explain this statements
- NAV becomes more subjective in a negative and less liquid
market - P/FFO and P/AFFO are likely to fall in a neg-
ative economic environment
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A liquid market a one with many available buyers and sellers and comparatively low transaction costs. The details of what makes a market liquid may vary depending on the asset being exchanged. In a liquid market, it is easy to execute a trade quickly and at a desirable price because there are numerous buyers and sellers, and the product being exchanged is standardized and in high demand. In a liquid market despite daily changes in supply and demand the spread between what the buyer wants to pay and what sellers will offer remains relatively small. The opposite of a liquid market is called a “thin market” or an “illiquid market.” Thin markets may have considerably large spreads between the highest available buyer and the lowest available seller.
2.P/FFO and P/AFFO are likely to fall into a negative economic environment
P/FFO is the net income plus amortization and depreciation. The costs are added back because we deduct the total costs from the total revenue when calculating the net income.
Depreciation and amortization are non-cash expenses that do not affect a company’s cash flows. Deducting non-cash expenses from the revenue results in a lower profit. Therefore, the dividends distributed to shareholders are reduced by the sum of the non-cash expenses.
Both the P/FFO and P/AFFO add back the non-cash costs to the net income to eliminate the effects of depreciation and amortization, which do not affect cash flow. Both methods work better than conventional procedures such as the EPS in measuring the real estate industry’s performance.
Both metrics are also common in the measurement of REITs but are not yet defined in financial reporting standards. Currently, the International Financial Reporting Standards (IFRS) do not officially recognize the two procedures as qualified measurements for the real estate industry.