Adjusted Funds from Operations - Explained
What are Adjusted Funds from Operations?
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Table of ContentsWhat are Adjusted Funds From Operations?How are Adjusted Funds From Operations Used?Calculating Adjusted Funds From OperationsAcademics Research on Adjusted Funds From Operations
What are Adjusted Funds From Operations?
Adjusted funds from operations is the evaluation of financial performance that is used while observing real estate investment trusts, commonly known as REITs. There are several methods to assess adjusted funds from operations of REIT. However, it is equivalent to funds from operations (FFO) of the trust with some adjustments made for recurring capital expenditures for the purpose of sustaining the underlying assets quality of real estate investment trusts.
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How are Adjusted Funds From Operations Used?
Irrespective of the method of computation of Adjusted Funds From Operations selected, it stands out to be a more reliable method of measuring residual cash flow for stakeholders than funds from operations. It is so because it considers increases in rent and excessive costs borne by the REIT, thereby offering a clearer base number while making predictions for present values. Also, it gives a better idea of the dividends that REITs can manage paying in future. It is considered to be a non-GAAP measure.
Calculating Adjusted Funds From Operations
In order to calculate adjusted funds from operations, it is important to calculate funds from operations of REIT. The FFO calculates cash flow by analyzing cash inflows and outflows. It shows the effect from the leasing and acquisition operations and interest expenses of REITs. FFO includes the net income earned by REIT that includes amortization and depreciation, and excludes capital gains received from selling property. Capital gains are eliminated because of not having long-term impact on the prospective earning capability of REIT. The formula for FFO: FFO is equivalent to the addition of net income, amortization, depreciation and subtraction of capital gains from property sales After calculating FFO, one can calculate AFFO with this formula: AFFO= FFO + increase in rent - capital expenditures - routine maintenance amounts For example, REITs net income for the previous reporting cycle was $2 million. In that period, it earned $400,000 by selling a property, and incurred a loss of $100,000 by selling another. The amortization and depreciation expenses were $35,000 and $50,000 respectively. Also, rent increases were worth $40,000, routine maintenance was $30,000 and capital expenditures were $40,000. With this information provided, FFO will be ascertained in the following manner: FFO = $2,000,000 + $35,000 + $50,000 - ($400,000 - $100,000) = $1,785,000 FFO being $1,785,000 will help in calculating AFFO: AFFO = FFO + $40,000 - $75,000 - $30,000 = $1,785,000 - $65,000 = $1,720,000