FFO, AFFO, and NAV compared
| Metric | Calculation | Use |
|---|---|---|
| FFO | Net Income + Depreciation + Amortization − Gains on Sales | Standard REIT profitability (NAREIT definition) |
| AFFO | FFO − Recurring CapEx − Straight-line Rent Adjustments | True cash available for dividends |
| NAV | Fair Value of Properties − Liabilities | What the REIT’s assets are actually worth |
The AFFO formula: cash after maintenance
AFFO = FFO − Maintenance CapEx − Straight-line Rent Adj.
P/FFO: the REIT version of P/E
P/FFO is the REIT equivalent of P/E. A REIT trading at 15x FFO is comparable to a stock at 15x earnings. P/AFFO is more conservative and reflects true cash generation after maintenance spending.
Compare a REIT's P/E to its P/FFO
Why FFO beats net income for REITs
Reading a REIT's discount to NAV
What explains the gap between net income and FFO
Sit with the ideas.
A healthcare REIT reports net income of $120M, depreciation of $300M, and a $40M gain from selling an old medical office building. Recurring capex is $80M. What are FFO and AFFO?
What is FFO for a REIT?
FFO (Funds From Operations) is the REIT industry's standard profitability measure. It starts with net income, adds back depreciation and amortization, and removes gains on property sales. It exists because GAAP forces REITs to depreciate buildings that, when well maintained, often hold or gain value -- so net income systematically understates the cash a REIT actually generates.
What is the difference between FFO and AFFO?
AFFO (Adjusted FFO) takes FFO and subtracts recurring maintenance capex and straight-line rent adjustments. FFO measures standard REIT profitability; AFFO estimates the true cash available to pay dividends, so it is the more conservative figure and the one most REITs target their payout against.
Why use P/FFO instead of P/E for REITs?
P/FFO is the REIT equivalent of the P/E ratio. Because depreciation depresses a REIT's net income, its P/E is distorted and close to useless for real estate. P/FFO -- and the more conservative P/AFFO -- compare the share price to the cash the properties actually earn, which is why REITs are quoted on FFO multiples rather than P/E.
What does it mean when a REIT trades at a discount to NAV?
NAV (net asset value) is the fair value of a REIT's properties minus its liabilities. When a REIT trades below its NAV, the market is pricing the company for less than its underlying real estate is estimated to be worth -- which can signal either a potential opportunity or concerns about management or the assets.