AFFO

A financial metric used to measure the recurring cash generated by a Real Estate Investment Trust (REIT).

Adjusted Funds From Operations (AFFO) is a specialized financial metric used to evaluate the performance and dividend sustainability of Real Estate Investment Trusts (REITs). It builds upon Funds From Operations (FFO) by making further adjustments to reflect the actual, recurring cash flow generated by a real estate portfolio. Specifically, it subtracts recurring capital expenditures (such as routine building maintenance, roofing, or carpet replacement) and adjusts for non-cash items like straight-line rent. While standard FFO is a widely accepted industry benchmark, it does not account for the ongoing capital required to keep properties in rentable condition. Because these maintenance expenses require real cash outlays, FFO can sometimes overstate the cash a REIT has available for distribution. AFFO solves this by deducting these capital expenditures, providing a more precise measurement of a REIT's true residual cash flow. Investors closely monitor AFFO to assess the safety and growth potential of a REIT's dividend. By comparing a REIT's dividend payment to its AFFO, investors can calculate a highly accurate payout ratio. A payout ratio close to or exceeding 100% of AFFO indicates that the dividend may be unsustainable, whereas a lower ratio suggests the dividend is well-covered and has room to grow. One pitfall is that AFFO is a non-GAAP metric, meaning different REITs may calculate it slightly differently, requiring investors to review the footnotes of financial disclosures for consistency.

A residential REIT reports standard FFO of $200 million. During the year, it spent $30 million on routine maintenance capex (such as replacing HVAC units and painting vacant apartments) and recorded $5 million in non-cash straight-line rent adjustments. Its AFFO is calculated as: $200,000,000 - $30,000,000 - $5,000,000 = $165,000,000.