Bridge REIT accounting earnings and cash measures

Learning goals

• Calculate simplified FFO.
• Explain why 56 applies to this case.
• Identify the case-specific assumption or failure mode before taking action.

Draft · approximately 30 minutes, excluding further revision.

Shared case and decision context

A property trust reports net income 50, property depreciation 20 and a property-sale gain 8. Use a simplified FFO convention adding property depreciation and excluding the sale gain. Recurring maintenance capital spending is 6 and there are no other AFFO adjustments.

Economic or professional mechanism

Listed property vehicles combine real-estate economics with public-market pricing, capital access and governance. FFO adjusts selected accounting items but is not standardized free cash flow across every issuer. AFFO-type measures seek recurring cash capacity using further adjustments; definitions must be reconciled before peer comparison. NAV and income-based approaches answer complementary valuation questions.

Apply, challenge and communicate

Simplified FFO is 62 and the stated AFFO proxy 56. A high distribution relative to accounting earnings can be explainable by depreciation, but cash sustainability still requires maintenance investment, debt maturity and occupancy analysis. Never assume the issuer’s adjusted number is automatically comparable or legally distributable.

Value a REIT using consistently defined property and share cash

Supplemental REIT data: sustainable cash NOI is 60, caprate 6%, nonproperty assets 20, debt 300, other senior claims 20, and 20 shares. Property value=1,000; equity NAV=1,000+20−300−20=700; NAV/share 35. Appraised cap rates and cash NOI must reflect vacancies, capital needs and portfolio composition. A premium or discount to NAV can reflect management, fees, expected growth and market liquidity, not automatically mispricing.

The original case gives FFO 62 and AFFO 56. With 20 shares these are 3.1 and 2.8 per share. Applying supported P/FFO 12 implies 37.2; P/AFFO 13 implies 36.4. A perpetual equity cash model with next AFFO/share 2.8, r 10%, g 2% implies 35, provided AFFO is a defensible distributable proxy. Reconcile differences rather than averaging incompatible methods; FFO/AFFO definitions and recurring capex assumptions require issuer-specific review.

Formula and assumptions

Simplified FFO=NI+property depreciation−property-sale gain; AFFO proxy=FFO−maintenance capex

Case analysis with explicit assumptions

1. A property trust reports net income 50, property depreciation 20 and a property-sale gain 8. Use a simplified FFO convention adding property depreciation and excluding the sale gain. Recurring maintenance capital spending is 6 and there are no other AFFO adjustments.
2. Method: Simplified FFO=NI+property depreciation−property-sale gain; AFFO proxy=FFO−maintenance capex
3. Case result: 62. Simplified FFO is 62 and the stated AFFO proxy 56. A high distribution relative to accounting earnings can be explainable by depreciation, but cash sustainability still requires maintenance investment, debt maturity and occupancy analysis. Never assume the issuer’s adjusted number is automatically comparable or legally distributable.

Errors to catch

• Do not replace the stated assumptions with an unstated shortcut. Reconcile units, timing and the claim being valued or duty being assessed.
• Guaranteed dividend safety is not a defensible conclusion for these case facts.

Original knowledge check

Answer every question before checking. Review explanations after submitting; retry starts a new attempt.

Sources and coverage status

These original lessons are drafts. Public outlines are used to check scope; the official learning-outcome text and proprietary question banks are not reproduced here. Follow the source for exam-year requirements and updates.

• Reference · www.cfainstitute.org
• Reference · www.investor.gov