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AFFO (Adjusted FFO) Explained

AFFO takes FFO further by subtracting recurring capital spending and adjusting for straight-line rent to estimate distributable cash

The Gap FFO Leaves Behind

FFO fixes the biggest problem with using GAAP net income to judge a REIT - it adds back real estate depreciation, a large non-cash charge. But FFO has its own blind spot: it doesn't account for the real, recurring cash a landlord has to spend just to keep properties competitive. New carpet and appliances between apartment leases, a parking lot resurfacing, HVAC replacements, leasing commissions on renewed space - none of that shows up as a deduction in FFO, yet all of it is genuine cash going out the door every year.

AFFO - Adjusted Funds From Operations - starts with FFO and makes further adjustments to get closer to the cash a REIT could theoretically distribute to shareholders without slowly starving its portfolio of the maintenance it needs. It is not a standardized, Nareit-defined metric the way FFO is; each company builds its own AFFO calculation and discloses the components in its earnings materials.

The AFFO Formula

While the exact line items vary by company, a typical AFFO build looks like this:

• Start with FFO
• Subtract recurring (maintenance) capital expenditures - the ongoing spending needed to keep existing properties in service
• Subtract leasing costs such as tenant improvement allowances and leasing commissions tied to renewing existing space
• Adjust for straight-line rent (explained below)
• Add back certain non-cash items, such as stock-based compensation or amortization of above/below-market lease intangibles and deferred financing costs

A simplified illustration: a REIT reports FFO of $80 million for the quarter. Of that, $8 million goes to recurring capex and leasing costs, and a $2 million straight-line rent adjustment needs to come out. AFFO would be roughly $80M - $8M - $2M = $70M. Divided over, say, 100 million shares, that's $0.70 per share, noticeably below the $0.80 FFO-per-share figure from the same period.

Recurring Capex vs. Growth Capex

The key judgment call inside AFFO is separating recurring capital expenditures (spending that simply maintains the existing portfolio's earning power) from growth capital expenditures (new development, redevelopment, or value-add renovations that are expected to increase NOI). Only the recurring portion is subtracted in AFFO - growth spending is treated as an investment, not a maintenance cost, since it's optional and expected to generate its own return.

This distinction is also where AFFO comparisons across companies get tricky: two REITs with identical portfolios could report different AFFO if one classifies a given renovation as "recurring" and the other calls it "value-add." Reading the footnotes in the earnings supplement matters here - see how to read a REIT earnings supplement.

The Straight-Line Rent Adjustment

Under GAAP, when a lease includes scheduled rent increases (say, $10 per square foot in year one, stepping up to $14 by year five), the REIT doesn't recognize the actual cash rent received each year. Instead, it recognizes the average rent over the lease term evenly, "straight-lining" it. Early in a lease, this makes reported rental revenue (and therefore FFO) higher than the cash actually collected; late in the lease, it's the reverse. AFFO backs out this timing difference so the metric tracks cash rent actually received in the period, rather than the smoothed accounting version.

Same Idea, Different Names

AFFO goes by several names depending on the company: Cash Available for Distribution (CAD), Funds Available for Distribution (FAD), or simply a company-specific "Core FFO" or "Adjusted FFO" label. Mortgage REITs use an entirely different measure, distributable earnings (sometimes "EAD," earnings available for distribution), since they don't own depreciable property. See equity vs. mortgage REITs for that distinction. Whatever the label, the goal is the same: get closer to sustainable, recurring cash flow than either net income or plain FFO can offer on their own.

Why AFFO Matters for the Dividend

Because AFFO subtracts the maintenance spending FFO ignores, it's generally considered the more conservative - and more relevant - figure for judging whether a REIT's dividend is well covered. Dividing the dividend by AFFO produces the AFFO payout ratio, one of the most closely watched coverage checks in REIT research. Each REIT's profile page on this site shows the company's own reported AFFO per share (or its closest equivalent - Core FFO, CAD, or distributable earnings) as disclosed in its latest 8-K.

AFFO Across Different Property Types

Capital intensity varies a great deal by property type, which is part of why AFFO margins differ meaningfully across REIT sectors. An apartment REIT spending, say, $500 per unit replacing worn carpet and appliances between tenants is a routine, recurring cost baked into AFFO every year. A net lease REIT, by contrast, often shifts most property-level maintenance obligations onto the tenant under the lease terms, which can make its recurring capex - and the gap between its FFO and AFFO - considerably smaller as a share of revenue.

Because there's no single audited standard behind it, the gap between a company's FFO and its own AFFO or Core FFO figure can vary for reasons that have as much to do with disclosure choices as underlying performance. Investors comparing AFFO margins across two REITs are, in effect, also comparing two different sets of adjustment policies - one reason some analysts build their own normalized AFFO from the disclosed line items rather than relying solely on a company's headline number. One relationship does hold consistently, though: because AFFO is typically lower than FFO in a given period, an AFFO payout ratio is always equal to or higher than the equivalent FFO payout ratio for the same dividend.

See it in the data: See a REIT's reported AFFO per share → Screen REITs by yield and valuation →

Research and education only — nothing here is investment advice. Figures such as the 90% distribution rule are general and can change; always confirm against a company's filings.