What is ffo reit

This calculation takes a REIT's FFO and subtracts any recurring expenditure that is capitalized and then amortized, as well as any straight-lining of rents. These recurring capital expenditures may include such maintenance expenses as painting projects or roof replacements.

In addition to AFFO, this alternate measure is sometimes referred to as funds available for distribution or cash available for distribution. Tools for Fundamental Analysis. Financial Statements. Real Estate Investing. Actively scan device characteristics for identification.

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List of Partners vendors. Your Money. Personal Finance. Your Practice. Popular Courses. However, there are two REIT-specific points you should know. This is because REITs must pay out most of their income. A REIT's total debt expressed as a multiple of its pre-tax annual earnings. Too much debt can be a major risk factor for REITs. Interest coverage of means that a REIT is earning five times the amount of money it needs to pay the interest on its debts.

This tells you how much cushion a REIT has before it runs into serious financial trouble. A company with a high debt-to-EBITDA ratio might pay little interest on its debts, giving it a sustainable interest coverage multiple. In this case, it could have a dangerously low interest coverage multiple. It's important to look at both. The amount a REIT or investor pays for a commercial property relative to its annual income.

Here's why this is important from a valuation standpoint. By dividing that amount by the market average cap rate of 6.

Any one REIT metric can be deceiving. Be sure to look at a combination of metrics before deciding whether any particular REIT is an attractive investment opportunity. Our team of analysts agrees.

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Earnings also affect how much money is available to pay dividends, buy back shares , or reinvest in the business. A far better metric to use is funds from operations FFO. Let's look at. The same is true of other businesses with substantial real estate assets. It's because of a simple tax deduction known as depreciation. This is a big advantage of investing in real estate. The depreciation deduction allows real estate investors to keep more of their profits.

However, it makes your stated profit misleading. The same concept applies to REITs, only on a larger scale. REITs generally have massive depreciation "expenses" that reduce their net income. That's why depreciation meaningfully distorts REIT earnings. FFO also makes a few smaller adjustments, such as subtracting preferred dividends and distributions.

But depreciation is typically the largest change by far. Data source: Equity Residential. Figures may not add perfectly due to rounding. As you can see, depreciation makes a big difference. In other words, the method one company uses to calculate adjusted FFO may be different from the method another REIT uses although they're generally quite similar.