100happywishes.com
All about investing

Adjusted Funds From Operations—AFFO

Contents

  1. Navigating the World of AFFO
  2. Key Insights:
  3. Demystifying AFFO
  4. AFFO Computation:
  5. Illustrative Example: Computing AFFO
  6. Calculation:
  7. Beyond Traditional Metrics

Unraveling Adjusted Funds From Operations (AFFO) in Real Estate Investment Trusts

Navigating the World of AFFO

Adjusted Funds From Operations (AFFO) serves as a crucial financial metric in the realm of Real Estate Investment Trusts (REITs). This article sheds light on the intricacies of AFFO, its significance in evaluating REITs, and the methodology behind its calculation.

Key Insights:

  • AFFO offers a nuanced perspective on a REIT's residual cash flow, accounting for recurring capital expenditures.
  • Unlike simple Funds From Operations (FFO), AFFO deducts additional costs and incorporates income sources like rent increases.
  • Despite the absence of an official formula, AFFO computations typically involve adjustments for rent increases, capital expenditures, and routine maintenance.

Demystifying AFFO

AFFO, while not standardized across the industry, is favored by analysts for its comprehensive approach in estimating a REIT's true earnings potential. By factoring in expenses like capital expenditures and maintenance costs, AFFO provides a more accurate depiction of a REIT's ability to generate dividends.

AFFO Computation:

  • Start by determining the FFO, which encompasses cash flow from specific activities including leasing, acquisition, and interest costs.
  • Subtract capital gains from property sales from the FFO to arrive at a net figure.
  • Calculate the AFFO by further adjusting the FFO for rent increases, capital expenditures, and routine maintenance.

Illustrative Example: Computing AFFO

Let's consider a hypothetical scenario: a REIT with $2 million in net income, amortization of $35,000, and depreciation of $50,000. Additionally, the REIT earned $400,000 from one property sale and incurred a loss of $100,000 from another. Net rent increases amounted to $40,000, with capital expenditures of $75,000 and routine maintenance costs of $30,000.

Calculation:

  • FFO: $2,000,000 + $35,000 + $50,000 - ($400,000 - $100,000) = $1,785,000
  • AFFO: $1,785,000 + $40,000 - $75,000 - $30,000 = $1,720,000

Beyond Traditional Metrics

In the evaluation of REITs, conventional metrics like earnings-per-share (EPS) and price-to-earnings ratio (P/E) may fall short. AFFO offers a more nuanced perspective, providing insights into a REIT's operational efficiency and ability to generate sustainable returns.