A lower capitalization rate implies a lower FFO, why?

CFA Level II Alternative Investments
#1

An example 10 in the CFA Volume 5 page 124, question A’s answer states that “a lower capitalization rate (i.e. a lower NOI with such other parameters as interest costs and corporate expenses being the same) implies a lower FFO and hence a higher P/FFO ratio if P/NAV ratios are similar, as is the case here." Why capitalization rate has something to do with FFO? I thought we use the cap rate to calculate the “value of operating real estate”. Can someone help explain/ Thanks!

#2

I assume that the value is held constant.

#3

Thanks for pointing that out! The value is constant. However, I thought the FFO is related to the Net Income. The capitalization rate is used to calculate the value from the NOI. How does the capitalization rate affect the FFO? I just dont see the connection, do you mind explaining a little more on this? Thanks!

#4

Possibly because a lower FFO estimate is more “conservative” and therefore less risky?

#5

I found the answer to this. Just in case someone has the same question"

Capitalization rate is like an multiplier for property value to get Net Operating Income:

(net operating income) = (property value) x (cap rate)

So the smaller the cap rate, the less the NOI will be per $1 of property value. FFO begins with NOI."

Cheers