Hi all,

Would you mind to answer this (likely) simple question ?

How come we deduct capital expenditures from FFO to get AFFO ? Aren’t capital expenditures already deducted in computing net income and FFO ?

FFO = net income + depreciation charges + …

AFFO = FFO - capital expenditures

I thought that capital expenditures were alrealy in net income and FFO

What is FFO? Do you mean CFO? CFO = Revenue - Expenses + WCC adjustments

FCF is generally CFO - CapEx. When I go to purchase a machine I can choose to capitalize or expense it. Notice if I capitalize it then it isn’t an expense, so it is not reduced from revenue and has no impact on net income. It is a cash outflow from financing, but some analysts like to include it in the FCF because it is usually an ongoing expense (like maintenance or something), just capitalized.

So no, CapEx is not included in your calculation of net income

AFFO is just an additional modification of a REITs NI by reducing cashflow from FFO for recurring maitenance costs to arrive at something that is more “true” to cash inflow.

I find it confusing as well because the NI calculation apprently takes into account repairs and maintenance so im not sure where the difference is or how it will be tested come exam time

Still unclear.

You ever find an aswer to your question?

I can only assume that there is a difference between expenses for general maintenance which would show up in a lesser NI and ‘maintenance capex’ which would be capitalised and not show up in NI. I came across something like this at work recently and will check up on it. This goes against what we learnt in Level I where if the maintenance does not extend the useful economic life of the asset it is merely an expense.

On a similar line of thought, I would have thought that the leasing costs would have been absorbed into FFO, so why take them out for AFFO?

I am only thinking aloud here…

I suspect there is a difference between maintenance capex for real estate valuatons as opposed to expenses fo property that produces something (a factory). Expenses for the latter are ‘expensed’ if they do not extend the life of the property or imporve usability.

However, with real estate we are valuing properties not on an output basis. If there is an output, we could call it the rent that can be obtained. Rents will increase with better appearance/condition of property. So, what may merely be an expense for a factory, eg. a coat of paint, can actually add value or at least maintain the value/life of a rental property. Thus, it could be capitalised as a ‘maintenance capex’.

My theory only…