FFO and AFFO

What these terms mean is Funds from Operations (FFO) and Adjusted Funds from Operations. These are currently mostly used with REITs. They were also used for Income Trust companies. They seem to be used more and more and some analysts are now using them when looking at utilities companies. This is especially true of the AFFO financial calculation.

For definitions of these terms, go to Investopedia for the definition on FFO and AFFO. Also, the Blogger Thicken by Wallet did a good review of FFO and AFFO financial calculations. This entry is a bit old, but it is still relevant.

A problem is that different analysts can calculate these values differently. So it is a good idea to go to the same source to get the values for a particular stock you are investigating.

The FFO has been around a much longer time, but its calculation has changed over the years. This value actually started as a value call Distributable Income or some similar name. Currently a lot of analysts are now switching to AFFO as they feel it is a better financial measurement.

A common use for this financial measurement, besides looking at its growth, is to look at a Dividend Payout Ratio. You get a Dividend Payout Ratio by dividing the dividend by the FFO or AFFO value. This is a percentage of payout and good DPR re FFO and AFFO depends partly on what industry you are talking about.

You can also use the FFO and AFFO financial calculations to help determine if the stock price is relatively cheap or expensive. You can look at the Price/FFO Ratio or Price/AFFO Ratio over time by calculating the P/FFO and P/AFFO using high, low and median stock prices over the past 5 and 10 years. The AFFO calculation is relatively new, so you may be able just to look at relative P/AFFO ratios over the past 5 years.

Another measure you can use is FFO yield or AFFO yield. You can then determine if the yield is a good one for your investment money or what the market is willing to pay for a property. In Investopedia, there is a good article called "How To Assess A Real Estate Investment Trust (REIT)" that explains how to use AFFO and FFO financial measurements.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my site for an index to these blog entries and for stocks followed. Follow me on Twitter.