Adjusted funds from operations
Sector Deep DivesFFO less the recurring capital expenditure needed to maintain the portfolio, the best proxy for distributable cash.
Also written: AFFO
AFFO takes FFO and subtracts what the portfolio actually consumes: maintenance capital expenditure, leasing commissions and tenant improvement costs, and it reverses the straight lining of rent that FFO leaves in.
Straight lining matters more than it sounds. Accounting spreads contracted rent increases evenly across a lease, so reported rent can exceed cash rent for years, and FFO inherits that gap while AFFO removes it.
Because it nets off real recurring costs, it is the better measure of dividend sustainability. A REIT whose dividend is covered on FFO but not on AFFO is paying out more than the portfolio genuinely generates.
There is no standardised definition, so what each company includes varies, and comparing two REITs on AFFO requires reading how each one calculates it rather than trusting the label.
Worked example
FFO of 275, less 45 of maintenance capex, 15 of leasing commissions and tenant improvements, and 15 of straight lined rent reversal, gives AFFO of 200.
A dividend of 240 is covered 1.15 times on FFO but only 0.83 times on AFFO. The REIT is distributing more than the portfolio actually generates.
That gap is the reason AFFO exists, and why comparing two REITs requires reading how each one calculates it rather than trusting the label.