For real estate investments, the metrics used to quantify how certain properties or portfolios/Real Estate Investment Trusts (REITs) are valued are different than the typical valuation metrics used on most conventional stocks on the TSX or S&P 500, for example.
This is because real estate has unique characteristics to that of operating businesses in the sense that real property tends to be long-term, bond-like physical assets with a “coupon”-like cash flow structure, most of which is paid out to shareholders (REITs tend to have payout ratios in the 90%+ range).
For REITs, assessing Net Operating Income (NOI) rather than earnings in the norm, with a REIT’s NOI representing rental/lease revenue less operating expenses.
A REIT’s cap rate is the yield an investor receives on a given property, and is equivalent to the NOI of a building dividend by the value of the building.
Lower cap rates mean higher building values, so comparing cap rates across REITs with similar geographical/property type mixes can tell an investor which portfolio of properties may be undervalued relative to each other.
Vacancy rates are another important metric to assess knowing how full a given portfolio of properties is, on average, relative to the overall market can tell an investor if said properties are well managed or not.
Invest wisely, my friends.
