Prepared by: Claude Code & Reggie Chan Date: October 22, 2025 Version: 2.0 Status: DRAFT
- Executive Summary
- Introduction
- Definitions and Terminology
- Methodology Overview
- Calculation Framework
- Component Classification
- Worked Example
- Coverage Ratios and Analysis
- Reconciliation and Validation
- Industry Best Practices
- Frequently Asked Questions
- References
This guidance note presents a standardized methodology for calculating Adjusted Free Cash Flow (AFCF) for real estate issuers, with specific application to publicly-traded Real Estate Investment Trusts (REITs).
AFCF provides a comprehensive measure of cash available to service financing obligations (debt service and distributions) after accounting for both operating activities and recurring investment requirements. It extends the established AFFO/ACFO framework to incorporate investing activities while maintaining focus on sustainable, recurring cash flows.
- Sustainability Focus - Excludes non-recurring items (asset sales, M&A, one-time proceeds)
- Dual Reporting - Reports both Sustainable AFCF (primary) and Total AFCF (comparison)
- IFRS Alignment - Reconciles to IFRS cash flow statement components
- Industry Consistency - Follows REALPAC AFFO/ACFO principles
Sustainable AFCF = ACFO + Recurring Cash Flow from Investing
Where:
ACFO = Adjusted Cash Flow from Operations (per REALPAC Jan 2023)
Recurring CFI = Development CAPEX + Routine acquisitions + JV contributions
Excludes:
- Property dispositions (non-recurring asset sales)
- Business combinations (M&A transactions)
- JV exits (return of capital from joint venture dispositions)
- Other non-recurring investing proceeds
- Debt Service Coverage Analysis - Measure ability to service total debt obligations from free cash flow
- Distribution Sustainability Assessment - Evaluate payout sustainability after growth investments
- Self-Funding Capacity - Determine reliance on external capital markets
- Credit Risk Assessment - Complement existing coverage ratios with comprehensive free cash flow metric
Real estate issuers, particularly REITs, are capital-intensive businesses that require ongoing investment in property portfolios. Traditional operating cash flow metrics (FFO, AFFO, ACFO) provide valuable insights into operating performance but do not capture the complete picture of cash available for financing obligations.
Existing metrics measure:
- FFO - Earnings-based proxy for operating performance
- AFFO - FFO adjusted for sustaining capital expenditures and other recurring items
- ACFO - Cash-based measure of sustainable operating cash flow (REALPAC methodology)
Gap identified:
- None of these metrics incorporate investing activities (acquisitions, dispositions, development)
- Growth capital requirements not reflected in debt service capacity analysis
- Asset sales can temporarily mask underlying financing needs
This guidance note establishes a standardized methodology for calculating AFCF that:
- Builds on the established REALPAC ACFO framework
- Incorporates recurring investing activities
- Excludes non-recurring transactions (asset sales, M&A)
- Provides transparent dual reporting (sustainable vs. total)
- Reconciles to IFRS financial statements
This methodology applies to:
- Publicly-traded REITs (Canada and international)
- Private real estate issuers with public debt
- Real estate corporations with investment property portfolios
It is designed for use by:
- Credit rating agencies
- Fixed income investors
- Debt capital markets participants
- REIT management and boards
- Financial analysts
Adjusted Cash Flow from Operations (ACFO) Cash flow from operations adjusted for 17 recurring items per REALPAC White Paper (January 2023). Represents sustainable economic cash flow from property operations after sustaining capital expenditures, tenant improvements, and leasing costs.
Adjusted Free Cash Flow (AFCF) Cash available to service financing obligations (debt principal, interest, and distributions) after all operating activities and recurring investment activities. Calculated as ACFO plus recurring cash flow from investing activities.
Cash Flow from Investing (CFI) Total cash inflows and outflows from investing activities per IFRS Statement of Cash Flows (IAS 7), including property acquisitions, dispositions, development capital expenditures, and joint venture transactions.
Recurring Investing Activities Ongoing, routine investing activities that support normal business operations and organic growth, including development capital expenditures, routine property acquisitions, and joint venture capital contributions.
Non-Recurring Investing Activities One-time or episodic transactions that are not part of routine operations, including property dispositions, business combinations, joint venture exits, and other non-recurring proceeds.
Self-Funding Ratio Ratio of Sustainable AFCF to total financing obligations (debt service plus distributions), measuring the issuer's ability to cover all obligations from internally-generated free cash flow without external financing.
| Abbreviation | Definition |
|---|---|
| ACFO | Adjusted Cash Flow from Operations |
| AFCF | Adjusted Free Cash Flow |
| AFFO | Adjusted Funds From Operations |
| CFI | Cash Flow from Investing |
| CFF | Cash Flow from Financing |
| CFO | Cash Flow from Operations |
| FFO | Funds From Operations |
| IFRS | International Financial Reporting Standards |
| JV | Joint Venture |
| REIT | Real Estate Investment Trust |
| REALPAC | Real Property Association of Canada |
┌─────────────────────────────────────────────────────────────────┐
│ Cash Flow Cascade │
├─────────────────────────────────────────────────────────────────┤
│ │
│ IFRS Cash Flow from Operations (CFO) │
│ + 17 ACFO Adjustments (REALPAC Jan 2023) │
│ = Adjusted Cash Flow from Operations (ACFO) │
│ │
│ + Development CAPEX (recurring growth) │
│ + Routine property acquisitions │
│ + JV capital contributions │
│ + Other routine investing outflows │
│ - Property dispositions (EXCLUDED - non-recurring) │
│ - Business combinations (EXCLUDED - M&A) │
│ - JV exits (EXCLUDED - one-time) │
│ │
│ = Adjusted Free Cash Flow (AFCF) - SUSTAINABLE │
│ │
│ versus: │
│ │
│ Cash Flows from Financing (CFF) │
│ - Debt principal repayments │
│ - Interest payments │
│ - Common distributions │
│ - Preferred distributions │
│ + New debt issuances │
│ + Equity issuances │
│ │
│ = Change in Cash Position │
└─────────────────────────────────────────────────────────────────┘
Tier 1: Sustainable AFCF (Primary Metric)
Purpose: Measure recurring free cash flow generation capacity
Sustainable AFCF = ACFO + Recurring CFI
Components:
- Includes: Ongoing development, routine acquisitions, JV partnerships
- Excludes: Asset sales, M&A, JV exits, other one-time proceeds
Tier 2: Total AFCF (Comparison Metric)
Purpose: Provide transparency on full cash flow impact
Total AFCF = ACFO + All CFI
Components:
- Includes: All investing activities (recurring + non-recurring)
- Use: Reconciliation to IFRS, transparency, episodic transaction analysis
AFCF extends ACFO by incorporating investing activities while maintaining ACFO's sustainability focus:
| Aspect | ACFO | AFCF |
|---|---|---|
| Starting Point | IFRS CFO | ACFO |
| Adjustments | 17 REALPAC items | + Recurring CFI only |
| Focus | Operating cash flow | Free cash flow after investments |
| Deducts | Sustaining capex/TI/LC | + Growth capex/acquisitions |
| Excludes | Non-recurring operating items | + Non-recurring investing items |
| Use Case | Operating performance | Debt service coverage |
Critical: No Double-Counting
ACFO already deducts:
- ✓ Sustaining capital expenditures (Adj 4)
- ✓ Sustaining tenant improvements (Adj 6)
- ✓ External leasing costs (Adj 5)
These items do NOT appear in CFI under standard IFRS classification, therefore AFCF = ACFO + CFI does not double-count these items.
ACFO should be calculated using the REALPAC methodology (January 2023 White Paper) with 17 standardized adjustments to IFRS Cash Flow from Operations.
Required Input:
- IFRS Cash Flow from Operations (CFO)
- 17 REALPAC ACFO adjustments (if calculating)
- OR: Issuer-reported ACFO (if disclosed)
From the IFRS Statement of Cash Flows, extract all investing activity components:
Recurring Components (Include in Sustainable AFCF):
-
Development Capital Expenditures
- Definition: Cash spent on development projects, redevelopments, and major repositioning
- Sign: Negative (outflow)
- Note: Excludes sustaining capex (already in ACFO)
-
Property Acquisitions
- Definition: Cash paid for property acquisitions (routine, ongoing growth)
- Sign: Negative (outflow)
- Materiality: Consider excluding acquisitions >10% of gross assets (likely debt-financed)
-
Joint Venture Capital Contributions
- Definition: Cash invested in joint venture partnerships for development or acquisition
- Sign: Negative (outflow)
- Note: Excludes JV distributions received (already in ACFO Adj 3)
-
Other Investing Outflows
- Definition: Other routine investing activities
- Sign: Negative (outflow)
Non-Recurring Components (Exclude from Sustainable AFCF):
-
Property Dispositions
- Definition: Proceeds from sale of investment properties
- Sign: Positive (inflow)
- Rationale: One-time, non-sustainable proceeds
-
Business Combinations
- Definition: Cash paid for mergers and acquisitions of entities
- Sign: Negative (outflow) or Positive (if disposal)
- Rationale: Episodic, non-recurring transactions
-
Joint Venture Return of Capital
- Definition: Return of invested capital from JV exits or dispositions
- Sign: Positive (inflow)
- Rationale: One-time liquidation, not recurring distributions
-
Other Investing Inflows
- Definition: Other non-recurring investing proceeds
- Sign: Positive (inflow)
- Rationale: Typically one-time in nature
Sustainable Net CFI:
Net CFI (Sustainable) = Development CAPEX
+ Property Acquisitions
+ JV Capital Contributions
+ Other Investing Outflows
(Sum of recurring components only)
Total Net CFI:
Net CFI (Total) = All CFI Components
(Should reconcile to IFRS total CFI)
Sustainable AFCF (Primary):
Sustainable AFCF = ACFO + Net CFI (Sustainable)
Total AFCF (Comparison):
Total AFCF = ACFO + Net CFI (Total)
Non-Recurring Adjustment:
Non-Recurring CFI = Net CFI (Total) - Net CFI (Sustainable)
If weighted average units outstanding is available:
AFCF per Unit (Basic) = Sustainable AFCF / Weighted Average Units
AFCF per Unit (Diluted) = Sustainable AFCF / Diluted Weighted Average Units
┌─────────────────────────────────────────────────────────────┐
│ CFI Component Classification Framework │
├─────────────────────────────────────────────────────────────┤
│ │
│ Is this CFI item part of routine business operations? │
│ │ │
│ ├─── YES ──→ Is it ongoing/recurring? │
│ │ │ │
│ │ ├─── YES ──→ RECURRING │
│ │ │ (Include in Sustainable │
│ │ │ AFCF) │
│ │ │ │
│ │ └─── NO ──→ NON-RECURRING │
│ │ (Exclude from │
│ │ Sustainable AFCF) │
│ │ │
│ └─── NO ──→ One-time transaction? │
│ │ │
│ └─── YES ──→ NON-RECURRING │
│ (Exclude from │
│ Sustainable AFCF) │
└─────────────────────────────────────────────────────────────┘
| CFI Component | Classification | Rationale | Include in Sustainable AFCF? |
|---|---|---|---|
| Development CAPEX | Recurring | Ongoing portfolio improvement, normal business activity | ✓ YES |
| Property Acquisitions (routine) | Recurring | Normal growth strategy, ongoing portfolio expansion | ✓ YES |
| Property Acquisitions (major) | Non-Recurring | >10% of assets, likely debt-financed, episodic | ✗ NO (Materiality threshold) |
| JV Capital Contributions | Recurring | Ongoing partnership investments, strategic relationships | ✓ YES |
| Property Dispositions | Non-Recurring | Asset sales are episodic, non-sustainable proceeds | ✗ NO |
| Business Combinations | Non-Recurring | M&A is episodic, transformational, not routine | ✗ NO |
| JV Return of Capital | Non-Recurring | One-time exits from partnerships, not recurring distributions | ✗ NO |
| Other Investing Outflows | Recurring | Routine investing activities | ✓ YES |
| Other Investing Inflows | Non-Recurring | Typically one-time proceeds (asset sales, recoveries) | ✗ NO |
Property Acquisitions:
Apply materiality threshold to distinguish routine from transformational acquisitions:
If Property Acquisition > 10% of Gross Assets:
→ Classify as Non-Recurring (likely debt-financed)
If Property Acquisition ≤ 10% of Gross Assets:
→ Classify as Recurring (routine growth)
Rationale:
- Large acquisitions typically require dedicated financing
- Small acquisitions can be absorbed by operating cash flow
- 10% threshold aligns with disclosure materiality standards
Alternative Approach:
- Use fixed dollar threshold (e.g., $50M)
- Based on issuer size and historical acquisition patterns
Background:
- Mid-size diversified REIT
- Mixed retail and office portfolio
- Moderate leverage (45% debt/assets)
- Historical property dispositions program
From ACFO Calculation:
IFRS Cash Flow from Operations (CFO): $52,340
+ REALPAC ACFO Adjustments: -$2,340
= Adjusted Cash Flow from Operations (ACFO): $50,000
From Cash Flow Statement - Investing Activities:
Development CAPEX: -$20,000
Property acquisitions (routine): -$8,000
Property dispositions (asset sales): +$35,000
JV capital contributions: -$5,000
JV return of capital (exit): +$3,000
Business combinations: $0
Other investing outflows: -$2,000
Other investing inflows: +$1,000
─────────
Total Cash Flow from Investing (CFI): +$4,000
From Cash Flow Statement - Financing Activities:
Interest paid (in CFO): -$22,000
Debt principal repayments: -$15,000
New debt issuances: +$10,000
Common distributions: -$18,000
Preferred distributions: -$1,000
Equity issuances: +$5,000
Other Data:
Weighted average units outstanding: 100,000
Gross assets: $2,000,000
Step 1: ACFO (Given)
ACFO = $50,000 thousand
Step 2: Classify CFI Components
| Component | Amount | Classification | Reason |
|---|---|---|---|
| Development CAPEX | -$20,000 | Recurring | Ongoing portfolio improvement |
| Property acquisitions | -$8,000 | Recurring | <10% of assets ($8M / $2,000M = 0.4%) |
| Property dispositions | +$35,000 | Non-Recurring | Asset sales - episodic |
| JV contributions | -$5,000 | Recurring | Ongoing partnerships |
| JV return of capital | +$3,000 | Non-Recurring | One-time JV exit |
| Other outflows | -$2,000 | Recurring | Routine activities |
| Other inflows | +$1,000 | Non-Recurring | One-time proceeds |
Step 3: Calculate Net CFI
Sustainable Net CFI (Recurring Only):
Net CFI (Sustainable) = -$20,000 (development)
+ -$8,000 (acquisitions)
+ -$5,000 (JV contributions)
+ -$2,000 (other outflows)
─────────
= -$35,000 thousand
Total Net CFI (All Components):
Net CFI (Total) = -$35,000 (recurring, from above)
+ +$35,000 (property dispositions)
+ +$3,000 (JV return of capital)
+ +$1,000 (other inflows)
─────────
= +$4,000 thousand
✓ Reconciles to IFRS total CFI
Non-Recurring Adjustment:
Non-Recurring CFI = $4,000 (total) - (-$35,000) (sustainable)
= $39,000 thousand
Breakdown:
• Property dispositions: $35,000
• JV return of capital: $3,000
• Other inflows: $1,000
────────
Total: $39,000
Step 4: Calculate AFCF
Sustainable AFCF (Primary Metric):
Sustainable AFCF = ACFO + Net CFI (Sustainable)
= $50,000 + (-$35,000)
= $15,000 thousand
Total AFCF (Comparison):
Total AFCF = ACFO + Net CFI (Total)
= $50,000 + $4,000
= $54,000 thousand
Step 5: Per-Unit Metrics
AFCF per Unit = $15,000 / 100,000 units
= $0.15 per unit
═══════════════════════════════════════════════════════════
AFCF CALCULATION SUMMARY - Sample REIT Q2 2025
═══════════════════════════════════════════════════════════
ACFO (Starting Point): $50,000 thousand
Recurring CFI:
Development CAPEX -$20,000
Property acquisitions (routine) -$8,000
JV capital contributions -$5,000
Other investing outflows -$2,000
─────────
Net Recurring CFI: -$35,000
SUSTAINABLE AFCF (PRIMARY): $15,000 thousand
AFCF per Unit: $0.15
─────────────────────────────────────────────────────────
Non-Recurring CFI (Excluded):
Property dispositions +$35,000
JV return of capital +$3,000
Other investing inflows +$1,000
─────────
Total Non-Recurring: +$39,000
TOTAL AFCF (For Comparison): $54,000 thousand
═══════════════════════════════════════════════════════════
Sustainable AFCF of $15,000:
- Positive free cash flow after recurring operations and investments
- Indicates ability to generate cash from core business
- Available to service financing obligations
Impact of Non-Recurring Items:
- Property dispositions added $35,000 (one-time boost)
- Total AFCF of $54,000 overstates sustainable capacity by 260%
- Excluding non-recurring items provides realistic assessment
Credit Analysis Implications:
- Sustainable AFCF of $15,000 should be used for coverage ratios
- Total debt service = $22,000 (interest) + $15,000 (principal) = $37,000
- AFCF debt service coverage = $15,000 / $37,000 = 0.41x (
⚠️ LOW) - REIT cannot self-fund from sustainable free cash flow
- Reliant on capital markets for refinancing
1. AFCF Debt Service Coverage
Formula:
AFCF Debt Service Coverage = Sustainable AFCF / Total Debt Service
Where:
Total Debt Service = Interest Expense + Principal Repayments
Interpretation:
- < 1.0x: Cannot cover debt service from free cash flow
- 1.0x - 1.5x: Adequate coverage, tight cushion
- 1.5x - 2.0x: Good coverage, moderate cushion
-
2.0x: Strong coverage, healthy cushion
Example (Sample REIT):
Total Debt Service = $22,000 (interest) + $15,000 (principal) = $37,000
AFCF Debt Service Coverage = $15,000 / $37,000 = 0.41x
Assessment: ⚠️ LOW - Cannot self-fund debt service
2. AFCF Distribution Coverage
Formula:
AFCF Distribution Coverage = Sustainable AFCF / Total Distributions
Where:
Total Distributions = Common + Preferred + NCI distributions
Alternative (Payout Ratio):
AFCF Payout Ratio = Total Distributions / Sustainable AFCF × 100%
Interpretation:
- Coverage > 1.3x (Payout < 77%): Strong - distributions well covered
- Coverage 1.1x - 1.3x (Payout 77-91%): Adequate - sustainable
- Coverage 1.0x - 1.1x (Payout 91-100%): Tight - limited cushion
- Coverage < 1.0x (Payout > 100%): Insufficient - distributions exceed AFCF
Example (Sample REIT):
Total Distributions = $18,000 + $1,000 = $19,000
AFCF Distribution Coverage = $15,000 / $19,000 = 0.79x
AFCF Payout Ratio = $19,000 / $15,000 = 127%
Assessment: ⚠️ INSUFFICIENT - Distributions exceed AFCF
3. AFCF Self-Funding Ratio
Formula:
AFCF Self-Funding Ratio = Sustainable AFCF / Total Financing Obligations
Where:
Total Financing Obligations = Total Debt Service + Total Distributions
Note: Does NOT subtract new financing (measures inherent capacity)
Interpretation:
- < 0.5x: HIGH reliance on capital markets
- 0.5x - 0.8x: MODERATE reliance on external financing
- 0.8x - 1.0x: LOW reliance, nearly self-funding
- ≥ 1.0x: SELF-FUNDING, generates surplus cash
Example (Sample REIT):
Total Obligations = $37,000 (debt service) + $19,000 (distributions) = $56,000
AFCF Self-Funding Ratio = $15,000 / $56,000 = 0.27x
Assessment: ⚠️ HIGH RELIANCE - Can only cover 27% of obligations
4. Financing Gap Analysis
Formula:
Net Financing Needs = Total Obligations - Sustainable AFCF
New Financing = New Debt + New Equity
Financing Gap = Net Financing Needs - New Financing
Interpretation:
- Positive Gap: Burning cash, drawing down reserves
- Zero Gap: Balanced, stable cash position
- Negative Gap: Building reserves, deleveraging capacity
Example (Sample REIT):
Net Financing Needs = $56,000 - $15,000 = $41,000
New Financing = $10,000 (debt) + $5,000 (equity) = $15,000
Financing Gap = $41,000 - $15,000 = $26,000
Assessment: Burning $26,000 in cash reserves per period
| Metric | Formula | Sample REIT | Interpretation |
|---|---|---|---|
| NOI Interest Coverage | NOI / Interest | Varies | Operating performance |
| AFFO Payout | Dist / AFFO | Varies | Operating cash payout |
| AFCF Debt Service Coverage | AFCF / (Int + Prin) | 0.41x | |
| AFCF Distribution Coverage | AFCF / Dist | 0.79x | |
| AFCF Self-Funding Ratio | AFCF / Total Oblig | 0.27x |
Key Insight:
AFCF ratios provide a more conservative assessment than traditional operating metrics because they incorporate growth investment requirements. An issuer may show:
- Strong AFFO payout ratio (e.g., 85% - sustainable)
- But weak AFCF self-funding ratio (e.g., 0.27x - high market reliance)
This reveals dependency on capital markets for growth funding even when operations are healthy.
Three-Way Reconciliation:
Method 1: Direct IFRS Reconciliation
─────────────────────────────────────
CFO (IFRS): $52,340
+ CFI (IFRS): +$4,000
+ CFF (IFRS): -$19,000
────────
= Change in Cash: $37,340
════════
Method 2: ACFO-Based Reconciliation
─────────────────────────────────────
ACFO (Calculated): $50,000
+ Total CFI (IFRS): +$4,000
+ CFF (IFRS): -$19,000
────────
= Change in Cash (approx): $35,000
════════
Note: Small difference due to ACFO adjustments
Method 3: AFCF-Based Reconciliation
─────────────────────────────────────
Sustainable AFCF: $15,000
+ Non-Recurring CFI: +$39,000
+ CFF (IFRS): -$19,000
────────
= Change in Cash (approx): $35,000
════════
✓ Reconciles to Method 2
Check 1: ACFO + CFI = AFCF
ACFO: $50,000
+ Net CFI (Sustainable): -$35,000
────────
= Sustainable AFCF: $15,000 ✓
ACFO: $50,000
+ Net CFI (Total): +$4,000
────────
= Total AFCF: $54,000 ✓
Check 2: CFI Component Reconciliation
Recurring CFI: -$35,000
+ Non-Recurring CFI: +$39,000
────────
= Total CFI (IFRS): +$4,000 ✓
Check 3: Development CAPEX Consistency
If ACFO discloses development CAPEX separately (Adj 4):
ACFO Development CAPEX (disclosed): -$20,000
CFI Development CAPEX (extracted): -$20,000
════════
Difference: $0 ✓
Check 4: Reasonableness Tests
Test 1: AFCF < ACFO (for growing REITs with net investing outflows)
AFCF ($15,000) < ACFO ($50,000) ✓ PASS
Test 2: AFCF Debt Coverage < NOI Interest Coverage (more conservative)
Typically true for capital-intensive REITs ✓ PASS
Test 3: Total CFI reconciles to IFRS
Calculated: +$4,000
IFRS Statement: +$4,000 ✓ PASS
| Issue | Symptom | Solution |
|---|---|---|
| CFI doesn't reconcile | Calculated ≠ IFRS total | Check for missing components, restricted cash movements |
| Development CAPEX mismatch | ACFO Adj 4 ≠ CFI | Verify classification (sustaining vs. development) |
| AFCF > ACFO (unexpected) | Net CFI positive when growing | Review large dispositions, verify not routine |
| Negative AFCF (unexpected) | AFCF < 0 when ACFO strong | Review heavy development/acquisition activity |
Minimum Disclosure (Recommended):
Issuers should disclose the following in MD&A or supplemental financial information:
- ACFO Calculation (per REALPAC methodology)
- CFI Components Breakdown:
- Development CAPEX
- Property acquisitions (routine vs. major)
- Property dispositions
- JV transactions (contributions vs. returns)
- AFCF Calculation:
- Sustainable AFCF (primary metric)
- Total AFCF (comparison)
- Non-recurring adjustment
- Coverage Ratios:
- AFCF debt service coverage
- AFCF distribution coverage
- AFCF self-funding ratio
Enhanced Disclosure (Best Practice):
- Multi-Period Trend (8 quarters or 3 years)
- Per-Unit Metrics (basic and diluted)
- Reconciliation to IFRS cash flow statement
- Peer Comparison (if available industry data)
- Management Discussion of AFCF trends and financing strategy
When Calculating AFCF from Public Filings:
-
Verify ACFO Calculation:
- Check if issuer uses REALPAC methodology
- Validate adjustments against standard framework
- Adjust if issuer methodology differs
-
Extract CFI Components Carefully:
- Review notes to financial statements
- Verify classification (operating vs. investing)
- Check for non-standard treatments
-
Apply Judgment on Classification:
- Large acquisitions (>10% assets) → Non-recurring
- Routine portfolio churn → Recurring
- Development pipeline → Recurring if ongoing program
-
Consider Industry and Business Model:
- Growth-oriented REITs: Higher development CAPEX
- Value/Opportunistic: More dispositions activity
- Core/Stable: Lower investing activity
-
Assess Data Quality:
- Comprehensive CFI disclosure → "Strong"
- Partial CFI disclosure → "Moderate"
- Minimal disclosure → "Limited" (use caution)
Integration with Existing Metrics:
AFCF complements traditional credit metrics:
┌─────────────────────────────────────────────────────────┐
│ Comprehensive Credit Analysis Framework │
├─────────────────────────────────────────────────────────┤
│ │
│ Operating Performance: │
│ • FFO / Total Debt │
│ • AFFO Payout Ratio │
│ • NOI Interest Coverage │
│ │
│ Free Cash Flow Analysis (NEW): │
│ • AFCF Debt Service Coverage │
│ • AFCF Distribution Coverage │
│ • AFCF Self-Funding Ratio │
│ • Financing Gap │
│ │
│ Leverage: │
│ • Debt / Assets │
│ • Net Debt / EBITDA │
│ • Unencumbered Assets │
│ │
│ Liquidity: │
│ • Cash Runway (using AFCF for burn rate) │
│ • Undrawn Facilities │
│ • Debt Maturity Profile │
│ │
└─────────────────────────────────────────────────────────┘
Suggested Rating Thresholds (Illustrative):
| Rating Category | AFCF Self-Funding Ratio | AFCF Debt Service Coverage | Interpretation |
|---|---|---|---|
| Investment Grade | > 0.80x | > 1.2x | Low market reliance |
| BB+/BB | 0.60x - 0.80x | 0.9x - 1.2x | Moderate market reliance |
| BB-/B+ | 0.40x - 0.60x | 0.6x - 0.9x | High market reliance |
| B/B- | < 0.40x | < 0.6x | Very high market reliance |
Note: These are illustrative thresholds only. Actual rating criteria incorporate multiple factors and agency-specific methodologies.
Q1: Why is AFCF needed when we already have AFFO and ACFO?
A: AFFO and ACFO measure operating cash flow but don't incorporate investing activities. AFCF provides a comprehensive view of cash available for financing obligations after ALL recurring business activities, including growth investments. This is critical for assessing self-funding capacity and capital markets reliance.
Q2: Should AFCF be used instead of AFFO/ACFO?
A: No. AFCF complements, not replaces, existing metrics. Use AFFO/ACFO for operating performance assessment and AFCF for debt service capacity and financing needs analysis.
Q3: How does AFCF align with "Free Cash Flow" used in other industries?
A: AFCF is conceptually similar to Free Cash Flow (FCF = CFO - CAPEX) but adapted for real estate:
- Starts with ACFO (industry-standard operating cash flow)
- Distinguishes recurring vs. non-recurring investing (sustainability focus)
- Excludes asset sales (non-recurring proceeds)
Q4: Why exclude property dispositions from Sustainable AFCF?
A: Property dispositions are non-recurring asset sales that cannot sustain operations long-term. Including them can artificially inflate AFCF and mask underlying financing needs. Following AFFO/ACFO principles, AFCF focuses on sustainable, recurring cash flows.
Q5: How should major acquisitions (>10% of assets) be treated?
A: Major acquisitions should be classified as non-recurring because they:
- Typically require dedicated debt or equity financing
- Are transformational/episodic, not routine
- Distort assessment of normal business cash generation
Routine acquisitions (<10% of assets) that represent normal portfolio growth can be classified as recurring.
Q6: What if an issuer has continuous disposition activity?
A: Apply judgment based on business model:
- Opportunistic/Value REITs: Continuous dispositions are part of strategy → May include in recurring CFI
- Core/Growth REITs: Dispositions are portfolio management → Exclude as non-recurring
Document rationale and apply consistently.
Q7: How do you handle development CAPEX that's 100% debt-financed?
A: Include development CAPEX in recurring CFI (cash outflow) and separately capture new debt in financing activities. The self-funding analysis automatically accounts for this through the netting approach:
Net Financing Needs = (Obligations - AFCF)
New Financing = New Debt (includes development financing)
Gap = Net Needs - New Financing
This reveals whether the issuer can self-fund or relies on external capital.
Q8: Where do I find the required data?
A: Required data sources:
- ACFO: Issuer MD&A or calculate using REALPAC methodology
- CFI Components: IFRS Statement of Cash Flows (investing activities section)
- CFF Components: IFRS Statement of Cash Flows (financing activities section)
- Supplemental: Notes to financial statements for detail on acquisitions/dispositions
Q9: What if CFI components aren't disclosed in detail?
A: Data quality depends on disclosure level:
- Strong: All components disclosed → Full AFCF calculation
- Moderate: Total CFI only → Use Total AFCF, note limited sustainability assessment
- Limited: No CFI detail → AFCF cannot be reliably calculated
In moderate/limited cases, engage with issuer IR to request enhanced disclosure.
Q10: How do I reconcile AFCF to the cash flow statement?
A: Three-way reconciliation (see Section 9):
ACFO + Total CFI + CFF ≈ Change in Cash
Validate:
1. ACFO ≈ CFO (with REALPAC adjustments)
2. Total CFI reconciles to IFRS CFI
3. AFCF = ACFO + CFI
Small differences between ACFO and CFO are expected due to adjustments.
Q11: What AFCF coverage ratio is considered healthy?
A: General guidelines (vary by issuer profile):
-
AFCF Debt Service Coverage:
- Healthy: >1.5x
- Adequate: 1.0x - 1.5x
- Weak: <1.0x
-
AFCF Self-Funding Ratio:
- Self-Funding: ≥1.0x
- Low Reliance: 0.8x - 1.0x
- Moderate Reliance: 0.5x - 0.8x
- High Reliance: <0.5x
Q12: Can AFCF be negative?
A: Yes. Negative AFCF indicates:
- Operating cash flow (ACFO) is insufficient to fund recurring investments
- Issuer must access external financing for both obligations AND growth
- Common for development-heavy or rapidly-growing REITs
- Not necessarily bad if strategy is sound and capital markets accessible
Q13: How does AFCF relate to burn rate analysis?
A: AFCF is the foundation for burn rate calculation:
If AFCF Self-Funding Ratio < 1.0x:
→ Issuer burns cash
→ Burn Rate = Total Obligations - AFCF
→ Cash Runway = Available Cash / Monthly Burn Rate
See v1.0.7 burn rate methodology for details.
-
REALPAC White Paper: Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO) Real Property Association of Canada, January 2023 Foundation for ACFO methodology
-
IAS 7: Statement of Cash Flows International Financial Reporting Standards Cash flow classification and presentation standards
-
REALPAC White Paper: Adjusted Cash Flow from Operations (ACFO) Real Property Association of Canada, January 2023 17 standardized ACFO adjustments
-
Moody's Investors Service: Rating Methodology for REITs and Other Commercial Real Estate Firms Credit analysis framework for real estate issuers
-
S&P Global Ratings: Corporate Methodology Cash flow analysis and coverage ratio criteria
-
DBRS Morningstar: Rating REITs and Real Estate Companies Canadian REIT-specific credit assessment criteria
-
CFA Institute: Free Cash Flow Analysis in Capital-Intensive Industries Best practices for FCF calculation and interpretation
-
This Methodology: AFCF Two-Tier Methodology (v1.0.14) October 2025 Detailed implementation guide and technical specifications
╔═══════════════════════════════════════════════════════════════╗
║ AFCF METHODOLOGY QUICK REFERENCE CARD ║
╠═══════════════════════════════════════════════════════════════╣
║ ║
║ PRIMARY FORMULA ║
║ ─────────────────────────────────────────────────────────── ║
║ Sustainable AFCF = ACFO + Recurring CFI ║
║ ║
║ RECURRING CFI (Include): ║
║ ✓ Development CAPEX ║
║ ✓ Property acquisitions (routine, <10% assets) ║
║ ✓ JV capital contributions ║
║ ✓ Other investing outflows (routine) ║
║ ║
║ NON-RECURRING CFI (Exclude): ║
║ ✗ Property dispositions (asset sales) ║
║ ✗ Business combinations (M&A) ║
║ ✗ JV return of capital (exits) ║
║ ✗ Other investing inflows (one-time) ║
║ ║
║ KEY COVERAGE RATIOS ║
║ ─────────────────────────────────────────────────────────── ║
║ 1. Debt Service Coverage = AFCF / (Interest + Principal) ║
║ Healthy: >1.5x | Adequate: 1.0-1.5x | Weak: <1.0x ║
║ ║
║ 2. Distribution Coverage = AFCF / Total Distributions ║
║ Strong: >1.3x | Adequate: 1.1-1.3x | Weak: <1.0x ║
║ ║
║ 3. Self-Funding Ratio = AFCF / Total Obligations ║
║ Self-Fund: ≥1.0x | Moderate: 0.5-0.8x | High: <0.5x ║
║ ║
║ VALIDATION CHECKS ║
║ ─────────────────────────────────────────────────────────── ║
║ ✓ ACFO + CFI = AFCF ║
║ ✓ Recurring CFI + Non-Recurring CFI = Total CFI (IFRS) ║
║ ✓ Development CAPEX matches ACFO Adj 4 ║
║ ✓ AFCF < ACFO (for growing REITs) ║
║ ║
╚═══════════════════════════════════════════════════════════════╝
Excel/Spreadsheet Template Format:
ISSUER: _____________________ PERIOD: _________
═══════════════════════════════════════════════════════════
AFCF CALCULATION WORKSHEET
═══════════════════════════════════════════════════════════
INPUTS
───────────────────────────────────────────────────────────
ACFO (from REALPAC calculation): $__________
Cash Flow from Investing Components:
Development CAPEX: $__________ (-)
Property acquisitions (routine): $__________ (-)
Property dispositions: $__________ (+)
JV capital contributions: $__________ (-)
JV return of capital: $__________ (+)
Business combinations: $__________
Other investing outflows: $__________ (-)
Other investing inflows: $__________ (+)
──────────────
Total CFI (IFRS): $__________
CALCULATION
───────────────────────────────────────────────────────────
RECURRING CFI:
Development CAPEX $__________
Property acquisitions (routine) $__________
JV capital contributions $__________
Other investing outflows $__________
──────────────
Total Recurring CFI: $__________
NON-RECURRING CFI:
Property dispositions $__________
JV return of capital $__________
Business combinations $__________
Other investing inflows $__________
──────────────
Total Non-Recurring CFI: $__________
AFCF METRICS:
ACFO: $__________
+ Recurring CFI: $__________
──────────────
= SUSTAINABLE AFCF (PRIMARY): $__________
══════════════
ACFO: $__________
+ Total CFI: $__________
──────────────
= TOTAL AFCF (COMPARISON): $__________
VALIDATION:
Total CFI (calculated): $__________
Total CFI (IFRS): $__________
Variance: $__________ ✓
COVERAGE RATIOS
───────────────────────────────────────────────────────────
Financing Obligations:
Interest expense: $__________
Principal repayments: $__________
Total debt service: $__________
Common distributions: $__________
Preferred distributions: $__________
Total distributions: $__________
Total obligations: $__________
Ratios:
AFCF Debt Service Coverage: __________ x
AFCF Distribution Coverage: __________ x
AFCF Payout Ratio: __________ %
AFCF Self-Funding Ratio: __________ x
FINANCING GAP ANALYSIS
───────────────────────────────────────────────────────────
Net financing needs: $__________
New debt issuances: $__________
New equity issuances: $__________
Total new financing: $__________
──────────────
Financing gap (burn): $__________
═══════════════════════════════════════════════════════════
Version History:
| Version | Date | Changes | Author |
|---|---|---|---|
| 1.0 | October 2025 | Initial publication | Credit Analysis Working Group |
Approval:
This methodology guidance note has been reviewed and approved for publication.
Disclaimer:
This guidance note is provided for informational purposes only and does not constitute financial, investment, or legal advice. Users should consult with qualified professionals before making any financial decisions. The methodologies presented herein represent suggested best practices and may be adapted to specific circumstances with appropriate disclosure.
Copyright:
© 2025 Reggie Chan. All rights reserved.
END OF GUIDANCE NOTE