REIT Metrics That Actually Matter: FFO, NAV, and What the Numbers Tell You

OK so you’ve decided you want to invest in REITs. You know the types, you have a brokerage account, and you’re ready to go. But how do you actually pick a good one? You can’t just close your eyes and throw a dart at a list.

This is where metrics come in. And not the vague “this company seems solid” kind. I mean actual numbers that tell you whether a REIT is making money, managing its properties well, and worth your investment.

In Chapter 5 of Real Estate Investment Trust Investing, Mike Hartley breaks down the key metrics you need to know. Let me walk you through them in plain English.

The Financial Metrics

FFO (Funds From Operations)

This is the big one. FFO is basically the REIT version of earnings per share. Here’s why it exists: normal companies report net income, but that number includes depreciation and amortization. For most businesses, that makes sense because equipment actually loses value over time.

But real estate? Properties usually go up in value. So if a REIT owns a building worth $10 million and depreciates it by $500,000 on paper, their net income looks $500K lower than their actual cash situation. That’s misleading.

FFO fixes this. It takes net income, adds back depreciation and amortization, and excludes any one-time profits from selling properties. What you get is a much clearer picture of how much cash the REIT is actually generating from its operations.

Here’s the thing. If you’re comparing two REITs and only looking at net income, you might think one is performing way worse than the other when really it just owns older buildings with more depreciation on the books. FFO levels the playing field.

Price-to-FFO Ratio

Think of this like the P/E ratio but for REITs. You take the REIT’s share price and divide it by the FFO per share.

A lower ratio might mean the REIT is undervalued. A higher ratio could mean it’s overpriced, or it could mean investors expect strong growth. Context matters here.

So if REIT A has a Price-to-FFO of 12 and REIT B has one of 20, REIT A might be a better deal. But maybe REIT B owns data centers in a booming market and that premium is justified. You have to look at the full picture, not just one number.

NAV (Net Asset Value)

NAV is straightforward. Take all of a REIT’s assets (properties, cash, everything), subtract all its liabilities (loans, debts, obligations), and you get the net asset value.

Why does this matter? Because you can compare NAV per share to the actual share price. If the share price is below NAV, you might be getting a bargain. The market is pricing the REIT lower than its actual assets are worth. If the share price is way above NAV, you might be paying a premium.

It’s not a perfect indicator on its own. But combined with FFO, it gives you a solid foundation for figuring out if a REIT is fairly priced.

The Operational Metrics

Financial metrics tell you about money. Operational metrics tell you about how well the REIT is actually running its properties.

Occupancy Rate

This one is pretty intuitive. It’s the percentage of a REIT’s properties that are currently leased to tenants. If a REIT owns 100 apartments and 95 are rented, the occupancy rate is 95%.

Hartley says 95% is a good benchmark. Anything significantly below that and you should ask questions. Why are tenants leaving? Is the location bad? Is management not maintaining the properties? Are rents too high for the market?

A consistently high occupancy rate means steady rental income, which means steady dividends for you.

Average Rent per Square Foot

This tells you about the income potential of the REIT’s properties. Higher rent per square foot generally means higher quality properties in better locations.

But it’s most useful when comparing REITs in the same sector. Comparing the rent per square foot of an office REIT to a warehouse REIT doesn’t tell you much. Comparing two office REITs in similar markets? Now you’re getting useful info.

Operating Expense Ratio

This measures how efficiently a REIT manages its costs. You calculate it by dividing operating expenses by gross income.

Lower is better. A REIT with a 30% operating expense ratio is keeping more of its rental income than one running at 50%. That extra money can go toward maintenance, new acquisitions, or bigger dividends.

Putting It All Together

Here’s where it gets interesting. No single metric tells the whole story. You need to look at them as a group.

A REIT might have amazing FFO but a terrible occupancy rate. That could mean it’s relying on a few big tenants paying premium rents, which is risky. What happens if one of those tenants leaves?

Or a REIT might have a high occupancy rate but a low average rent per square foot. It’s full, but it’s not generating much income per property. There might be limited room for growth.

Hartley talks about some specific trade-offs to watch:

High FFO but low dividend yield. This might mean the REIT is reinvesting heavily into new properties rather than paying out dividends. That could be great for long-term growth, but if you need income now, it’s not ideal.

Low Price-to-FFO but high debt-to-equity. The REIT looks cheap, and maybe there’s a reason. High debt means more risk, especially if interest rates go up. The low price might be the market telling you something.

High occupancy but rising operating expenses. The properties are full, but costs are eating into profits. Management might not be running things efficiently, or the buildings might need expensive repairs.

Your Metric Checklist

When evaluating a REIT, here’s a practical approach:

1. Start with FFO and Price-to-FFO to understand earnings and valuation
2. Check NAV to see if the price makes sense relative to actual assets
3. Look at occupancy rate for stability
4. Compare rent per square foot to similar REITs
5. Check the operating expense ratio for efficiency
6. Look at the debt-to-equity ratio for risk

And always compare within the same sector. A healthcare REIT and an industrial REIT will have completely different “normal” ranges for these metrics.

The numbers don’t lie, but they also don’t explain themselves. Your job is to read them together and build a picture of whether this REIT is well-managed, fairly priced, and likely to keep paying you dividends.

Next up, we’ll look at how to read the actual financial statements where all these numbers come from.

This post is part of a series retelling the book Real Estate Investment Trust Investing by Mike Hartley (2023). Opinions and commentary are my own.