Chartered Financial Analyst Level 2
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- Compared to adjusted funds from operations (AFFO) used in REIT valuation, funds from operations (FFO) is:
Exam-Like
A
open to less error in estimation.
B
a superior measure of economic income.
C
more reflective of a REIT's dividend-paying ability.
Explanation:
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.
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