Learn more about P/FFO and P/AFFO
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What is P/FFO vs P/AFFO?
P/FFO vs P/AFFO are considered more sophisticated metrics to measure REIT performance. Though earnings per share (EPS) is often used to measure the performance of a REIT, P/FFO (Price/Funds from Operations) and P/AFFO (Price/Adjusted Funds from Operations) are preferred since they embrace procedures that better estimate the performance of the real estate industry.
EPS takes the total revenues for the period minus all costs, divided by the total number of shares to get the earnings per share. It does not consider the fact that certain costs may be non-cash, such as amortization and depreciation. Non-cash expenses reduce the dividends paid to the shareholders, while most real estate properties appreciate as opposed to depreciating. The P/FFO and, consequently, the P/AFFO take into consideration such costs and overlook them to give the shareholders their deserved dividend amounts.
Differences: P/FFO vs P/AFFO
There are two conspicuously notable differences between the two methods of determining the performance of a real estate investment trust (REIT). First, the P/FFO comes with a common formula across the board used by different companies, while the P/AFFO lacks a standard formula. Different companies use different formulas and include various factors in the formula for calculating the P/AFFO. It makes the P/AFFO difficult to compare between different companies and REITs.
Secondly, the P/AFFO is an adjusted version of the P/FFO. The P/AFFO is adjusted by subtracting any capital expenditures from the P/FFO. The P/FFO ignores capital expenditures and other routine maintenance costs like repainting and roof replacement. They are vital costs that keep the property in its best condition and make it attractive to investors and potential tenants. The P/AFFO also subtracts straight-line rent income, which decreases the cash available for distribution.
Similarities: P/FFO vs P/AFFO
P/FFO is the net income plus amortization and depreciation. The costs are added back because when calculating the net income, we deduct the total costs from the total revenue.
Depreciation and amortization are non-cash expenses that do not affect the cash flows of a company. Deducting non-cash expenses from the revenue results in a lower profit. Therefore, the dividends distributed to shareholders are reduced by the sum of the non-cash expenses.
Both the P/FFO and P/AFFO add back the non-cash costs to the net income to eliminate the effects of depreciation and amortization, which do not affect cash flow. Both methods work better than conventional procedures such as the EPS in measuring the real estate industry’s performance.
Both metrics are also common in the measurement of REITs but are not yet defined in financial reporting standards. Currently, the International Financial Reporting Standards (IFRS) does not officially recognize the two procedures as qualified measurements for the real estate industry.
P/FFO vs. P/AFFO: Which is More Appropriate to Use?
Between the two metrics, the most appropriate measurement for evaluating the real estate industry depends on the instance. When conducting a comparison of REITs across multiple companies, the most preferred metric is the P/FFO. This is because P/FFO is standardized, and multiple REITs will use the standard formula.
P/AFFO lacks a standardized formula. The adjusted funds from operations can, however, be termed as a better estimator of the REIT’s performance since it eliminates non-cash costs from the formula. The P/AFFO is precise since it subtracts the capital expenditures and other routine maintenance expenses.
Both methods offer the possibility of giving a common estimate in rare circ*mstances. If a REIT does not incur depreciation, amortization, and capital expenditures, both methods will arrive at similar figures in the measurement of REIT performance. For example, the P/FFO takes the net income and adds depreciation and amortization, which, in this case, is absent, making both formulas identical. The P/AFFO takes the P/FFO and subtracts the capital expenditures and other routine expenses, which, in this case, are absent.
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FAQs
The P/AFFO is adjusted by subtracting any capital expenditures from the P/FFO. The P/FFO ignores capital expenditures and other routine maintenance costs like repainting and roof replacement. They are vital costs that keep the property in its best condition and make it attractive to investors and potential tenants.
What is the difference between Affo and FFO? ›
Adjusted Funds From Operations (AFFO) is a measure of the financial performance of a REIT, and it is used as an alternative to Funds From Operations (FFO). AFFO is a superior measure compared to FFO because the former considers the maintenance costs of the real estate property over its life.
What is the formula for Affo FFO? ›
Though no one official measure exists, an AFFO formula is along the lines of AFFO = FFO + rent increases - capital expenditures - routine maintenance amounts.
Why do REITs use P FFO? ›
One of the reasons is that it gives a better estimate figure of a REIT's value with a more precise residual figure for the data consumers. It can also predict more precisely the value of future dividends, which enables investors to plan on shares investments.
What is the P to FFO ratio? ›
P/FFO measures the ratio of the share price to the mean cash flow from operations. A high ratio suggests that the stock is priced higher compared to the company's cash flow - a sign of high investor confidence. Nevertheless, a high ratio also suggests that a stock may be overpriced.
What is the difference between Price FFO and Price Affo? ›
The P/AFFO is adjusted by subtracting any capital expenditures from the P/FFO. The P/FFO ignores capital expenditures and other routine maintenance costs like repainting and roof replacement. They are vital costs that keep the property in its best condition and make it attractive to investors and potential tenants.
Does affo include CapEx? ›
While AFFO is closer to the “true cash flow” than FFO, it's still far above actual Free Cash Flow because: AFFO does not factor in the Change in Working Capital, but FCF does. AFFO does not subtract Growth CapEx (i.e., spending on developing or acquiring new properties), while FCF does.
What is p affo? ›
P/AFFO is an adjusted version of Funds from Operations (FFO), which takes into account capital expenditures of a company. The P/AFFO metric is not standardized, making it impossible to compare one REIT from the other since there are no standard procedures for the P/AFFO between companies.
Why use affo? ›
Although FFO is commonly used, professionals tend to focus on AFFO for two reasons: It measures more precisely the residual cash flow available to shareholders, and it's thus a better “base number” for estimating value. It is true residual cash flow and a better predictor of the REIT's future capacity to pay dividends.
What is a good FFO for a REIT? ›
REITs tend to have higher-than-average payout ratios, and 70–80% of FFO is common. But if this percentage is too close to (or higher than) 100%, a dividend cut could be on the horizon.
The P/FFO or Price to Funds From Operations is an operating performance indicator for real estate investment trusts that evaluates the per-share value a REIT generates from its business operations. Its formula is P/FFO = Price Per Share / Funds From Operations Per Share.
What is affo yield? ›
An AFFO yield is the AFFO per share generated in a stated year as a percentage of the current share price, or the inverse of an AFFO multiple (Price per Share / AFFO per Share).
What is a good FFO to debt ratio? ›
For corporations, the credit agency Standard & Poor's considers a company with an FFO to total debt ratio of more than 0.6 to have minimal risk.
What is the difference between FFO and Affo? ›
With that said, FFO is the preferred metric for investors to understand the recurring operations of a REIT compared to net income. But there is one major drawback to the FFO metric that AFFO directly addresses, which is the routine capital expenditures of the REIT, i.e. maintenance Capex.
What is the formula for calculating FFO? ›
FFO is calculated by adding depreciation, amortization, and losses on sales of assets to earnings and then subtracting any gains on sales of assets and any interest income. It is sometimes quoted on a per-share basis.
How is FFO payout ratio calculated? ›
FFO Payout Ratio, Total - % represents the Company level FFO Payout Ratio, as reported by the company. It shows the dividend payout rate from the Funds from Operations (FFO) for each share. It is obtained using Dividends per Common share divided by Funds from Operations per share.
What is the difference between net operating income and FFO? ›
Net Operating Income (NOI) → While funds from operations (FFO) provide a levered measure of profit after taxes and overhead, net operating income (NOI) provides a pure, property-level measure of profit.
What is a good FFO number for a REIT? ›
Be sure you're comparing the dividend to FFO, not to a REIT's net income. REITs tend to have higher-than-average payout ratios, and 70–80% of FFO is common. But if this percentage is too close to (or higher than) 100%, a dividend cut could be on the horizon.
What is the difference between funds from operations and operating cash flow? ›
The FFO represents the operating performance and takes net income, depreciation, amortization, and losses on property sales into account while factoring out any interest income and gains from property sales. The cash flow from operations, on the other hand, is reported on the cash flow statement.
What is an affo yield? ›
An AFFO yield is the AFFO per share generated in a stated year as a percentage of the current share price, or the inverse of an AFFO multiple (Price per Share / AFFO per Share).
