Price to AFFO Multiple (P/AFFO) Explained
Price to AFFO Multiple (P/AFFO): The Price to AFFO multiple (P/AFFO) is the commercial real estate equivalent of the Price-to-Earnings (P/E) ratio, dividing a REIT's share price by its annual Adjusted Funds From Operations per share to determine relative valuation.
Institutional Analysis & Context
Traditional P/E ratios are meaningless for REITs because GAAP depreciation distorts net earnings. P/AFFO replaces earnings with cash available for distribution. A low P/AFFO relative to sector peers indicates potential undervaluation, while a high multiple reflects premium growth expectations.
Formula & Calculation Breakdown
| Metric Component | Definition & Application |
|---|---|
| Current Stock Price | Public equity market closing price per common share |
| Annual AFFO Per Share | Diluted AFFO divided by weighted average common shares outstanding |
Real-World Calculation Example
Flagship REITs Exemplifying This Metric
Analyze how top public REITs perform across this dimension in the live market:
Frequently Asked Questions
What is an average P/AFFO ratio for a REIT?
Historically, high-quality REITs trade between 14x and 18x P/AFFO. High-growth sectors command 20x to 26x, while slower-growth sectors trade between 10x and 14x.
Why is P/AFFO better than P/E for REITs?
Because P/E uses GAAP net income, which artificially penalizes REITs with massive non-cash depreciation charges on appreciating physical properties.
Does a low P/AFFO always mean a bargain?
Not always. A very low multiple can reflect high debt leverage, impending lease expirations, or structural sector headwinds.