AFFO Yield: What is It, Calculation, Importance & More

AFFO Yield (Adjusted Funds From Operations Yield) is a key financial metric used primarily in the context of Real Estate Investment Trusts (REITs) to assess the performance and profitability of the trust. It represents the ratio of a REIT’s annual Adjusted Funds from Operations (AFFO) to its current market price, giving investors an indication of the REIT’s ability to generate income for its shareholders.

Unlike traditional profit metrics such as earnings per share (EPS), AFFO excludes certain non-cash items like depreciation and gains or losses on property sales, making it a more accurate measure of a REIT’s operational performance. By focusing on cash flows and excluding one-off items, AFFO provides a better picture of the REIT’s true income potential.

To calculate AFFO Yield, you divide the REIT’s AFFO by its current market price per share. The formula for AFFO Yield is:

AFFO Yield = (AFFO per Share​ / Market Price per Share) × 100

In this formula,

• AFFO per Share is the REIT’s Adjusted Funds from Operations per share.
• Market Price per Share is the REIT’s current trading price in the market.

Consider a REIT with the following information:

• AFFO per Share: $3.00
• Market Price per Share: $50.00

These values are based on the REIT’s most recent financial report, which provides the AFFO per share and the stock price at the time of calculation.

AFFO Yield = (AFFO per Share​ / Market Price per Share) × 100

AFFO Yield = 3/50 ×100 = 6%

In this case, the AFFO Yield of 6% means that the REIT generates $3.00 in adjusted funds from operations for each share of stock, and this is equivalent to 6% of the current share price of $50. This is a helpful metric for investors who are looking for income-producing assets, as it shows the potential return in terms of cash generation relative to the market price.

AFFO Yield is a crucial metric for evaluating the financial health and investment potential of Real Estate Investment Trusts (REITs). It plays a vital role in helping investors assess whether a REIT is generating sufficient income to cover its dividends and operational costs. Here are the key reasons why AFFO Yield is important: 

AFFO Yield is a critical metric because it focuses on the actual cash generated by a REIT’s core operations. It excludes non-cash items like depreciation and amortization, giving investors a clearer view of the income the REIT can distribute to its shareholders in the form of dividends.

AFFO Yield adjusts for non-cash items like depreciation and amortization, offering a clearer view of the actual cash available to cover dividends and reinvest in the business. This makes it a more reliable gauge of cash flow than net income, especially for REITs.

AFFO Yield helps investors assess if a REIT generates enough cash to support its high dividend payouts. A high AFFO Yield indicates strong cash flow for sustainable dividends, while a low yield may signal potential risks to continued dividend payments.

AFFO Yield is often used by income-focused investors, especially those looking for steady dividend payments. A higher AFFO Yield suggests that a REIT is generating more cash for each dollar of its share price, which could imply higher potential returns in the form of dividends.

The AFFO Yield can be a useful tool for valuing a REIT. A higher yield might indicate that the REIT is undervalued, while a lower yield could suggest it is overvalued, assuming all other factors remain constant. This metric can help investors compare REITs with similar profiles or historical data.

AFFO Yield is also used to track a REIT’s performance over time. If the yield increases, it could indicate that the REIT is becoming more efficient at generating cash. On the other hand, a declining yield may point to declining operational efficiency or increasing market prices without a corresponding increase in income.

Interpreting AFFO Yield depends on various factors, including the REIT’s sector, market conditions, and investor expectations.

• High AFFO Yield: A high yield might indicate that the REIT is generating more cash per share relative to its price. This could be a positive sign for income-focused investors, especially if the REIT has a history of reliable dividend payouts. However, it is important to ensure that the high yield isn’t the result of a declining share price or a risky business model.
• Low AFFO Yield: A low AFFO Yield suggests that the REIT is not generating much cash relative to its share price. This could be a sign that the REIT is overvalued or struggling to generate cash flows. However, a low yield could also indicate that the REIT is investing heavily in growth and expansion, which might lead to higher future earnings.
• Industry Comparison: To better understand the AFFO Yield, it’s important to compare it against other REITs in the same sector. For instance, a 7% yield might be strong for a residential REIT but relatively low for a retail REIT, where the industry average might be higher.
• Growth Potential: While AFFO Yield is essential for evaluating a REIT’s ability to generate current cash flow, investors should also look at the growth potential of the REIT. A REIT with lower AFFO Yield but strong growth prospects could offer higher returns in the long term.

A “good” AFFO Yield varies depending on the type of REIT, the market conditions, and the investor’s objectives. However, here are some general guidelines:

• Industry-Specific Comparisons: For example, a good AFFO Yield in the residential REIT sector might be around 4-6%, while a REIT in the industrial or retail sectors could have higher yields due to different market dynamics.
• Economic Conditions: In a low-interest-rate environment, investors may expect higher yields from REITs to compensate for reduced bond yields. In contrast, during periods of high economic growth and low risk, investors might accept lower AFFO yields.
• Dividend Sustainability: A “good” AFFO Yield is often one that allows the REIT to sustain or grow its dividends over time. A very high yield may look attractive but could indicate that the REIT is sacrificing growth or taking on higher risks.
• Benchmarking: When analyzing AFFO Yield, it’s also helpful to compare it against the REIT’s historical yield and to see how it stacks up against peer companies in the same sector.

While AFFO Yield is a useful metric for assessing the income-generating ability of Real Estate Investment Trusts (REITs), it has its limitations. Here are some key drawbacks to keep in mind:

AFFO Yield does not consider a REIT’s debt levels. High leverage can affect a REIT’s ability to pay dividends, despite having a high AFFO Yield. Investors should assess the REIT’s debt-to-equity ratio alongside its AFFO Yield to get a clearer picture.

While excluding depreciation and amortization provides a more accurate measure of cash flow, it also removes key financial aspects that may influence a REIT’s profitability. For instance, non-cash items like property revaluation gains or losses could affect future cash flows but are not reflected in AFFO.

AFFO Yield can be affected by market conditions and investor sentiment. A sharp decline in the REIT’s share price may artificially increase its AFFO Yield, leading to misleading conclusions.

AFFO Yield is useful but should not be the sole metric for evaluating a REIT. It needs to be considered alongside other financial metrics, such as Funds From Operations (FFO), net income, and debt ratios, to gain a full understanding of a REIT’s financial health.

Changes in a REIT’s capital structure, such as issuing more shares or taking on more debt, can affect its AFFO Yield. These changes may alter the performance without necessarily improving the underlying business operations.

InvestingPro offers detailed insights into companies’ AFFO Yield including sector benchmarks and competitor analysis.

While both metrics measure potential returns, AFFO Yield focuses on the REIT’s ability to generate cash, whereas dividend yield looks specifically at the dividend payouts relative to share price.

Yes, but sector-specific factors must be considered. Some sectors, like industrial or healthcare, may naturally have higher AFFO yields than others, like residential or office-based REITs.

Not necessarily. A higher yield could indicate a discount in the share price or higher risk, so it’s essential to analyze it alongside other financial metrics to understand the REIT’s overall health.

AFFO Yield directly impacts a REIT’s dividend sustainability. A higher AFFO Yield typically suggests that the REIT can maintain or grow its dividends, but the sustainability depends on other factors like debt levels.

AFFO Yield is typically calculated and reported quarterly along with the REIT’s financial results, but it can be analyzed at any point depending on the investor’s interest and the REIT’s reporting schedule.