What Are Adjusted Funds From Operations (AFFO)?
The financial performance metric, adjusted funds from operations (AFFO), is largely used to analyze real estate investment trusts (REITs). Although several computation methods may be employed, the AFFO of a REIT is typically equal to the trust’s funds from operations (FFO), with adjustments made for ongoing capital expenditures that are necessary to preserve the quality of the REIT’s underlying assets. The calculation adjusts rent, lease fees, and other significant elements to GAAP straight-lining.
Knowing AFFO (Adjusted Funds From Operations)
AFFO is regarded as a more accurate indicator of residual cash flow for shareholders than plain FFO, regardless of the method used by industry experts to calculate it. Although FFO is frequently utilized, it doesn’t entirely capture the total residual cash flow because it doesn’t account for capital expenses needed to sustain the current portfolio of properties. Because it considers new expenses incurred by the REIT as well as other income streams like rent increases, professional analysts prefer AFFO. As a result, it offers a more precise starting point for calculating present values and a better indicator of the REIT’s potential dividend yield in the future. This measure deviates from GAAP.
AFFO Adjusted Funds From Operations Calculation
An analyst must establish the REIT’s funds from operations (FFO) before computing the AFFO. The FFO measures cash flow from a predetermined list of activities. The impact of leasing and purchase activity by the REIT, as well as interest expenses, are reflected in FFO. FFO includes amortization and depreciation in the REIT’s net income but does not include capital gains from property sales. These profits are not included since they are one-time occurrences and typically do not have a long-term impact on the REIT’s prospects for future earnings.
The formula for FFO is:
FFO = net income + amortization + depreciation – capital gains from property sales
Once the FFO is determined, the AFFO can be calculated. Though there is no one official formula, calculations for AFFO typically would be something like:
AFFO = FFO + rent increases – capital expenditures – routine maintenance amounts
AFFO CALCULATION
As an example of the AFFO calculation, assume that a REIT had $2 million in net income over the last reporting period. During that time, it earned $400,000 from selling one of its properties and lost $100,000 from selling another. It reported $35,000 of amortization and $50,000 of depreciation. During the period, net rent increases were $40,000, capital expenditures were $75,000, and routine maintenance amounted to $30,000.
Given this information, the FFO can be calculated as:
FFO = $2,000,000 + $35,000 + $50,000 – ($400,000 – $100,000) = $1,785,000
From this, the AFFO is calculated as:
AFFO = FFO + $40,000 – $75,000 – $30,000 = $1,720,000
- A financial metric known as adjusted funds from operations (AFFO) calculates a real estate investment trust’s (REIT) estimated value.
- Although AFFO is based on funds from operations (FFO), it is preferred because it considers costs, providing a more realistic assessment of the REIT’s present values and dividend-paying capacity.
- An AFFO calculation is along the lines of AFFO = FFO + rent increases – capital expenditures – routine maintenance amounts, although no single recognized measure exists.
