Chartered Financial Analyst Level 2

Explanation

FFO (Funds from Operations) is considered open to less error in estimation compared to AFFO (Adjusted Funds from Operations) because:

• FFO is calculated using standardized accounting principles with fewer adjustments
• AFFO requires additional estimates and assumptions for:
  • Maintenance capital expenditures
  • Straight-line rent adjustments
  • Lease incentives
  • Other non-cash items

These additional adjustments in AFFO introduce more subjectivity and potential estimation errors, making FFO a more standardized and less error-prone measure.

Why other options are incorrect:

• B: AFFO is generally considered a superior measure of economic income as it accounts for capital expenditures needed to maintain property quality
• C: AFFO is more reflective of a REIT's dividend-paying ability since it considers the cash required for property maintenance

Therefore, FFO's main advantage over AFFO is its reduced susceptibility to estimation errors due to fewer subjective adjustments.