REIT vs C-corp Valuation: The Interview Answer

Introduction

Few interview questions sort candidates as fast as "how does valuing a REIT differ from valuing a normal company," because the wrong answer treats a REIT as a C-corp that happens to own buildings. It is not. Two structural facts make a REIT a different animal, and a strong answer leads with both. First, a REIT pays essentially no corporate-level tax, because it distributes its income to shareholders rather than retaining it. Second, real estate carries enormous depreciation, which makes a REIT's reported earnings a poor measure of its economics. The first fact changes the tax math; the second changes the metrics. Together they explain why you reach for FFO and NAV instead of EPS and EV/EBITDA, and why the comparison is structural rather than cosmetic.

The defining feature of a REIT is that it is a tax conduit. To qualify, it must distribute at least 90% of its taxable income to shareholders, and in exchange it deducts those dividends and pays little or no entity-level tax. A regular C-corp does the opposite: it pays corporate income tax on its profits, then shareholders pay tax again on dividends, the classic double taxation. By passing income straight through, a REIT eliminates the corporate layer entirely.

REIT Tax Conduit

A REIT is a pass-through entity for income that it distributes: by paying out at least 90% of taxable income as dividends, it deducts those distributions and avoids corporate-level income tax, so its earnings are taxed only once, at the shareholder level. This is the structural feature that distinguishes it from a C-corp, which is taxed at both the corporate and shareholder levels.

The clearest way to make the point in an interview is to trace a dollar of income through both structures. Most REITs distribute close to 100% of taxable income precisely to drive entity-level tax to zero, so far more of each pretax dollar reaches the investor.

That single layer of tax is why the same stream of property income supports a higher valuation inside a REIT than inside a C-corp. The qualification rules behind the structure are covered in what a REIT is and why the structure exists, and the payout mechanic in the 90% distribution requirement.

The second structural fact is depreciation. A C-corp is reasonably valued on net income and EBITDA because those figures track its economics. For a REIT, they do not. Real estate depreciation is a massive non-cash charge that crushes reported net income even when the buildings are appreciating, so EPS and a P/E multiple understate the business badly. The industry's answer is to value REITs on metrics that add depreciation back or sidestep it entirely.

The reasons trace directly to the structure. FFO adds real estate depreciation back to net income; AFFO then subtracts the maintenance capital that EBITDA ignores, which matters enormously for capex-heavy sectors like office and lodging. NAV rebuilds value from the buildings up. The depreciation distortion itself is covered in why GAAP understates REIT economics, and the FFO-versus-AFFO distinction in how to explain FFO vs AFFO.

Putting the pieces together, the comparison is not that REITs use "different multiples" but that the entire frame shifts. A C-corp analysis asks what the business earns and applies an earnings or EBITDA multiple. A REIT analysis asks what the underlying real estate is worth (NAV) and what cash the portfolio throws off to shareholders (AFFO and the dividend), because the structure forces nearly all of that cash out the door. The dividend yield is central to a REIT in a way it rarely is for a C-corp, since the 90% rule makes the distribution the main event rather than an afterthought.

What drives value also differs in emphasis. A C-corp grows value by growing earnings and expanding margins, and it can fund that growth by retaining profits. A REIT grows value per share by acquiring properties at a yield above its cost of capital, developing at a profit, and pushing rents, each of which lifts FFO and AFFO per share and, ideally, NAV per share. Because the 90% rule forces out nearly all cash, a REIT cannot self-fund growth by retaining earnings; it raises external equity and debt instead. That dependence on external capital is itself a structural difference worth naming, since it ties the payout rule directly to how REITs expand and to why their access to cheap equity matters so much.

The Catch at the Shareholder Level

There is a catch that a sharp interviewer will probe, and addressing it pre-empts the follow-up. The entity-level tax saving is not a pure free lunch, because REIT dividends are generally taxed at the investor's ordinary income rate rather than the lower qualified-dividend rate that applies to most C-corp dividends.

The full treatment of how REIT and C-corp dividends are taxed and how that feeds valuation lives in REIT vs C-corp valuation and dividend treatment, and the broader real estate tax backdrop in real estate tax fundamentals.

A clean answer moves in two beats that mirror the two structural facts: a REIT avoids corporate tax by distributing its income, so more cash reaches investors and the dividend is central; and depreciation distorts its earnings, so you value it on FFO, AFFO, and NAV rather than P/E and EV/EBITDA. Lead with the structure, let the metrics follow from it, and acknowledge the investor-level tax nuance so the picture is honest.

Everything distinctive about REIT valuation, FFO, AFFO, NAV, the centrality of the dividend, the no-tax-effect rule, descends from a single design choice: trading corporate tax for a mandatory payout. Root the metric differences in that structure instead of listing them as unrelated facts, and the answer coheres around one cause rather than five symptoms. That root-cause framing, more than any single multiple, is what lifts the answer above the C-corp-with-buildings version everyone else gives.