{"id":28960,"date":"2024-05-01T10:23:56","date_gmt":"2024-05-01T15:23:56","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/?post_type=biws_kb&#038;p=28960"},"modified":"2024-11-19T22:52:17","modified_gmt":"2024-11-20T03:52:17","slug":"funds-from-operations-ffo","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/reit-modeling\/funds-from-operations-ffo\/","title":{"rendered":"Funds From Operations (FFO) for a REIT: Meaning, Calculations, and Real-Life Usage"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Funds From Operations (FFO) for a REIT: Meaning, Calculations, and Real-Life Usage<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/reit-modeling\/funds-from-operations-ffo\/#Using_Funds_from_Operations_FFO_to_Value_REITs_in_Real_Life\">Using Funds from Operations (FFO) to Value REITs in Real Life<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/reit-modeling\/funds-from-operations-ffo\/#IFRS_vs_US_GAAP_Differences_in_the_Funds_from_Operations_Calculation\">IFRS vs. U.S. GAAP Differences in the Funds from Operations Calculation<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/reit-modeling\/funds-from-operations-ffo\/#Funds_from_Operations_vs_Free_Cash_Flow\">Funds from Operations vs. Free Cash Flow<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/breakingintowallstreet.com\/kb\/reit-modeling\/funds-from-operations-ffo\/#Funds_from_Operations_FFO_vs_Net_Operating_Income_NOI\">Funds from Operations (FFO) vs. Net Operating Income (NOI)<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/breakingintowallstreet.com\/kb\/reit-modeling\/funds-from-operations-ffo\/#Adjusted_Funds_from_Operations_AFFO_and_Other_Variations\">Adjusted Funds from Operations (AFFO) and Other Variations<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/breakingintowallstreet.com\/kb\/reit-modeling\/funds-from-operations-ffo\/#Final_Thoughts_on_Funds_from_Operations_FFO\">Final Thoughts on Funds from Operations (FFO)<\/a><\/li><\/ul><\/nav><\/div>\n\n<blockquote><p><strong>Funds from Operations (FFO) Definition:<\/strong> For Equity REITs, FFO equals Net Income + Real Estate-Related Depreciation &amp; Amortization + Losses \/ (Gains) on Property Sales + Impairments. It is an improved version of Net Income that more accurately represents a REIT\u2019s operating performance and may better indicate the Dividends a REIT can issue, which is critical for its business model.<\/p><\/blockquote>\n<p>Here\u2019s an example calculation for AvalonBay, a multifamily REIT in the U.S.:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-28961 size-full\" title=\"Funds from Operations Calculation\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101000\/01-Funds-from-Operations-Calculation.jpg\" alt=\"Funds from Operations Calculation\" width=\"1118\" height=\"350\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101000\/01-Funds-from-Operations-Calculation.jpg 1118w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101000\/01-Funds-from-Operations-Calculation-300x94.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101000\/01-Funds-from-Operations-Calculation-1024x321.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101000\/01-Funds-from-Operations-Calculation-768x240.jpg 768w\" sizes=\"(max-width: 1118px) 100vw, 1118px\" \/><\/p>\n<p>As background information, a <a href=\"https:\/\/breakingintowallstreet.com\/kb\/reit-modeling\/\" target=\"_blank\" rel=\"noopener\">real estate investment trust (REIT)<\/a> is a company that buys, sells, develops, and operates <strong>properties<\/strong> and complies with very specific requirements to be exempt from corporate taxes (or pay very little in corporate taxes).<\/p>\n<p>For example, U.S.-based REITs must distribute 90% of their <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/net-income\/\" target=\"_blank\" rel=\"noopener\">Net Income<\/a> as Dividends and earn 75% of their profits from real estate; also, 75% of their total assets must be real estate-related.<\/p>\n<p>Due to the Dividend requirements, REITs maintain very low Cash balances and must, therefore, raise Debt and Equity constantly to acquire and develop properties.<\/p>\n<p>For REITs, the FFO metric <strong>is an improved version of Net Income<\/strong> that more accurately captures their ability to issue Dividends.<\/p>\n<p>Depreciation is a large non-cash expense for REITs, but it does not reduce their cash flow, so FFO adds it back.<\/p>\n<p><a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/why-gains-and-losses-are-non-cash-charges\/\" target=\"_blank\" rel=\"noopener\">Gains and Losses<\/a> are non-recurring items that get reversed in the FFO calculation because they do not affect a REIT\u2019s long-term ability to issue Dividends.<\/p>\n<p>They do reduce the REIT\u2019s income from properties, but the REIT typically redeploys the proceeds from these sales into new properties and makes up for it like that.<\/p>\n<p>FFO does <strong>not<\/strong> \u201creplace\u201d traditional cash flow metrics such as <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/how-to-calculate-free-cash-flow\/\" target=\"_blank\" rel=\"noopener\">Free Cash Flow (FCF)<\/a> or <a href=\"https:\/\/breakingintowallstreet.com\/kb\/discounted-cash-flow-analysis-dcf\/unlevered-free-cash-flow\/\" target=\"_blank\" rel=\"noopener\">Unlevered Free Cash Flow (UFCF)<\/a>.<\/p>\n<p>It is <strong>a more relevant version of Net Income<\/strong> designed for the specific business nuances of REITs.<\/p>\n<p>You can see the differences between FFO, FCF, and UFCF in this chart below for AvalonBay:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-28962 size-full\" title=\"Funds from Operations vs. Free Cash Flow vs. Net Operating Income\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101035\/02-FFO-UFCF-FCF-NOI.jpg\" alt=\"Funds from Operations vs. Free Cash Flow vs. Net Operating Income\" width=\"1010\" height=\"610\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101035\/02-FFO-UFCF-FCF-NOI.jpg 1010w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101035\/02-FFO-UFCF-FCF-NOI-300x181.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101035\/02-FFO-UFCF-FCF-NOI-768x464.jpg 768w\" sizes=\"(max-width: 1010px) 100vw, 1010px\" \/><\/p>\n<h3><strong>Files &amp; Resources:<\/strong><\/h3>\n<p><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/REIT\/FFO\/Funds-from-Operations-FFO.xlsx\" target=\"_blank\" rel=\"noopener\">Funds from Operations &#8211; AvalonBay Calculations and Public Comps (XL)<\/a><\/p>\n<p><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/REIT\/FFO\/Funds-from-Operations-Slides.pdf\" target=\"_blank\" rel=\"noopener\">Funds from Operations &#8211; Slides (PDF)<\/a><\/p>\n<p><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/REIT\/FFO\/AVB-10-K-Excerpts.pdf\" target=\"_blank\" rel=\"noopener\">AvalonBay &#8211; 10-K Excerpts for FFO Calculation (PDF)<\/a><\/p>\n<p><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/REIT\/FFO\/Vicinity-Annual-Report-Excerpts.pdf\" target=\"_blank\" rel=\"noopener\">Vicinity Centres &#8211; Annual Report Excerpts for FFO Calculation (PDF)<\/a><\/p>\n<p>Full Annual Reports &#8211; <a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/REIT\/FFO\/AVB-10-K.pdf\" target=\"_blank\" rel=\"noopener\">AvalonBay<\/a> | <a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/REIT\/FFO\/Vicinity-Centres-Australia-Annual-Report.pdf\" target=\"_blank\" rel=\"noopener\">Vicinity Centres<\/a><\/p>\n<h3><strong>Video Table of Contents:<\/strong><\/h3>\n<ul>\n<li><strong>0:00:<\/strong> Introduction<\/li>\n<li><strong>4:20:<\/strong> Part 1: Why We Use FFO for REITs<\/li>\n<li><strong>6:42:<\/strong> Part 2: Using FFO to Value REITs in Real Life<\/li>\n<li><strong>8:19:<\/strong> Part 3: IFRS vs. U.S. GAAP Differences<\/li>\n<li><strong>9:52:<\/strong> Part 4: FFO vs. FCF vs. NOI<\/li>\n<li><strong>11:48:<\/strong> Part 5: AFFO and Other Variations of FFO<\/li>\n<li><strong>13:20:<\/strong> Recap and Summary<\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"Using_Funds_from_Operations_FFO_to_Value_REITs_in_Real_Life\"><\/span><strong>Using Funds from Operations (FFO) to Value REITs in Real Life<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In <a href=\"https:\/\/breakingintowallstreet.com\/kb\/reit-modeling\/reit-valuation\/\" target=\"_blank\" rel=\"noopener\">REIT valuation<\/a>, you can use standard metrics and multiples such as EBITDA and TEV \/ EBITDA.<\/p>\n<p>However, instead of Net Income and the P \/ E multiple, you should use Funds from Operations and the P \/ FFO multiple (Price per Share\u00a0 \/ FFO per Share or Equity Value \/ FFO).<\/p>\n<p>If a REIT is growing its FFO more quickly than other, similar REITs, it should, in theory, trade at a higher FFO multiple.<\/p>\n<p>In this set of <a href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/comparable-company-analysis-cca\/\" target=\"_blank\" rel=\"noopener\">public comps<\/a> for AvalonBay, we see this expected, boring result:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-28963 size-full\" title=\"Funds from Operations in Public Comps for REITs\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101141\/03-FFO-Public-Comps.jpg\" alt=\"Funds from Operations in Public Comps for REITs\" width=\"1757\" height=\"1249\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101141\/03-FFO-Public-Comps.jpg 1757w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101141\/03-FFO-Public-Comps-300x213.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101141\/03-FFO-Public-Comps-1024x728.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101141\/03-FFO-Public-Comps-768x546.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101141\/03-FFO-Public-Comps-1536x1092.jpg 1536w\" sizes=\"(max-width: 1757px) 100vw, 1757px\" \/><\/p>\n<p>In reality, this relationship between growth rates and multiples doesn\u2019t always hold up for REITs because factors like leverage, development\/acquisition activities, and focus geography also play big roles.<\/p>\n<p>FFO multiples often vary more by REIT sub-sector (e.g., office vs. industrial vs. apartment) than by specific growth rates, especially since most REITs grow in a narrow range.<\/p>\n<p>Outside of valuation, many investors and analysts also use FFO to <strong>benchmark REITs <\/strong>and compare their operational efficiency, profitability, and dividend-paying potential.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"IFRS_vs_US_GAAP_Differences_in_the_Funds_from_Operations_Calculation\"><\/span>IFRS vs. U.S. GAAP Differences in the Funds from Operations Calculation<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/ifrs-vs-us-gaap\/\" target=\"_blank\" rel=\"noopener\">Under IFRS rules<\/a>, REITs do not depreciate their properties; instead, they <strong>periodically revalue them and<\/strong> record the Unrealized Gains and Losses from these revaluations on their financial statements.<\/p>\n<p>So, for non-U.S. REITs, we must adjust for both Realized and Unrealized Gains\/Losses when calculating FFO to ensure it accurately reflects the operational performance.<\/p>\n<p>There is no Depreciation add-back, but the <strong>adjustment for Gains and Losses<\/strong> is even bigger because Realized <strong>and<\/strong> Unrealized Gains and Losses are included.<\/p>\n<p>Here\u2019s an example for Vicinity Centres, an Australian REIT:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-28964 size-full\" title=\"Funds from Operations Calculation for an IFRS-Based REIT\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101217\/04-FFO-IFRS-REITs.jpg\" alt=\"Funds from Operations Calculation for an IFRS-Based REIT\" width=\"1188\" height=\"635\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101217\/04-FFO-IFRS-REITs.jpg 1188w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101217\/04-FFO-IFRS-REITs-300x160.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101217\/04-FFO-IFRS-REITs-1024x547.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101217\/04-FFO-IFRS-REITs-768x411.jpg 768w\" sizes=\"(max-width: 1188px) 100vw, 1188px\" \/><\/p>\n<p>In other regions, REITs often use variations on FFO.<\/p>\n<p>For example, many European REITs use <strong>EPRA Earnings<\/strong>, which is similar to FFO, but with these Unrealized Gains and Losses in place of Depreciation and additional adjustments for Deferred Taxes and a few other items.<\/p>\n<div class='code-block code-block-7' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/22172832\/building_icn.png\" alt=\"REIT Modeling\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master REIT Accounting, Valuation, and Financial Modeling for M&A and LBO Deals<\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Understand global REIT fundamentals<\/h4>\n              <p>You\u2019ll learn the accounting, valuation, and U.S. GAAP vs. IFRS differences<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Master valuation and financial modeling<\/h4>\n            <p>You\u2019ll build 3-statement, valuation, M&A, and LBO models for REITs<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 6 case studies<\/h4>\n            <p>Build 2 shorter \u201ccrash course\u201d models and 4 detailed \u201con the job\u201d ones\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/reit-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/REIT-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div>\n<\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"Funds_from_Operations_vs_Free_Cash_Flow\"><\/span>Funds from Operations vs. Free Cash Flow<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Free Cash Flow (FCF) more accurately represents the ongoing cash-flow generation of any company, including REITs, <strong>because it fully deducts Capital Expenditures (CapEx) and reflects the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/change-in-working-capital\/\" target=\"_blank\" rel=\"noopener\">Change in Working Capital<\/a>.<\/strong><\/p>\n<p>Free Cash Flow is normally defined like this:<\/p>\n<p><strong>FCF<\/strong> = Net Income + Depreciation &amp; Amortization + Losses \/ (Gains) + Impairments +\/- Change in Working Capital \u2013 CapEx<\/p>\n<p>Because of this deduction for CapEx, which is always high for REITs, FCF is always <strong>significantly lower than FFO<\/strong>.<\/p>\n<p>Here\u2019s a full comparison for AvalonBay:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-28965 size-full\" title=\"Funds from Operations vs. Free Cash Flow\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101251\/05-FFO-vs-FCF.jpg\" alt=\"Funds from Operations vs. Free Cash Flow\" width=\"1127\" height=\"573\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101251\/05-FFO-vs-FCF.jpg 1127w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101251\/05-FFO-vs-FCF-300x153.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101251\/05-FFO-vs-FCF-1024x521.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101251\/05-FFO-vs-FCF-768x390.jpg 768w\" sizes=\"(max-width: 1127px) 100vw, 1127px\" \/><\/p>\n<p>Since property acquisitions, developments, redevelopments, and sales are all <strong>recurring activities core to the business<\/strong>, they should all be part of a REIT&#8217;s CapEx.<\/p>\n<p>Unlevered Free Cash Flow (UFCF) is similar in many ways since it also fully deducts CapEx; the difference is that it <strong>adds back<\/strong> the Net Interest Expense so that it\u2019s capital structure-neutral:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-28966 size-full\" title=\"Unlevered Free Cash Flow for a REIT\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101329\/06-UFCF-REIT.jpg\" alt=\"Unlevered Free Cash Flow for a REIT\" width=\"1118\" height=\"276\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101329\/06-UFCF-REIT.jpg 1118w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101329\/06-UFCF-REIT-300x74.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101329\/06-UFCF-REIT-1024x253.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101329\/06-UFCF-REIT-768x190.jpg 768w\" sizes=\"(max-width: 1118px) 100vw, 1118px\" \/><\/p>\n<p>Technically, we should adjust the Taxes for this Interest Expense add-back as well, but since they\u2019re negligible for AvalonBay here, we don\u2019t bother with that.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Funds_from_Operations_FFO_vs_Net_Operating_Income_NOI\"><\/span>Funds from Operations (FFO) vs. Net Operating Income (NOI)<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Funds from Operations (FFO) and Net Operating Income (NOI) are both important metrics for REITs, but they are calculated differently and represent different aspects of a REIT&#8217;s performance.<\/p>\n<p>NOI is a <strong>property-level metric<\/strong> representing the total income generated from a REIT&#8217;s properties minus the cash operating expenses incurred, such as insurance, property taxes, management fees, and the sales and marketing required to attract new tenants.<\/p>\n<p>It does <strong>not<\/strong> factor in the REIT&#8217;s corporate-level expenses, such as administrative costs, management fees, executive salaries, depreciation on the properties, or the interest payments on debt:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-28967 size-full\" title=\"Net Operating Income (NOI) for a REIT\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101358\/07-NOI-Calculation-REIT.jpg\" alt=\"Net Operating Income (NOI) for a REIT\" width=\"1128\" height=\"298\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101358\/07-NOI-Calculation-REIT.jpg 1128w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101358\/07-NOI-Calculation-REIT-300x79.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101358\/07-NOI-Calculation-REIT-1024x271.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101358\/07-NOI-Calculation-REIT-768x203.jpg 768w\" sizes=\"(max-width: 1128px) 100vw, 1128px\" \/><\/p>\n<p>NOI is similar to <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/ebitda\/\" target=\"_blank\" rel=\"noopener\">EBITDA<\/a> but for properties rather than normal companies.<\/p>\n<p>FFO, on the other hand, is calculated at the trust or corporate level.<\/p>\n<p>Since FFO deducts the REIT\u2019s interest expense and corporate overhead, it\u2019s always <strong>lower than NOI<\/strong> and more representative of the REIT\u2019s Dividend-paying capacity.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Adjusted_Funds_from_Operations_AFFO_and_Other_Variations\"><\/span>Adjusted Funds from Operations (AFFO) and Other Variations<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>While Funds from Operations (FFO) is an \u201cimproved version of Net Income,\u201d Adjusted Funds from Operations (AFFO) builds on FFO and brings it closer to the REIT\u2019s \u201ctrue cash flow.\u201d<\/p>\n<p>The exact definition of AFFO varies, but one common calculation method is as follows:<\/p>\n<p><strong>Adjusted Funds from Operations (AFFO)<\/strong> = FFO \u2013 Recurring Maintenance CapEx +\/- Amortization of Lease Intangibles and Straight-Lining of Rent +\/- Other Adjustments.<\/p>\n<p>AFFO subtracts the recurring maintenance CapEx because this represents the ongoing spending the REIT needs to maintain its current properties and continue earning from them.<\/p>\n<p>The Amortization of Lease Intangibles is an acquisition-related item with no cash impact, and the Straight-Lining of Rent is a common adjustment for office\/retail\/industrial properties related to rent recognized vs. cash payments received.<\/p>\n<p>(Office, retail, and industrial properties usually use multi-year leases where the cash payments increase each year, but they recognize the rent evenly over each year of the lease term, which creates a difference in revenue recognized vs. cash revenue.)<\/p>\n<p>AFFO may also add back or adjust for other non-recurring items in the last part of the formula (\u201cOther Adjustments\u201d).<\/p>\n<p>Here\u2019s an example of the AFFO calculation for Vicinity Centres in Australia:<\/p>\n<p><img decoding=\"async\" class=\"alignnone size-full wp-image-28968\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101424\/08-AFFO-Calculation-REIT.jpg\" alt=\"Adjusted Funds from Operations (AFFO) for a REIT\" width=\"1491\" height=\"525\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101424\/08-AFFO-Calculation-REIT.jpg 1491w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101424\/08-AFFO-Calculation-REIT-300x106.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101424\/08-AFFO-Calculation-REIT-1024x361.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/05\/01101424\/08-AFFO-Calculation-REIT-768x270.jpg 768w\" sizes=\"(max-width: 1491px) 100vw, 1491px\" \/><\/p>\n<p>While AFFO is closer to the \u201ctrue cash flow\u201d than FFO, it&#8217;s still <strong>far above<\/strong> actual Free Cash Flow because:<\/p>\n<ul>\n<li>AFFO does <strong>not<\/strong> factor in the Change in Working Capital, but FCF does.<\/li>\n<li>AFFO does <strong>not<\/strong> subtract Growth CapEx (i.e., spending on developing or acquiring new properties), while FCF does.<\/li>\n<\/ul>\n<p>The other issue is that AFFO is a <strong>\u201cnon-standard\u201d metric<\/strong>, and each REIT calculates it differently.<\/p>\n<p>This makes a proper comparison difficult unless you go to the REIT\u2019s statements and calculate AFFO manually in the same way for each REIT in your set.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Final_Thoughts_on_Funds_from_Operations_FFO\"><\/span>Final Thoughts on Funds from Operations (FFO)<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>While Funds from Operations (FFO) is a critical metric for REITs that always factors into <a href=\"https:\/\/mergersandinquisitions.com\/3-statement-model\/\" target=\"_blank\" rel=\"noopener\">3-statement models<\/a> and valuations, it\u2019s not <em>the only<\/em> metric you care about.<\/p>\n<p>Free Cash Flow and EBITDA remain important, and other REIT-specific metrics, such as NOI and AFFO, are also useful.<\/p>\n<p>As with any other metric, the key with FFO is to understand its uses, advantages, and disadvantages to interpret it properly.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>For Equity REITs, Funds from Operations (FFO) equals Net Income + Real Estate-Related Depreciation &#038; Amortization + Losses \/ (Gains) on Property Sales + Impairments. It is an improved version of Net Income that more accurately represents a REIT\u2019s operating performance and may better indicate the Dividends a REIT can issue, which is critical for its business model.<\/p>\n","protected":false},"featured_media":0,"template":"","class_list":["post-28960","biws_kb","type-biws_kb","status-publish","hentry","kb_category-reit-modeling"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/28960","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=28960"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}