Real estate company analysis: NAV and cap rates
Indian investors seeking exposure to U.S. real estate stocks and REITs need to master several critical valuation metrics. Net Asset Value reveals whether a REIT trades below its intrinsic property value. Capitalisation rates signal risk-return profiles across property sectors. As of January 2026, U.S. REITs trade at a 12-18% median discount to NAV compared to a historical 2% premium. This creates potential entry points in the industrial and data centre sectors, where fundamentals remain strong. Understanding fundamental analysis tools for Indian investors provides the foundation for applying these REIT-specific valuation metrics effectively.
Net Asset Value determines whether you buy property portfolios at a discount.
Net Asset Value (NAV) represents the estimated market value of a REIT's underlying real estate portfolio minus liabilities. Unlike stocks valued by earnings, REITs require NAV analysis because GAAP uses historical cost, which is depreciated. Real estate typically appreciates over time, making book value misleading.
The real estate NAV formula works as follows:
NAV = (Property Value at Fair Market Value + Cash + Other Assets - Total Debt - Other Liabilities) ÷ Shares Outstanding
This differs fundamentally from book value. While book value records properties at historical cost less depreciation, NAV reflects current market value. A building purchased for $50 million in 2010 might have a book value of$35 million today after depreciation. However, its market value could reach $90 million. NAV reflects this reality.
When a REIT's stock price exceeds NAV per share, it trades at a premium. This indicates market confidence in management or expected property appreciation. When the stock trades below NAV, it represents a discount. This could signal an undervaluation opportunity or perceived risks.
Current NAV positions by sector show significant variation. Data centres trade at an 18.9% premium due to strong demand for AI. Healthcare premiums show 30-58% increases, reflecting a senior housing recovery. Industrial trades at a 26.7% discount despite solid fundamentals. Office trades at a 29.9% discount due to structural challenges. Self-storage shifted from premium to a 9% discount amid supply pressures.
Historical context matters here. REITs have traded at approximately 2% premium to NAV on average over 30 years. The current 12-18% median discount signals either broad undervaluation or appropriately priced returns in the higher interest-rate environment.
Cap rates reveal risk-return profiles across property sectors
The capitalisation rate (cap rate) represents the expected annual yield on a property based on its net operating income relative to value. It serves as the primary metric for comparing commercial real estate investments.
The cap rate formula is straightforward:
Cap Rate = Net Operating Income (NOI) ÷ Property Value
Net Operating Income equals Total Revenue minus Operating Expenses. NOI excludes debt service, depreciation, capital expenditures, and income taxes. It represents property-level cash generation before financing costs.
Cap rates of 7% or more indicate higher yields but also higher perceived risk. These typically represent secondary markets or distressed assets. Lower cap rates of 3-5% signal lower yields but greater safety and liquidity. These characteristics characterise premium assets in gateway markets. Cap rates move inversely to property values. When cap rates expand, property values decline.
Current cap rate benchmarks vary significantly by property type. Data centres range from 4.0% to 5.0% with an average of 4.4%. AI demand continues to compress these rates. Industrial Class A ranges from 4.75% to 5.75% with an average of 5.2%. Multifamily Class A ranges from 4.74% to 5.65% with an average of 5.0%. Retail strip centres range from 5.5% to 7.5% with an average of 6.45%. Self-storage ranges from 5.5% to 7.0% with an average of 6.2%. Office Class A CBD ranges from 6.5% to 8.5% with an average of 7.5%. Office Class B ranges from 8.0% to 11.0%, reflecting distressed conditions.
Regional variations matter significantly. Gateway markets like New York, Los Angeles, and San Francisco command cap rates 100-200 basis points lower than secondary markets. This reflects lower perceived risk and greater liquidity.
CBRE econometric analysis shows that, for every 100-basis-point change in 10-year Treasury yields, cap rates move differently across sectors. Industrial moves approximately 41 basis points, showingthe least sensitivity due to strong demand. Office moves approximately 70 basis points. Multifamily moves approximately 75 basis points. Retail moves approximately 78 basis points, indicating the greatest sensitivity.
Rental yield analysis complements cap rate evaluation
Rental yield measures the income return on a property investment and is closely related to cap rates, but it uses different inputs.
The gross rental yield formula is:
Gross Rental Yield = (Annual Gross Rent ÷ Property Value) × 100
The net rental yield formula equals:
Net Rental Yield = (NOI ÷ Property Value) × 100
The distinction matters. Gross yield ignores operating expenses, while net rental yield equals the cap rate. For quick property comparisons, gross yield works. For investment decisions, use the cap rate.
Same-store rent growth tracks organic rental income increases from existing properties. This critical metric shows pricing power. Industry-wide median same-store NOI growth reached 2.9% in 2024, down from 4.4% in 2023. Data centres lead at 8.0% growth. Industrial follows at 5.2%. Healthcare shows 4.1%. Self-storage declined 2.0%. Office fell 3.4%.
REIT dividend yields vary by sector. Office yields 5.25% on average, reflecting higher risk. Healthcare yields 4.17%. Self-storage yields 3.89%. Apartments yield 3.62%. Industrial yields 3.21%. Data centres yield 2-3%, reflecting growth premium. The overall equity REIT sector yields 3.94%, approximately three times the S&P 500 dividend yield.
Occupancy rates signal property market health.
The occupancy rate measures the percentage of rentable space currently leased. It directly impacts NOI and valuations.
The physical occupancy formula is:
Physical Occupancy = (Occupied Units ÷ Total Units) × 100
Economic occupancy better reflects reality when landlords offer rent concessions. A property might exhibit 95% physical occupancy but only 90% economic occupancy after accounting for free-rent periods.
Current occupancy benchmarks vary by property type. Industrial shows REIT occupancy of 95.6-96.1% against a market average of 93.4%. This indicates strong fundamentals. Retail shows REIT occupancy at 95.9-96.6%, compared with a market average of 95.9%. Multifamily shows REIT occupancy of 91.9-95.8% against a market average of 92.1%. This represents the lowest level in 25 years, driven bythe new supply. Office shows REIT occupancy of 86.2-87.7% against a market average of 86.1%. This reflects structural challenges. Self-storage occupancy is 85-93%, down from pandemic highs. Data centres are operating at 78-80% utilisation amid capacity constraints.
REIT-owned properties consistently outperform private market averages by 2-5 percentage points. This demonstrates superior asset selection and management quality.
The office sector presents the greatest challenge. The national vacancy rate reached 19.8% in late 2024. This represents a record high, driven by the adoption of remote work. San Francisco has the highest distress, with a 28.8% vacancy rate. Austin follows at 27.9%. Seattle shows 26.3%. The Bay Area shows 26.4%.
However, return-to-office trends accelerate. Now 53% of companies require three or more days in the office, up from 37% in 2023. Fully remote job postings declined from 21% to 7%—major employers, including Amazon, Google, JPMorgan, and Meta, mandate multiple office days weekly.
Weighted Average Lease Term (WALT) measures average remaining lease duration weighted by rental income. Single-tenanted retail shows the longest WA, LT at 10-15+ years. Office with large tenants shows 5-10 years of remaining term. Industrial shows 5-7 years. Multi-tenant retail shows a 3-5-year horizon. Multifamily shows 1 year with annual renewals. Higher WALT provides a more stable, predictable income.
Debt structure analysis reveals financial risk.
REITs depend heavily on debt financing because the 90% taxable income distribution requirement limits retained earnings. Understanding debt metrics helps assess refinancing risk and dividend sustainability.
These metrics complement the essential financial ratios used to analyse U.S. stocks and apply across all equity investments.
Key debt metrics and healthy benchmarks include Net Debt-to-EBITDA of 4x-6x, with a red-flag threshold above 7x. Interest coverage should exceed 3x with a red flag below 2x. Fixed-rate debt percentage should be 80-90%, with the red flag below 70%. Loan-to-value should range from 30-45%, with a red flag above 50%. Weighted average maturity should exceed 6 years with a red flag below 4 years.
Current industry averages for U.S. equity REITs show 5.6x Net Debt-to-EBITDA, 4.5x interest coverage, approximately 90% fixed-rate debt, and a 6.4-year weighted-average debt maturity. These metrics indicate sector-wide resilience despite higher interest rates.
REIT debt profiles vary significantly by sector. Prologis maintains a 3.0% weighted average rate, a 9.1-year maturity, and an A rating. Public Storage exhibits a 3.9x debt-to-EBITDA ratio and an 8.27x interest coverage ratio, indicating a strong balance sheet. Simon Property shows a 5.2x Debt-to-EBITDA ratio, indicating high leverage but strong cash flow. Equinix shows 4.1x Debt-to-EBITDA with approximately 7x interest coverage and $5.9 billion liquidity. AvalonBay shows a 4.2x Debt-to-EBITDA ratio, a 3.50% weighted average cost of capital, and an A rating. Boston Properties shows 8.2x Debt-to-EBITDA with a BBB+ rating on a negative outlook.
Office REITs carry the highest leverage at 8.01x average Net Debt-to-EBITDA. Healthcare follows at 6.55x. Self-storage maintains the most conservative profile at 3.9-4.1x. Data centres show 4.0-4.5x.
Approximately $1 trillion in commercial real estate debt matures annually through 2026-2027. REITs face approximately $110 billion in maturing debt in 2024-2025. New debt costs average 6.2% versus 4.3% on maturing loans. This 200-basis-point increase creates an approximately 2% annual earnings headwind.
Land bank valuation is critical to homebuilder analysis.
For homebuilder stocks like D.R. Horton, Lennar, and Toll Brothers, land banks are the inventory of owned and controlled land for future development. This critical asset determines growth capacity.
The Residual Value Method calculates land value as:
Land Value = Projected Home Sales Price - Construction Costs - Developer Margin - Carrying Costs
Key metrics include years of supply with an optimal range of 3-5 years based on the current closing pace. The option-versus-ownership mix trends toward 60-75% controlled through options rather than owned outright. The lot cost as a percentage of the home price typically ranges from 15% to 25%.
Current land bank data show D.R. Horton with 590,500 total lots, 25% owned and 75% optioned. NVR holds 180,100 lots at 0% owned and 100% optioned, representing the pure asset-light model. Toll Brothers holds 78,600 lots at 43% owned and 57% optioned, targeting 60% optioned. KB Home holds approximately 77,000 lots at 54% owned and 46% optioned.
The asset-light revolution transforms the industry. Lennar completed a historic February 2025 spin-off of $5.5 billion in land assets into Millrose Properties REIT. NVR pioneered this model by purchasing only finished lots through option agreements. This delivers an industry-leading 34.8% ROE by minimising balance-sheet exposure.
Pre-sales momentum indicates future revenue.
Pre-sales (homes sold before completion) and backlog (homes sold but not delivered) serve as leading indicators of homebuilder performance.
The cancellation rate formula is:
Cancellation Rate = Cancelled Orders ÷ Gross Orders
The absorption rate formula is:
Absorption Rate = Net Orders ÷ Active Communities per Month
Healthy benchmarks include a cancellation rate of 15-20%, with rates above 25% concerning. Absorption rate of 3-4 orders per community monthly indicates healthy demand, while below 2.5 signals weak demand.
Current pre-sales data indicate thatD.R. Horton has a $4.31 billion backlog and an 8% cancellation rate. NVR shows a $4.01 billion backlog with 17% cancellation rate. Toll Brothers reports a $6.38 billion backlog with only a 2.5% cancellation rate, reflecting its luxury advantage. PulteGroup reports a $6.5 billion backlog with an approximately 15% cancellation rate. KB Home reports a a $1.40 billion backlog and an 18% cancellation rate.
The U.S. remains underbuilt by approximately 2.5 million homes. This supports demand for new construction despite elevated mortgage rates. Public homebuilders now command 53% market share, up from 27% in 2012.
REIT-specific valuation metrics explained.
Funds From Operations (FFO) serves as the REIT industry's standard earnings metric. NAREIT developed this in 1991 because GAAP depreciation distorts real estate earnings.
The FFO formula is:
FFO = Net Income + Depreciation & Amortisation + Losses on Property Sales - Gains on Property Sales
FFO adds back depreciation because real estate typically appreciates rather than depreciates. It removes property sale gains and losses as non-recurring items. This provides a clearer picture of recurring cash earnings.
Adjusted FFO (AFFO), also called Cash Available for Distribution, further refines FFO:
AFFO = FFO - Non-Cash Rent Adjustments - Recurring Maintenance CapEx - Leasing Commissions
AFFO more accurately reflects sustainable dividend-paying capacity by accounting for required capital maintenance.
Price-to-FFO benchmarks vary by sector. Data centres trade at 22.4x P/FFO, reflecting a growth premium. Manufactured housing trades at 17.7x, reflecting a defensive premium. The shopping centre trades at 17.1x, reflecting a recovery valuation. Industrial trades at 19-20x reflecting quality premium. Healthcare trades at 15-17x. Office trades at 8.9x, reflecting distressed pricing. Hotels trade at 7.8,x reflecting margin concerns.
The current median REIT P/FFO of approximately 12.6x sits meaningfully below the normal 15-17x range. Historical analysis shows that when valuations reached similar discounts in 2003, 2009, and 2020, REITs subsequently outperformed stocks by 29.8% in the following year.
REITs must distribute 90% of taxable income, but should target below 80% of FFO or AFFO for sustainable dividends and retained capital. American Tower reports a 61.5% FFO payout, which is considered sustainable. Realty Income shows approximately 75% AFFO payout as sustainable. Global Medical REIT shows a 93% AFFO payout, representing a tight margin.
Major US REIT profiles with current metrics
Prologis (PLD), the world's largest industrial REIT, delivered record performance in 2024 with Core FFO of $5.56 per share. Occupancy held at 95.8% with 66-69% net effective rent change on renewals. The company maintains a 30% lease mark-to-market opportunity representing $1.4 billion in potential incremental NOI.
Public Storage (PSA), the largest self-storage REIT with 3,300+ facilities, generated $4.7 billion in 2024 revenue. The company maintains one of the industry's strongest balance sheets, with a 3.9x Debt-to-EBITDA ratio and 8.27x interest coverage. Current dividend yield stands at 4.25%.
Simon Property Group (SPG), the premier mall REIT, achieveda record FFO of $12.99 per share in 2024. Occupancy reached 96.5%, the highest in 8 years. Domestic property NOI grew 4.7%. Dividend yield stands at 4.75%.
Realty Income (O), "The Monthly Dividend Company," delivered its 14th consecutive year of AFFO growth at $4.19 per share with 98.7% portfolio occupancy across 15,621 properties. The REIT maintains 109 consecutive quarterly dividend increases. Dividend yield stands at 5.4% monthly.
Equinix (EQIX), the global data centre leader, generated $8.75 billion in 2024 revenue with 87 consecutive quarters of growth. AFFO reached approximately $35 per share with AI-driven demand accelerating.
When analysing U.S. REITs, watch for these warning signs. Debt-to-EBITDA above 7x signals elevated risk. Interest coverage below 2.0x indicates potential distress. Floating-rate debt exceeding 30% of total debt creates rate sensitivity. Near-term maturities exceeding 20% of the debt within 2 years, without a clear refinancing plan, raise concerns. An AFFO payout ratio above 100% threatens dividend sustainability. Credit rating downgrades, or negative outlook changes, warrant attention. Declining occupancy below sector benchmarks signals weakening fundamentals.
With REITs trading at 12-18% median NAV discounts versus the historical 2% premium, current valuations offer attractive entry points. Industrial shows a 26.7% discount. The combination of 3.9% sector dividend yields, potential NAV discount compression, and 3-6% projected FFO growth suggests a total return of 10%+ for quality U.S. REITs over the next 12-24 months.
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage companies, and not of Winvesta. We advise investors to check with certified experts before making any investment decisions.
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Table of Contents
Indian investors seeking exposure to U.S. real estate stocks and REITs need to master several critical valuation metrics. Net Asset Value reveals whether a REIT trades below its intrinsic property value. Capitalisation rates signal risk-return profiles across property sectors. As of January 2026, U.S. REITs trade at a 12-18% median discount to NAV compared to a historical 2% premium. This creates potential entry points in the industrial and data centre sectors, where fundamentals remain strong. Understanding fundamental analysis tools for Indian investors provides the foundation for applying these REIT-specific valuation metrics effectively.
Net Asset Value determines whether you buy property portfolios at a discount.
Net Asset Value (NAV) represents the estimated market value of a REIT's underlying real estate portfolio minus liabilities. Unlike stocks valued by earnings, REITs require NAV analysis because GAAP uses historical cost, which is depreciated. Real estate typically appreciates over time, making book value misleading.
The real estate NAV formula works as follows:
NAV = (Property Value at Fair Market Value + Cash + Other Assets - Total Debt - Other Liabilities) ÷ Shares Outstanding
This differs fundamentally from book value. While book value records properties at historical cost less depreciation, NAV reflects current market value. A building purchased for $50 million in 2010 might have a book value of$35 million today after depreciation. However, its market value could reach $90 million. NAV reflects this reality.
When a REIT's stock price exceeds NAV per share, it trades at a premium. This indicates market confidence in management or expected property appreciation. When the stock trades below NAV, it represents a discount. This could signal an undervaluation opportunity or perceived risks.
Current NAV positions by sector show significant variation. Data centres trade at an 18.9% premium due to strong demand for AI. Healthcare premiums show 30-58% increases, reflecting a senior housing recovery. Industrial trades at a 26.7% discount despite solid fundamentals. Office trades at a 29.9% discount due to structural challenges. Self-storage shifted from premium to a 9% discount amid supply pressures.
Historical context matters here. REITs have traded at approximately 2% premium to NAV on average over 30 years. The current 12-18% median discount signals either broad undervaluation or appropriately priced returns in the higher interest-rate environment.
Cap rates reveal risk-return profiles across property sectors
The capitalisation rate (cap rate) represents the expected annual yield on a property based on its net operating income relative to value. It serves as the primary metric for comparing commercial real estate investments.
The cap rate formula is straightforward:
Cap Rate = Net Operating Income (NOI) ÷ Property Value
Net Operating Income equals Total Revenue minus Operating Expenses. NOI excludes debt service, depreciation, capital expenditures, and income taxes. It represents property-level cash generation before financing costs.
Cap rates of 7% or more indicate higher yields but also higher perceived risk. These typically represent secondary markets or distressed assets. Lower cap rates of 3-5% signal lower yields but greater safety and liquidity. These characteristics characterise premium assets in gateway markets. Cap rates move inversely to property values. When cap rates expand, property values decline.
Current cap rate benchmarks vary significantly by property type. Data centres range from 4.0% to 5.0% with an average of 4.4%. AI demand continues to compress these rates. Industrial Class A ranges from 4.75% to 5.75% with an average of 5.2%. Multifamily Class A ranges from 4.74% to 5.65% with an average of 5.0%. Retail strip centres range from 5.5% to 7.5% with an average of 6.45%. Self-storage ranges from 5.5% to 7.0% with an average of 6.2%. Office Class A CBD ranges from 6.5% to 8.5% with an average of 7.5%. Office Class B ranges from 8.0% to 11.0%, reflecting distressed conditions.
Regional variations matter significantly. Gateway markets like New York, Los Angeles, and San Francisco command cap rates 100-200 basis points lower than secondary markets. This reflects lower perceived risk and greater liquidity.
CBRE econometric analysis shows that, for every 100-basis-point change in 10-year Treasury yields, cap rates move differently across sectors. Industrial moves approximately 41 basis points, showingthe least sensitivity due to strong demand. Office moves approximately 70 basis points. Multifamily moves approximately 75 basis points. Retail moves approximately 78 basis points, indicating the greatest sensitivity.
Rental yield analysis complements cap rate evaluation
Rental yield measures the income return on a property investment and is closely related to cap rates, but it uses different inputs.
The gross rental yield formula is:
Gross Rental Yield = (Annual Gross Rent ÷ Property Value) × 100
The net rental yield formula equals:
Net Rental Yield = (NOI ÷ Property Value) × 100
The distinction matters. Gross yield ignores operating expenses, while net rental yield equals the cap rate. For quick property comparisons, gross yield works. For investment decisions, use the cap rate.
Same-store rent growth tracks organic rental income increases from existing properties. This critical metric shows pricing power. Industry-wide median same-store NOI growth reached 2.9% in 2024, down from 4.4% in 2023. Data centres lead at 8.0% growth. Industrial follows at 5.2%. Healthcare shows 4.1%. Self-storage declined 2.0%. Office fell 3.4%.
REIT dividend yields vary by sector. Office yields 5.25% on average, reflecting higher risk. Healthcare yields 4.17%. Self-storage yields 3.89%. Apartments yield 3.62%. Industrial yields 3.21%. Data centres yield 2-3%, reflecting growth premium. The overall equity REIT sector yields 3.94%, approximately three times the S&P 500 dividend yield.
Occupancy rates signal property market health.
The occupancy rate measures the percentage of rentable space currently leased. It directly impacts NOI and valuations.
The physical occupancy formula is:
Physical Occupancy = (Occupied Units ÷ Total Units) × 100
Economic occupancy better reflects reality when landlords offer rent concessions. A property might exhibit 95% physical occupancy but only 90% economic occupancy after accounting for free-rent periods.
Current occupancy benchmarks vary by property type. Industrial shows REIT occupancy of 95.6-96.1% against a market average of 93.4%. This indicates strong fundamentals. Retail shows REIT occupancy at 95.9-96.6%, compared with a market average of 95.9%. Multifamily shows REIT occupancy of 91.9-95.8% against a market average of 92.1%. This represents the lowest level in 25 years, driven bythe new supply. Office shows REIT occupancy of 86.2-87.7% against a market average of 86.1%. This reflects structural challenges. Self-storage occupancy is 85-93%, down from pandemic highs. Data centres are operating at 78-80% utilisation amid capacity constraints.
REIT-owned properties consistently outperform private market averages by 2-5 percentage points. This demonstrates superior asset selection and management quality.
The office sector presents the greatest challenge. The national vacancy rate reached 19.8% in late 2024. This represents a record high, driven by the adoption of remote work. San Francisco has the highest distress, with a 28.8% vacancy rate. Austin follows at 27.9%. Seattle shows 26.3%. The Bay Area shows 26.4%.
However, return-to-office trends accelerate. Now 53% of companies require three or more days in the office, up from 37% in 2023. Fully remote job postings declined from 21% to 7%—major employers, including Amazon, Google, JPMorgan, and Meta, mandate multiple office days weekly.
Weighted Average Lease Term (WALT) measures average remaining lease duration weighted by rental income. Single-tenanted retail shows the longest WA, LT at 10-15+ years. Office with large tenants shows 5-10 years of remaining term. Industrial shows 5-7 years. Multi-tenant retail shows a 3-5-year horizon. Multifamily shows 1 year with annual renewals. Higher WALT provides a more stable, predictable income.
Debt structure analysis reveals financial risk.
REITs depend heavily on debt financing because the 90% taxable income distribution requirement limits retained earnings. Understanding debt metrics helps assess refinancing risk and dividend sustainability.
These metrics complement the essential financial ratios used to analyse U.S. stocks and apply across all equity investments.
Key debt metrics and healthy benchmarks include Net Debt-to-EBITDA of 4x-6x, with a red-flag threshold above 7x. Interest coverage should exceed 3x with a red flag below 2x. Fixed-rate debt percentage should be 80-90%, with the red flag below 70%. Loan-to-value should range from 30-45%, with a red flag above 50%. Weighted average maturity should exceed 6 years with a red flag below 4 years.
Current industry averages for U.S. equity REITs show 5.6x Net Debt-to-EBITDA, 4.5x interest coverage, approximately 90% fixed-rate debt, and a 6.4-year weighted-average debt maturity. These metrics indicate sector-wide resilience despite higher interest rates.
REIT debt profiles vary significantly by sector. Prologis maintains a 3.0% weighted average rate, a 9.1-year maturity, and an A rating. Public Storage exhibits a 3.9x debt-to-EBITDA ratio and an 8.27x interest coverage ratio, indicating a strong balance sheet. Simon Property shows a 5.2x Debt-to-EBITDA ratio, indicating high leverage but strong cash flow. Equinix shows 4.1x Debt-to-EBITDA with approximately 7x interest coverage and $5.9 billion liquidity. AvalonBay shows a 4.2x Debt-to-EBITDA ratio, a 3.50% weighted average cost of capital, and an A rating. Boston Properties shows 8.2x Debt-to-EBITDA with a BBB+ rating on a negative outlook.
Office REITs carry the highest leverage at 8.01x average Net Debt-to-EBITDA. Healthcare follows at 6.55x. Self-storage maintains the most conservative profile at 3.9-4.1x. Data centres show 4.0-4.5x.
Approximately $1 trillion in commercial real estate debt matures annually through 2026-2027. REITs face approximately $110 billion in maturing debt in 2024-2025. New debt costs average 6.2% versus 4.3% on maturing loans. This 200-basis-point increase creates an approximately 2% annual earnings headwind.
Land bank valuation is critical to homebuilder analysis.
For homebuilder stocks like D.R. Horton, Lennar, and Toll Brothers, land banks are the inventory of owned and controlled land for future development. This critical asset determines growth capacity.
The Residual Value Method calculates land value as:
Land Value = Projected Home Sales Price - Construction Costs - Developer Margin - Carrying Costs
Key metrics include years of supply with an optimal range of 3-5 years based on the current closing pace. The option-versus-ownership mix trends toward 60-75% controlled through options rather than owned outright. The lot cost as a percentage of the home price typically ranges from 15% to 25%.
Current land bank data show D.R. Horton with 590,500 total lots, 25% owned and 75% optioned. NVR holds 180,100 lots at 0% owned and 100% optioned, representing the pure asset-light model. Toll Brothers holds 78,600 lots at 43% owned and 57% optioned, targeting 60% optioned. KB Home holds approximately 77,000 lots at 54% owned and 46% optioned.
The asset-light revolution transforms the industry. Lennar completed a historic February 2025 spin-off of $5.5 billion in land assets into Millrose Properties REIT. NVR pioneered this model by purchasing only finished lots through option agreements. This delivers an industry-leading 34.8% ROE by minimising balance-sheet exposure.
Pre-sales momentum indicates future revenue.
Pre-sales (homes sold before completion) and backlog (homes sold but not delivered) serve as leading indicators of homebuilder performance.
The cancellation rate formula is:
Cancellation Rate = Cancelled Orders ÷ Gross Orders
The absorption rate formula is:
Absorption Rate = Net Orders ÷ Active Communities per Month
Healthy benchmarks include a cancellation rate of 15-20%, with rates above 25% concerning. Absorption rate of 3-4 orders per community monthly indicates healthy demand, while below 2.5 signals weak demand.
Current pre-sales data indicate thatD.R. Horton has a $4.31 billion backlog and an 8% cancellation rate. NVR shows a $4.01 billion backlog with 17% cancellation rate. Toll Brothers reports a $6.38 billion backlog with only a 2.5% cancellation rate, reflecting its luxury advantage. PulteGroup reports a $6.5 billion backlog with an approximately 15% cancellation rate. KB Home reports a a $1.40 billion backlog and an 18% cancellation rate.
The U.S. remains underbuilt by approximately 2.5 million homes. This supports demand for new construction despite elevated mortgage rates. Public homebuilders now command 53% market share, up from 27% in 2012.
REIT-specific valuation metrics explained.
Funds From Operations (FFO) serves as the REIT industry's standard earnings metric. NAREIT developed this in 1991 because GAAP depreciation distorts real estate earnings.
The FFO formula is:
FFO = Net Income + Depreciation & Amortisation + Losses on Property Sales - Gains on Property Sales
FFO adds back depreciation because real estate typically appreciates rather than depreciates. It removes property sale gains and losses as non-recurring items. This provides a clearer picture of recurring cash earnings.
Adjusted FFO (AFFO), also called Cash Available for Distribution, further refines FFO:
AFFO = FFO - Non-Cash Rent Adjustments - Recurring Maintenance CapEx - Leasing Commissions
AFFO more accurately reflects sustainable dividend-paying capacity by accounting for required capital maintenance.
Price-to-FFO benchmarks vary by sector. Data centres trade at 22.4x P/FFO, reflecting a growth premium. Manufactured housing trades at 17.7x, reflecting a defensive premium. The shopping centre trades at 17.1x, reflecting a recovery valuation. Industrial trades at 19-20x reflecting quality premium. Healthcare trades at 15-17x. Office trades at 8.9x, reflecting distressed pricing. Hotels trade at 7.8,x reflecting margin concerns.
The current median REIT P/FFO of approximately 12.6x sits meaningfully below the normal 15-17x range. Historical analysis shows that when valuations reached similar discounts in 2003, 2009, and 2020, REITs subsequently outperformed stocks by 29.8% in the following year.
REITs must distribute 90% of taxable income, but should target below 80% of FFO or AFFO for sustainable dividends and retained capital. American Tower reports a 61.5% FFO payout, which is considered sustainable. Realty Income shows approximately 75% AFFO payout as sustainable. Global Medical REIT shows a 93% AFFO payout, representing a tight margin.
Major US REIT profiles with current metrics
Prologis (PLD), the world's largest industrial REIT, delivered record performance in 2024 with Core FFO of $5.56 per share. Occupancy held at 95.8% with 66-69% net effective rent change on renewals. The company maintains a 30% lease mark-to-market opportunity representing $1.4 billion in potential incremental NOI.
Public Storage (PSA), the largest self-storage REIT with 3,300+ facilities, generated $4.7 billion in 2024 revenue. The company maintains one of the industry's strongest balance sheets, with a 3.9x Debt-to-EBITDA ratio and 8.27x interest coverage. Current dividend yield stands at 4.25%.
Simon Property Group (SPG), the premier mall REIT, achieveda record FFO of $12.99 per share in 2024. Occupancy reached 96.5%, the highest in 8 years. Domestic property NOI grew 4.7%. Dividend yield stands at 4.75%.
Realty Income (O), "The Monthly Dividend Company," delivered its 14th consecutive year of AFFO growth at $4.19 per share with 98.7% portfolio occupancy across 15,621 properties. The REIT maintains 109 consecutive quarterly dividend increases. Dividend yield stands at 5.4% monthly.
Equinix (EQIX), the global data centre leader, generated $8.75 billion in 2024 revenue with 87 consecutive quarters of growth. AFFO reached approximately $35 per share with AI-driven demand accelerating.
When analysing U.S. REITs, watch for these warning signs. Debt-to-EBITDA above 7x signals elevated risk. Interest coverage below 2.0x indicates potential distress. Floating-rate debt exceeding 30% of total debt creates rate sensitivity. Near-term maturities exceeding 20% of the debt within 2 years, without a clear refinancing plan, raise concerns. An AFFO payout ratio above 100% threatens dividend sustainability. Credit rating downgrades, or negative outlook changes, warrant attention. Declining occupancy below sector benchmarks signals weakening fundamentals.
With REITs trading at 12-18% median NAV discounts versus the historical 2% premium, current valuations offer attractive entry points. Industrial shows a 26.7% discount. The combination of 3.9% sector dividend yields, potential NAV discount compression, and 3-6% projected FFO growth suggests a total return of 10%+ for quality U.S. REITs over the next 12-24 months.
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage companies, and not of Winvesta. We advise investors to check with certified experts before making any investment decisions.
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Invest in 11,000+ US stocks & ETFs
