Examining Funds From Operations (FFO) for Real Estate Investment Trusts (REITs): Crucial Performance Metric

Examining Funds From Operations (FFO) for Real Estate Investment Trusts (REITs): Crucial Performance Metric

In the world of Real Estate Investment Trusts (REITs), two key metrics stand out when assessing performance: Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO). While FFO provides a baseline measure of a REIT's operating performance, AFFO offers a more refined view, providing a closer proxy to the REIT's sustainable cash earnings.

Funds From Operations (FFO) is calculated by starting with Core or standard FFO and making adjustments to better reflect the cash flow available to REIT shareholders. Specifically, FFO removes GAAP depreciation (which may not reasonably reflect real estate asset value erosion) and gains/losses from sales to provide a clearer image of operating performance.

However, FFO can overstate cash flow because it ignores capital expenditures needed to maintain the properties. To address this, Adjusted Funds From Operations (AFFO) is calculated. AFFO goes further by subtracting recurring capital expenditures and adjusting for additional non-cash items, thus offering a more accurate estimate of actual cash available to shareholders.

The calculation for AFFO involves starting with Core FFO and then deducting recurring maintenance CAPEX, non-cash operating revenues/expenses (e.g., straight-line rents, above/below market rent amortization), non-cash compensation and interest expenses, and adjustments related to unconsolidated joint ventures.

For instance, Simon Property Group, a popular mall REIT, reported an FFO of $4 billion in 2017, up 6% from 2016. To arrive at FFO, Simon added back depreciation and amortization, and adjusted for other smaller figures, including a reduction for payment of preferred distributions and dividends. However, to calculate AFFO, any recurring expenditure that is capitalized and then amortized, as well as any straight-lining of rents, would be subtracted from the FFO.

AFFO is seen as a measure of a REIT's cash-generated or dividend-paying capacity. Real estate analysts often calculate a REIT's AFFO when assessing its earnings potential. REITs must publicly disclose their funds from operations, which can be found in the footnotes of their income statement.

In summary, while FFO provides a valuable baseline measure of a REIT's operating performance, AFFO offers a more refined view by accounting for property maintenance costs and other non-cash adjustments. This gives investors a closer proxy to the REIT's sustainable cash earnings, particularly relevant for assessing dividend sustainability and true economic performance. FFO and AFFO are crucial tools for understanding the financial health and performance of REITs.

A tokenized Real-Estate Investment Trust (REIT) could potentially attract more investors due to the increased liquidity it offers compared to traditional REITs. This is because tokenized assets can be bought and sold more easily, providing a level of liquidity that is often lacking in the real-estate market.

Investors may find it advantageous to invest in a token that represents a share of a REIT's Adjusted Funds From Operations (AFFO). This is because AFFO provides a more accurate estimate of the actual cash available to shareholders, which is essential for assessing dividend sustainability and true economic performance.

The financing of such an Initial Coin Offering (ICO) could provide the necessary capital for the acquisition, maintenance, and growth of real-estate properties within the REIT. This increased liquidity, combined with the refined financial performance metrics provided by AFFO, could make tokenized REITs an attractive option for investors interested in the finance and business world.

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