Reading the Numbers · REITs

FFO adjusts accounting earnings for certain real estate items. AFFO adds further issuer defined adjustments. Neither measure should be mistaken for a universally defined cash balance.

Why investors look beyond net income

Real estate depreciation can reduce accounting earnings even when a property's economic value behaves differently. Nareit FFO starts from GAAP net income and adjusts for specified real estate depreciation, gains, losses and related items, with appropriate treatment of partnerships and joint ventures. It supplements reported earnings rather than replacing them.

Use a simplified FFO bridge carefully

Imagine net income of $20 million, relevant real estate depreciation of $15 million and a $5 million gain from a depreciable property sale. With no other adjustments, simplified FFO is $30 million. The calculation removes that sale gain and adds back depreciation. Real reconciliations can include additional qualifying adjustments, so do not copy the simplified formula blindly.

Read every AFFO adjustment

Adjusted funds from operations is not one universal calculation. An issuer might adjust rent accounting, recurring capital spending, compensation or other items differently from a peer. Examine both the definition and the economic reason. A cost paid in shares can still matter to existing shareholders even when it is removed from a supplemental earnings measure.

Reconcile earnings to cash and shares

Operating cash flow is influenced by working capital and other cash movements that FFO does not measure. Maintenance spending also consumes cash even though depreciation has been added back. Compare totals and diluted per share figures. If FFO rises 10% while the relevant share count rises 15%, existing investors have not received 10% growth per share.

Try it yourself

FFO is $50 million on ten million shares. It rises to $55 million while shares rise to eleven million. How much does FFO per share grow?

Show the worked answer

It remains $5 per share, so growth is zero. Total growth financed by additional equity is different from growth in each existing share's claim.

Further reading

Educational material, not a recommendation to transact. All numerical examples are hypothetical and exclude costs unless stated. Actual terms, eligibility, tax treatment and broker procedures depend on the security and jurisdiction.

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