Adjusted Funds From Operations (AFFO)

Adjusted Funds From Operations (AFFO) is a cash-flow metric used to assess the recurring, maintainable earnings of a real estate investment trust (REIT). Building on Funds From Operations (FFO), AFFO adjusts for capital expenditures and other items to better reflect the REIT’s ability to generate cash and pay dividends.

Why AFFO matters

• Provides a closer estimate of distributable cash flow than GAAP net income or FFO alone.
• Accounts for recurring capital expenditures and maintenance costs that reduce cash available for dividends.
• Can include recurring income adjustments (for example, straight‑lined rent or contractual rent increases) and exclude one-time gains from property sales.
• Is a non‑GAAP measure and may be calculated differently across firms; always check a REIT’s methodology.

How AFFO is calculated

1. Compute FFO first. A common FFO formula:
   FFO = Net income + Amortization + Depreciation − Capital gains from property sales

(FFO adds back noncash depreciation and amortization and removes one‑time property sale gains.)

1. Adjust FFO to estimate AFFO. A typical AFFO adjustment:
   AFFO = FFO + Recurring rent adjustments − Capital expenditures − Routine maintenance expense

Notes:
* There is no single standardized AFFO formula; companies and analysts may include or exclude different items (leasing costs, straight‑lining adjustments, tenant improvements, etc.).
* Capital expenditures in AFFO typically refer to recurring maintenance capex, not growth or acquisition capex.

Example

Assume a REIT reports:
* Net income: $2,000,000
Amortization: $35,000
Depreciation: $50,000
Net capital gains on property sales: $400,000 − $100,000 = $300,000
Net rent increases (recurring): $40,000
Capital expenditures (maintenance): $75,000
Routine maintenance: $30,000

Step 1 — Calculate FFO:
FFO = 2,000,000 + 35,000 + 50,000 − 300,000 = 1,785,000

Step 2 — Calculate AFFO:
AFFO = 1,785,000 + 40,000 − 75,000 − 30,000 = 1,720,000

Key takeaways

• AFFO refines FFO by removing recurring cash costs (like maintenance capex) and adding recurring income adjustments, producing a better estimate of distributable cash flow.
• Because AFFO is non‑GAAP and methodologies vary, compare definitions when analyzing different REITs.
• Traditional equity metrics such as EPS and P/E are often unreliable for REITs; AFFO is commonly used by investors and analysts for valuation and dividend sustainability analysis.

References / Further reading

• Nareit — Glossary of REIT Terms
• Nareit — Funds From Operations White Paper (2018 Restatement)
• Stephanie Krewson‑Kelly & R. Brad Thomas, The Intelligent REIT Investor (Wiley)
• Corporate Finance Institute (CFI) — Adjusted Funds From Operations (AFFO)