AFFO is mostly relevant in real estate transactions. A building is bought and managed and rented. Lease payments are collected, the janitor is paid, and funds flow from the operation of this building, or set of buildings, which in the case of an AFFO, is generally in the form of a REIT, or real estate investment trust.
The AFFO element flows directly from the net after expenses of operation and taxes, as well as capital expenditures, i.e., the cost of that lit tennis court on the roof, as it relates to whatever cash is flowing back to investors.
In the case of a REIT, where multiple buildings are involved, included in the calculation of building cash flow are gains from properties that have been sold out of the portfolio for cash to some other buyer.
The key idea with AFFO: the concept, or calculation, drives entirely from cash flow, rather than accounting earnings, which might add in things like depreciation and amortization and other non-cash charges.
Related or Semi-related Video
Finance: What is Capital Expenditure, i....54 Views
finance- a la shmoop. what is capex ?funny name kind of sounds like group therapy
for men trying to quit wearing hats or maybe it's a Space Age head cover [men sit in a circle]
Michael Phelps will wear on his comeback tour. sadly it's neither of those. capex
is short for capital expenditure and it simply refers to the spending of capital
to buy stuff. you know what an expenditure is ie an expense, for example
when famed surgical glove manufacturer all you need is glove spends money on [man smiles in front of warehouse]
synthetic rubber for its products, well, the buying of the gallons and gallons of
rubber is an expense. they generally use that rubber within a short timeframe of
when they bought it- a month a quarter certainly within the year. so the buckets
of rubber they buy for their raw material are just a normal expenditure
or expense. so what makes something a capital expense? well think about it like
a petty crime versus a capital crime. in a petty crime the criminal will do time
and be done and move on in life. a capital crime means someone was killed [man walks out of jail]
whole different level of serious -versus that jaywalking thing -so when a capital
expenditure comes around well its costs are taken or allocated or amortized over
long periods of time like years or even decades. you know like a prison sentence.
so when all you need is glove buys a new robotic rubber gloves machine so that [assembly line shown]
they no longer have to sew the gloves by hand, that is a capital expense. why
because it costs a lot of money 10 million bucks in fact ,and because they
expect to be able to use that thing for 20 years before it wears out and is
worthless. so they'll spend 10 million dollars in
cash today of their capital to buy it and then reduce that value by 500 grand
a year on their balance sheet each year for 20 years. the value of their capital [balance sheet shown]
expenditure will slowly decline to nothing on their books but it will
presumably more than pay for itself in saved costs applied to human labor in
making the gloves. as for actually using the [robot holds up hand]
however well it'll be a while until we can trust robots with that.
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