Net Income (NI)
NI is a measure that is widely known and is calculated in accordance with Generally Accepted Accounting Principles (GAAP).
Advantages
Because NI is a widely known measure and is calculated in accordance with GAAP, it is easily comparable across the REIT industry.
Disadvantages
NI, by including depreciation and amortization (which can differ by company), may not directly reflect the impacts of leasing, financing and acquisition activities on operations, therefore making comparability across companies difficult.
Funds From Operations (FFO)1
CREIT believes that Funds From Operations, which is a non-GAAP financial measure, provides an additional and useful means to assess the financial performance of commercial real estate entities. FFO is frequently used by securities analysts, investors and other interested parties to evaluate the performance of a REIT.
Advantages of FFO as a measure of performance:
FFO, by excluding the impact of depreciation and amortization, and gains/losses from property dispositions (which can differ by company) reflects the impact on operations from trends in leasing activity, acquisition activity and interest costs.
Limitations of FFO as a performance measure:
FFO does not represent amounts available for capital requirements, debt service obligations, commitments or uncertainties.
FFO is calculated as follows:
Net income for the period
Adjust for:
+ Amortization of buildings and leasehold properties
+ Amortization of major maintenance costs
+ Amortization of leasing costs
+ Amortization of leasing costs on acquisition of properties
+ Amortization of intangible assets on acquisition of properties
- Gains on dispositions of property
+ Loss on dispositions of property
+ Future income tax expense
+/- Adjustments resulting from discontinued operations
1FFO should not be considered as an alternative to Net Income in accordance with GAAP or as an alternative to Cash Flow as a measure of liquidity. FFO is an additional indicator of operating performance.
Adjusted Funds from Operations (AFFO)2
CREIT considers AFFO to be an indicative measure of a REIT's cash generating activities after providing for all operating capital requirements.
Advantages of AFFO:
AFFO serves to overcome the limitations of FFO, by considering the impact of capital requirements for operations.
Limitations of AFFO:
AFFO, year-over-year, can vary dramatically depending upon the lease expiry profile that exists in any one period.
CREIT defines AFFO as follows:
FFO (as defined above)
Adjust for:
+ Amortization of value of above- and below-market leases
–Additions to leasing costs
–Major maintenance costs
+/- Foreign currency translation gains (losses)
–Straight-line rent in excess of contract rent
+/- Adjustments resulting from discontinued operations
2 AFFO should not be considered an alternative to Net Income in accordance with GAAP or an alternative to Cash Flow as a measure of liquidity. AFFO is an additional indicator of operating performance.
