What is AFFO Yield?
The AFFO Yield is the ratio between the AFFO per share of a REIT and its current market price, expressed as a percentage.
How to Calculate AFFO Yield?
The AFFO yield is an earnings-based method to analyze the current valuation of a real estate investment trust (REIT).
For participants in the REIT market, most notably real estate investors, the AFFO yield metric is a tool to determine if the valuation of a REIT as of the present date is undervalued, overvalued, or trading at its fair value.
Per regulations set by the SEC, REITs are required to distribute at least 90% of their total taxable income in the form of dividends to shareholders to qualify to receive special tax benefits.
Therefore, REIT investors must ensure that sufficient income is generated to meet operating costs and meet (or exceed) the dividend payout using metrics such as funds from operations (FFO) and adjusted funds from operations (AFFO).
- Funds from Operations (FFO) → FFO was designed by Nareit to serve as a standardized metric to measure the operating performance of REITs. Unlike the traditional GAAP metrics, FFO is widely recognized as an accurate method to analyze a REIT’s operating performance. Hence, FFO is reported by most REITs in their financial filings and investor presentations, despite not being a GAAP measure.
- Adjusted Funds from Operations (AFFO) → In contrast, AFFO was created to address the shortcomings and sources of criticism regarding FFO. AFFO is considered to be an improvement from the traditional FFO metric in estimating the residual cash flow available to shareholders. However, the drawback to AFFO is the lack of uniformity among the calculation process. Because there is more discretion in the adjustments applied, the method by which AFFO is computed and reported to investors differs across different REITs, causing the potential for misinterpretations to rise.
The two most common adjustments that differentiate AFFO from FFO is the deduction of the REIT’s recurring, maintenance capital expenditures (Capex) and adjusting for the non-cash straight-line rent expense (i.e. spread the rent expense evenly across the lease term).
In practice, however, FFO is reported and discussed more in comparison to AFFO because the latter relies more on subjective estimates.
The process to compute the AFFO yield consists of the following steps.
- Determine the Current Market Price per Share (Market Capitalization ÷ Total Number of Shares)
- Calculate AFFO per Share (Adjusted Funds from Operations ÷ Total Number of Shares)
- Divide the Market Price per Share by AFFO per Share
- Multiply by 100 to Convert the Output into Percentage Form
AFFO Yield Formula
The formula to calculate the AFFO yield is as follows.
Where:
- Funds from Operations (FFO) = Net Income + Depreciation – Gain on Sale, net + NCI Loss, net
- Adjusted Funds from Operations (AFFO) = Funds from Operations (FFO) – Maintenance Capital Expenditures (Capex) – Straight-Line Rent +/– Other Adjustments
- Market Capitalization = Current Market Price × Total Number of Shares Outstanding
The “Current Market Price” of a REIT is readily observable via online data platforms such as Bloomberg, as well as financial sites that pull trading data in real-time from third-party resources (e.g. CNBC, WSJ).
Or, the AFFO yield formula can be expressed on a per-share basis.
Where:
- AFFO per Share = Adjusted Funds from Operations (AFFO) ÷ ÷ Total Number of Shares Outstanding
- Current Market Price = Market Capitalization ÷ Total Number of Shares Outstanding
Note: The AFFO yield is the reciprocal of the P/AFFO multiple (i.e. Price-to-AFFO ratio).
Learn More → Adjusted Funds from Operations (AFFO)
AFFO Yield Calculator
We’ll now move to a modeling exercise, which you can access by filling out the form below.
REIT AFFO Yield Calculation Example
Suppose we’re tasked with calculating the AFFO yield of a REIT that recently reported its financial results for fiscal year ending 2022.
In 2022, the REIT generated $8.5 million in funds from operations (FFO). To move from the REIT’s reported FFO into AFFO, there are two adjustments:
- Funds from Operations (FFO) = $8.5 million
- Maintenance Capital Expenditures (Capex) = $400k
- Straight-Line Rent = $100k
Upon adjusting FFO by the recurring, maintenance Capex and non-cash straight-line rent expense, the adjusted funds from operations (AFFO) of the REIT is $8 million.
- Adjusted Funds from Operations (AFFO) = $8.5 million – $400k – $100k = $8 million
In the next step, we’ll assume the REIT had a total of 4 million shares outstanding in 2022, which for simplicity, we’ll assume remained unchanged from the start to the end of the year.
- Total Number of Shares Outstanding = 4 million
Given the share count of the REIT, the AFFO per share amounts to $2.00.
- AFFO per Share = $8 million ÷ 4 million = $2.00
In the final step, we arrive at an AFFO yield of 10.0% by dividing the AFFO per share by the current market price of the REIT, which we’ll assume was $20.00 per share as of the latest closing date.
- AFFO Yield (%) = $2.00 ÷ $20.00 = 0.10, or 10.0%
