022A (TTM) = $20.00 ÷ $1.60 = 12.5x
- P/FFO – 2023E (NTM) = $20.00 ÷ $1.66 = 12.0x
In conclusion, the REIT is currently trading at a P/FFO multiple of 12.5x based on its most recent earnings (TTM) and 12.0x on a forward basis (NTM).