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Adjusted Funds From Operations Definition
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.
A Little More on What is Adjusted Funds From Operations – AFFO
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 depriciation, 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, depriciation 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, REIT’s 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 depriciation 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
Reference for “Adjusted Funds From Operations – AFFO”
Academics Research on “Adjusted Funds From Operations – AFFO”
The information content of funds from operations (FFO) for real estate investment trusts (REITs), Vincent, L. (1999). The information content of funds from operations (FFO) for real estate investment trusts (REITs). Journal of Accounting and Economics, 26(1-3), 69-104. This paper examines the information content of alternative summary performance measures, using stock returns as the benchmark, for 138 REITs during 1994–1996. This paper tests for both incremental and relative information content of FFO (a voluntarily disclosed, accounting-based performance measure that is the industry standard for REITs) compared to GAAP net income (EPS), cash from operations, and earnings before interest, taxes, depreciation and amortization. Results indicate that both FFO and EPS consistently provide incremental information content with only weak evidence that EPS has greater relative information content and no evidence for the other summary performance measures.
NAREIT and tax laws changes will foster consistency in accounting practice and disclosure among REITs, Ferst, J. L., & MacCrate, J. R. (2000). NAREIT and tax laws changes will foster consistency in accounting practice and disclosure among REITs. The Appraisal Journal, 68(1), 14.
Investing in REITs: Real Estate Investment Trusts-revised & Updated Edition, Sahin, O. F. (2003). Investing in REITs: Real Estate Investment Trusts-revised & Updated Edition. Journal of Real Estate Literature, 11(2), 221. Sahin, O. F. (2003). Investing in REITs: Real Estate Investment Trusts-revised & Updated Edition. Journal of Real Estate Literature, 11(2), 221.
Real Estate Investment Trusts (REITs), Goddard, G. J., & Marcum, B. (2012). Real Estate Investment Trusts (REITs). In Real Estate Investment (pp. 253-272). Springer, Berlin, Heidelberg. In this final chapter, the real estate investment trust (REIT) will be discussed. These special investment vehicles can serve as a portfolio diversification strategy for investors seeking an investment which provides return possibilities in a variety of property types and locations. The REIT, while of relatively recent creation, has roots which trace back to earlier times. Students of real estate finance should be aware of the functioning and the strategy of REITs, as these entities have become increasingly more involved in real estate investment. The chapter concludes with thoughts of international dimensions of real estate.
Real Estate Investment Trust Corner, Business, W. T. M. (2018). Real Estate Investment Trust Corner. JOURNAL OF PASSTHROUGH ENTITIES.