A buyback below NAV always adds to NAV per share; whether it adds to AFFO per share depends on how it is funded, and the leverage-neutral test is the one that counts.
A REIT buyback below net asset value is always accretive to NAV per share, because each share is retired for less than the net assets behind it. Whether it is accretive to AFFO per share depends on how it is funded. On an illustrative REIT with a $40.00 NAV trading at $30.00, buying back 300 of stock lifts NAV to $41.11 a share, 2.78 per cent; funded by asset sales and debt repayment that hold leverage at 33.3 per cent, AFFO per share rises 1.39 per cent, and the buyback stops adding to AFFO above $34.29.
Worked in full in REIT Analysis and Valuation by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The REIT is illustrative: a stabilised portfolio valued at a 5.5 per cent cap rate, a 25.0 per cent discount to NAV in the share price, and a board deciding whether to spend 300 on its own stock. Figures are in millions except per-share amounts.
| Item | Value |
|---|---|
| Gross asset value at a 5.5% cap rate | 6,000 |
| Net debt at 4.5% | 2,000 |
| Shares outstanding | 100 |
| NOI / G&A / recurring capex (0.5% of GAV) | 330.0 / 30 / 30.0 |
| AFFO (NOI less G&A, capex and interest of 90.0) | 180.0 |
| NAV / NAV per share | 4,000 / $40.00 |
| AFFO per share / share price | $1.80 / $30.00 |
| AFFO yield at the price / loan to value | 6.00% / 33.3% |
Shares retired = 300 / $30.00 = 10.0, leaving 90.0
NAV per share after = (NAV − spend) / (shares − spend / price) = (4,000 − 300) / 90.0 = $41.11
AFFO per share after = (AFFO − AFFO given up to fund it) / 90.0
AFFO-neutral price = AFFO per share / funding cost; NAV-neutral price = NAV per share
The NAV result does not depend on the funding: whether the 300 comes from asset sales at book value or from new debt, net assets fall by 300 and the share count by 10.0. The AFFO result depends on what the funding costs, so the three routes have to be run separately.
| Funding | AFFO | AFFO / share | AFFO accretion | NAV / share | Loan to value |
|---|---|---|---|---|---|
| Before | 180.0 | 1.80 | n/a | 40.00 | 33.3% |
| Sell 300 of assets | 165.00 | 1.833 | 1.85% | 41.11 | 35.1% |
| Borrow 300 at 5.0% | 165.00 | 1.833 | 1.85% | 41.11 | 38.3% |
| Sell 450.0, repay 150.0 (leverage neutral) | 164.25 | 1.825 | 1.39% | 41.11 | 33.3% |
Selling assets gives up their NOI less the capex they needed, a 5.00 per cent yield, and borrowing costs 5.0 per cent, so both cost the same AFFO, and both earn 6.00 per cent on the shares retired. But both also raise leverage: selling 300 of assets shrinks the denominator, borrowing grows the numerator. Holding loan to value at 33.3 per cent means selling 450.0 of assets and using 150.0 to repay debt. That mix costs 5.25 per cent, and the AFFO accretion falls to 1.39 per cent. It is the honest number, because the other two routes are partly a leverage decision dressed as a buyback.
Holding the leverage-neutral funding and the 300 spend, the price decides both tests.
| Share price | Discount to NAV | NAV / share | NAV accretion | AFFO / share | AFFO accretion |
|---|---|---|---|---|---|
| $25.00 | 37.5% | 42.05 | 5.11% | 1.866 | 3.69% |
| $30.00 | 25.0% | 41.11 | 2.78% | 1.825 | 1.39% |
| $35.00 | 12.5% | 40.47 | 1.17% | 1.796 | −0.20% |
| $40.00 | 0.0% | 40.00 | 0.00% | 1.776 | −1.35% |
| $45.00 | −12.5% | 39.64 | −0.89% | 1.760 | −2.23% |
The two break-evens are different prices. NAV per share is unchanged at a $40.00 price, the NAV itself. AFFO per share is unchanged at 1.80 / 5.25 per cent = $34.29, a 14.3 per cent discount. Between the two, a buyback is a trade of earnings for net asset value, and the board has to say which it is buying.
A buyback also shrinks the company. G&A of 30 is now spread over a smaller asset base, liquidity in the shares falls, and the assets sold are rarely the average asset at the average cap rate. The leverage-neutral calculation is the starting point, not the decision.
A buyback below NAV adds to NAV per share by construction: here $40.00 becomes $41.11. To test AFFO, fund it leverage neutral and compare the AFFO yield on the shares, 6.00 per cent, with the blended cost of the assets sold and the debt repaid, 5.25 per cent. The book's Meridian Industrial Trust analysis, with its NAV build, and the REIT template, which carries Appendix F’s accretion frontier, are in the free workbooks for this book. For the NAV itself, see how to calculate a REIT's NAV per share, and for the mirror question of issuing equity at a discount, whether a discounted REIT can acquire accretively.
Because each share is retired for less than the net assets it represents. New NAV per share is (NAV less the amount spent) divided by (shares less the amount spent over the price). With a 4,000 NAV, 100 shares, $30.00 price and 300 spent, that is 3,700 over 90.0, or $41.11 against $40.00, whatever the funding.
It can, but then part of the accretion is simply extra leverage. Borrowing 300 at 5.0 per cent shows the same $41.11 NAV and 1.85 per cent AFFO accretion as selling assets, but loan to value rises from 33.3 to 38.3 per cent. Holding leverage constant cuts AFFO accretion to 1.39 per cent.
Where the AFFO yield on the shares equals the cost of the funding. With 1.80 of AFFO a share and a 5.25 per cent leverage-neutral funding cost, that is $34.29, a 14.3 per cent discount to NAV. Between $34.29 and the $40.00 NAV the buyback still adds to NAV but dilutes AFFO.
This article is one calculation from REIT Analysis and Valuation. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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