REIT valuation without the P/E trap: Realty Income

Realty Income trades at 50 times trailing earnings. For a tech company that would be a rich growth multiple; for a REIT it is close to meaningless. This walkthrough covers the three lenses built for real estate - and why the ordinary ones are switched off.

What this example teaches

• Why GAAP earnings (and therefore P/E) understate REIT cash generation
• What FFO, AFFO, and NAV each measure
• How dividend coverage fits into the model's REIT view

Model snapshot - June 11, 2026. Price $62.06. Blended model fair value estimate $73.75, which sits 18.8% above the price. The live strip above shows today's numbers.

The depreciation illusion

GAAP requires a REIT to depreciate its buildings every year, as if a Walgreens with a 12-year lease were wasting away to zero. That non-cash charge crushes reported earnings: Realty Income's trailing P/E screens at 50.2 while its dividend - paid in cash, monthly - yields about 5.4%. A company cannot pay out more cash than it earns indefinitely, so either the dividend is doomed or the earnings number is wrong. For most REITs it is the earnings number.

The industry's fix is FFO (funds from operations): earnings with depreciation added back and property-sale gains removed. AFFO goes further, subtracting the capex actually needed to maintain buildings - the closest thing to true distributable cash. NAV ignores income entirely and marks the property portfolio to market value per share.

What the model used

The model's Real Estate weighting is anchored on exactly those three - FFO, AFFO, and NAV carry the largest combined weight, with DDM next (a monthly-dividend REIT is a natural DDM candidate) and P/E nowhere in the sector weighting.

Method	Model fair value (6/11/26)	Note
DDM	$155.15	dividend stream, generous growth assumption
P/AFFO	$43.86	distributable-cash multiple
EV/EBITDA	$66.58	capital-structure-aware
P/B	$93.58	book anchor
P/E	$35.85	shown, but zero sector weight - the depreciation illusion

On the snapshot date the FFO and NAV methods abstained for this ticker - the required inputs were not available from the data provider that day - and the stock page's "Why this fair value" panel says so explicitly rather than silently blending fewer methods. Abstention with a stated reason is a feature: a blend that quietly changes its ingredients is harder to trust than one that tells you its coverage shrank.

The blended estimate of $73.75 sat 18.8% above the $62.06 price - a model reading that the discounted REIT sector pricing of the snapshot period left this dividend stream valued below what the model's payout and rate assumptions support. As always, that statement is conditional on those assumptions; the panel and sliders let you test them.

The coverage check that matters

For any REIT, one ratio does more work than any fair-value estimate: AFFO payout coverage - whether distributable cash actually covers the dividend. The model computes it and flags REITs paying out more than they generate. A high yield with thin coverage is how REIT value traps look before they spring; coverage context turns a yield number into information.

Figures are model estimates computed from public fundamentals under stated sector assumptions, as of June 11, 2026. They are educational illustrations, not investment advice or a prediction of future prices.