What Is AFFO?
Adjusted Funds From Operations (AFFO) is a refined measure of a REIT's (Real Estate Investment Trust) cash flow. While FFO adds back depreciation to net income, AFFO goes further by subtracting recurring capital expenditures and straight-line rent adjustments, giving a more accurate picture of sustainable cash available for dividends.
AFFO is considered a better indicator of a REIT's dividend-paying ability than FFO or net income because it accounts for the ongoing capital expenditures needed to maintain properties.
AFFO Formulas
FFO vs AFFO Comparison
| Metric | Includes | Best For |
|---|---|---|
| Net Income | All accounting items | General profitability |
| FFO | Net Income + D&A - Gains | Operating performance |
| AFFO | FFO - CapEx - SL Rent | Dividend sustainability |
Frequently Asked Questions
Why is AFFO better than FFO?
FFO adds back all depreciation but ignores that real estate does require ongoing capital expenditures (roof repairs, HVAC replacement, etc.). AFFO subtracts these recurring maintenance costs, providing a more realistic view of cash available for dividends.
How do you use AFFO to value a REIT?
The Price-to-AFFO ratio (P/AFFO) is the REIT equivalent of P/E ratio for stocks. A REIT trading at 15x AFFO is cheaper than one at 20x AFFO, all else being equal. Typical P/AFFO multiples range from 12-25x depending on the sector.
What is a good AFFO payout ratio?
An AFFO payout ratio of 70-85% is considered healthy for most REITs. This means 70-85% of AFFO is paid as dividends. Ratios above 90-100% may indicate the dividend is unsustainable.