Saturday, June 26, 2010

REIT Analysis using Funds from Operations (FFO): Million Dollar Journey

REIT Analysis using Funds from Operations (FFO): Million Dollar Journey

Posted: 14 Jun 2010 04:30 AM PDT
Real Estate Investment Trusts (REITs) are a popular way to get real estate exposure without directly owning the physical property.  But as they are equities, how do we go about analyzing if they are good value?
I’ve mentioned numerous times before that I’m cautious over buying income trusts as the bulk of them pay out more in distributions than their reported earnings.   Even though it seems impossible, they still continue to do so.  To me, a strong REIT has recession resistant tenants, low vacancy, a growth strategy,  and most importantly, a sustainable distribution.
In the case of REITs, they often pay out more in distributions than reported earnings mostly because of how earnings/net income is calculated.  Typically, net income (used for earnings) takes into account depreciation/amortization which can reduce net income significantly depending on the business.  In the case of a REIT, buildings are depreciated for accounting purposes, but it doesn’t necessarily mean that the building has decreased in value.  In reality, the building has most likely increased in value.  To account for this and perhaps better represent the cash flow of a REIT, most analysts use Funds from Operations (FFO) per share instead of Net Income/Earnings per share as a measuring stick for REITs.

How is FFO/AFFO Calculated

Funds from operations takes net income, adds back the amortization/depreciation, then subtracts proceeds from property sales.  For those of you who prefer formulas:
FFO = Net Income + Amortization (or depreciation) – Proceeds from Property Sales
AFFO stands for Adjusted Funds from Operation and accounts for the capital expenditures.  Some believe that if amortization expense is added back to the Net Income, then capital expenditures completed on the properties should be accounted for somehow.  The formula is:
AFFO = Net Income + Amortization (or depreciation) – Proceeds from Property Sales – Capital Expenditures

How to DIY

As a do-it-yourselfer, I went on a quest to figure out how to calculate FFO/AFFO on my own.  As I am familiar with reading balance sheets, it wasn’t overly complicated as most of the information can be plucked from company cash flow statements, then calculated manually.
However, for those who couldn’t be bothered with cash flow financial statements, most REITs report FFO/AFFO in their annual/quarterly reports.
If we take a look at a REIT like Calloways, for Q1 2010, we see that their earnings are around $7.4M with distributions of around $39.5M.  Sounds impossible right?  However, if you look at the FFO and AFFO numbers, you’ll see that their distribution is closer to 100% of their actual cash flow.

Final Thoughts

So instead of looking at simple earnings as the way to see if REIT distributions are sustainable, a better way is to take a look at the FFO/AFFO which may show you the real cash flow of the REIT.  Do you have any tips when analyzing REITs?
For more information, Thicken My Wallet also has a few articles on REITs and FFO calculations.

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Normal is Broke

Living With A Chain

How to Get a Job when No One is Hiring

When the jobs are hidden

To get a job, you have to find the openings that no one's advertising, and really impress your potential employer.

By Jia Lynn Yang, writer-reporter

NEW YORK (Fortune) -- David Perry, a longtime headhunter, says you're wasting your time if you're looking for job postings online. And he should know: he's often the guy on the other side helping companies lure new talent. Perry, who's based in Ottawa, says that in the last 22 years he has accomplished 996 searches totaling $172 million in salary. And the bottom line in today's economy, he says, is you have to tap the "hidden job market."

Perry's also the co-author of "Guerrilla Marketing for Job Hunters" and he recently spoke with Fortune.

What's the "hidden job market"?

When companies say, 'We have a hiring freeze,' that doesn't mean they're not hiring. It just means they're not adding headcount. Every year there's 20-25% turn over. So in a 1,000-person company, 200 or 250 people are going to turn over, either through attrition, or someone moves. Those companies are still hiring but they don't want to tell you.

So how do you find these jobs?

What you have to do in a recession is map your skills to employers to where you know they have a problem you can solve. My advice to job hunters is pick 10 to 20 companies, no more, and pick companies you're interested in, and that you think you can add value to. That requires researching companies, and so that list may take you two weeks. If you're trying to crack the hidden job market and you know the job position you want reports to vice president, find that vice president on LinkedIn and look at his profile to see who else he's connected to and go ask them, 'What's this guy like to work for?' Do the research before you even pick up the phone.

How can you get someone's attention?

We can go into billboards, sandwiches - that stuff only works once. It's only for one person who figures it out once, once in a city. If you're looking for fun stuff, we have this thing called the coffee cup caper, 30% of the time it will result in an interview. You send an employer a coffee cup with a little $5 swipe card with a little note that says, I'd like to get together and talk with you over coffee. I'll be calling soon. And you send it by U.S. post two day delivery, and that gets registered. So when they've signed for it, you wait about 20 minutes and then you call them. And then you go, Hi, I know you just got my package.' You're proving you're imaginative and creative.

What something people should avoid during a job interview?

This drives me insane: I've seen people mentally deciding in the interview whether they want the job. That's the last place to decide. You go into an interview, and you sell like your life depends on it. You've got to get the job first. I've seen it thousands of times. There's this point in the interview, where people go 'Hmm, do I really want this? You can see their body change. The employer picks it up and it's gone. If the employer is telling you, 'I love you,' and you're not saying 'I love you too,' it's over with.

How about following up afterwards?

If you really like the opportunity, don't go home and write thank you very much. Go back and write a letter that says, upon further reflection of what we were talking about, here's what I bring to the table, here's how I see myself fitting into the organization, including a 30-60-90 day plan.

How can someone attract a recruiter's attention?

You have to go to ZoomInfo and LinkedIn and create a profile. All corporate recruiters and probably 20% of the headhunters in America have ZoomInfo accounts. When we start a search, companies aren't going to advertise. The headhunter goes to ZoomInfo, types in requirements that we need, like skillset, degree, city, functional title, and up will come anywhere from a hundred to several thousand people who fit that criteria. Then we go to LinkedIn and run the same search. If you're in ZoomInfo with a picture, we're going to call you first. Just reverse engineer what recruiters are doing so you get found.

How can you really impress a potential employer?

It hasn't worked in years just to bring in your resume, except only in the most junior positions. I concentrate on directors to CEOs, and the last interview for us regardless is always a Power Point presentation of what you've learned, pain points, and how you intend to fix that. Everyone talks about being a great leader and great communicator, so prove it. Don't go into an interview and treat it like it's just another business meeting. Your career is your biggest asset now - because it's certainly not your house. To top of page


August 2008 Dave Ramsey on Barack Obama

This was aired in August 2008. So was Dave right???