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AFFO Yield

Step-by-Step Guide to Understanding AFFO Yield in REIT Valuation

Last Updated February 20, 2024

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AFFO Yield

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 must distribute at least 90% of their total taxable income in dividends to shareholders to qualify for special tax benefits.

Therefore, REIT investors must ensure sufficient income is generated to meet operating costs and meet (or exceed) the required dividend payouts 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 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 are the deduction of the REIT’s recurring maintenance capital expenditures (Capex) and adjusting for non-cash, straight-line rent expense (i.e. to spread the rent expense evenly across the lease term).

In practice, however, FFO is reported and discussed more frequently compared to AFFO, because the latter relies more heavily on subjective estimates.

The process to compute the AFFO yield consists of the following steps.

  1. Determine the Current Market Price per Share (Market Capitalization ÷ Total Number of Shares)
  2. Calculate AFFO per Share (Adjusted Funds from Operations ÷ Total Number of Shares)
  3. Divide the Market Price per Share by AFFO per Share
  4. Multiply by 100 to Convert the Output into Percentage Form
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AFFO Yield Formula

The formula to calculate the AFFO yield is as follows.

AFFO Yield (%) = Adjusted Funds from Operations (AFFO) ÷ Market Capitalization

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 on 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.

AFFO Yield (%) = AFFO per Share ÷ Current Market Price

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).

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AFFO Yield Calculator

We’ll now move to a modeling exercise, which you can access by filling out the form below.

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REIT AFFO Yield Calculation Example

Suppose we’re tasked with calculating the AFFO yield of a REIT that recently reported its financial results for the fiscal year ending 2022.

In 2022, the REIT generated $8.5 million in funds from operations (FFO). To calculate the REIT’s reported 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 market closing date.

  • AFFO Yield (%) = $2.00 ÷ $20.00 = 0.10, or 10.0%

AFFO Yield Calculator

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