What is ffo growth

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There is no standardized definition of AFFO; therefore, financial statement users should understand how the measure is defined by the company. Capitalization Rate The capitalization rate or "cap" rate for a property is determined by dividing the property's net operating income by its purchase price. Generally, high cap rates indicate higher returns and greater perceived risk. There is no standardized definition of CAD or FAD; therefore, financial statement users should understand how the measure is defined by the company.

Cost of Capital The cost to a company, such as a REIT, of raising capital in the form of equity common or preferred stock or debt. The cost of equity capital generally is considered to include both the dividend rate as well as the expected equity growth either by higher dividends or growth in stock prices. The cost of debt capital is merely the interest expense on the debt incurred.

Income tax expense. Depreciation and amortization. Under IRS Revenue Procedure , so long as a REIT provides its shareholders with a choice between cash or stock and so long as at least 10 percent of the total dividend is available in cash , the entire dividend distribution is treated as a distribution of cash for purposes of the tax rules to qualify as a REIT. We subtract these gains, assuming they are not recurring and thus do not contribute to the REIT's sustainable dividend-paying capacity.

The reconciliation of net income to FFO with minor items removed for the sake of clarity in and is laid out as follows:. FFO must be reported, but it contains a weakness: It does not deduct for capital expenditures required to maintain the existing portfolio of properties.

Shareholders' real estate holdings must be maintained—painting apartments, for example—so FFO is not quite the true residual cash flow remaining after all expenses and expenditures. AFFO doesn't have a uniform definition but most calculations subtract capital expenditures, as mentioned above. This number can typically be found on the REIT's cash flow statement. It's used as an estimate of the cash required to maintain existing properties, although a close look at specific properties could generate more accurate information.

This requires a careful look at the underlying prospects of the REIT and its sector. The specifics of evaluating a REIT's growth prospects are beyond the scope of this article, but here are a few sources to consider:. The REIT's total return comes from two sources: dividends paid and price appreciation. Let's look at multiples for XYZ. How do we interpret these multiples, aside from making a direct comparison to industry peers? Multiples vary with market conditions and specific REIT sub-sectors.

And, as with other equity categories, we want to avoid buying into a multiple that is too high. This equals about 7. The cap rate is a general number that tells investors how much the market is currently paying for real estate. Given a calculated AFFO yield of 7.