Adjusted Funds from Operations
A superior metric compared to FFO when evaluating a REIT’s performance. AFFO is used in order to account for any additional expenses the landlord is expected to incur over the life of the asset (such as TIs, CAPEX, leasing commissions etc.). The measure is calculated as follows:
AFFO = FFO – Maintenance Costs – CAPEX – Straight Line Rent Adjustments.
Adjusted Funds from Operations is comparable to the Net Operating Income metric, used in analyzing individual properties.
Putting ‘Adjusted Funds from Operations (AFFO)’ in Context
Scenario:
Great Lakes REIT, a public real estate investment trust specializing in core-plus acquisition investments, recently acquired Glenwood Plaza, a grocery-anchored retail center located in suburban Chicago, Illinois. Glenwood Plaza is a well-maintained property with a mix of national and regional tenants, anchored by a major grocery store. The acquisition aligns with Great Lakes REIT’s strategy of investing in stable properties with potential for moderate value appreciation through strategic asset management.
Property Overview:
- Property Name: Glenwood Plaza
- Location: Suburban Chicago, Illinois
- Size: 150,000 square feet
- Tenants: 20, including a major grocery anchor, several national retail chains, and local businesses
- Purchase Price: $45 million
- Net Operating Income (NOI): $3 million per year
- Occupancy Rate: 95%
AFFO Calculation Context:
In evaluating the performance of Glenwood Plaza, Great Lakes REIT utilizes Adjusted Funds from Operations (AFFO) as a key metric. AFFO provides a more accurate picture of the property’s financial health by accounting for ongoing capital expenditures and other necessary costs that are not reflected in Funds from Operations (FFO).
AFFO Formula:
AFFO = FFO – Maintenance Costs – CAPEX – Straight Line Rent Adjustments
Hypothetical Financial Details:
- Funds from Operations (FFO): $3.5 million per year
- Maintenance Costs: $200,000 per year
- Capital Expenditures (CAPEX): $300,000 per year
- Straight Line Rent Adjustments: $50,000 per year
AFFO Calculation for Glenwood Plaza:
- Start with FFO: FFO = $3,500,000
- Subtract Maintenance Costs: Maintenance Costs = $200,000
- Subtract CAPEX: CAPEX = $300,000
- Subtract Straight Line Rent Adjustments: Straight Line Rent Adjustments = $50,000
- Calculate AFFO: AFFO = $3,500,000 – $200,000 – $300,000 – $50,000 = $2,950,000
By using AFFO, Great Lakes REIT can provide its investors with a more comprehensive understanding of the property’s performance, reflecting the true cash flow available after accounting for essential ongoing costs. This is particularly important for a public REIT, as it ensures that the reported earnings are not overly optimistic and consider the necessary expenditures to maintain and enhance the value of their properties.
This detailed approach helps Great Lakes REIT make informed decisions about future investments and asset management strategies, ensuring sustainable long-term returns for their investors.
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