Refer earlier to article on Net Asset Value (NAV) of a REIT. This valuation metric attempts to capture the income-generating power of a REIT after deducting all its expected expenses and liabilities. Usually, the REIT’s stock price should trade not more than 15% to 20% above or below the market’s estimate of its net asset value. If there is a larger gap, watch out – can it be that the market might view the REIT’s management as particularly too strong or weak or the market is favouring REITs in one particular sector or could it mere speculation.

The other two interesting performance metric to measure REIT performance are:

• Funds from operation (FFO)
• Adjusted funds from operation (AFFO)

It is important to note that presently there is no fixed GAAP to make all REITS to comply with certain fixed financial reporting hence making these measures as imperfect, but it is logical to think of FFO as a proxy for operating cash flow and AFFO as a proxy for free cash flow. To judge the success of a REIT’s performance, it is important to look at the rate of change in FFO and AFFO.

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