# What Is Adjusted Funds From Operations (AFFO) and How to Calculate It

## What Are Adjusted Funds From Operations—AFFO?

In the world of real estate investment trusts (REITs), Adjusted Funds From Operations (AFFO) stands out as a key metric. It builds on Funds From Operations (FFO) by accounting for capital expenditures and maintenance costs, offering a clearer picture of a REIT's cash flow and its ability to pay dividends.

The AFFO of a [real estate investment trust (REIT)](https://www.investopedia.com/terms/r/reit.asp), though subject to varying methods of computation, is generally equal to the trust's [funds from operations](https://www.investopedia.com/terms/f/fundsfromoperation.asp) (FFO) with adjustments made for recurring capital expenditures used to maintain the quality of the REIT's underlying assets. The calculation takes in the adjustment to GAAP straight-lining of rent, leasing costs, and other material factors.

### Key Takeaways

*   Adjusted Funds From Operations (AFFO) is a financial measure used to estimate the true value and cash flow potential of a Real Estate Investment Trust (REIT).
*   AFFO is considered more accurate than Funds From Operations (FFO) because it deducts capital expenditures necessary for maintaining properties.
*   Unlike FFO, AFFO includes rent increases and excludes one-time gains from property sales to better reflect ongoing cash flow.
*   Understanding AFFO is important for investors assessing a REIT’s ability to pay dividends and manage property-related expenses over time.

## Why AFFO Offers a More Accurate Reflection of REIT Profitability

Regardless of how industry professionals choose to compute adjusted funds from operations (AFFO), it is considered to be a more accurate measure of residual cash flow for shareholders than simple FFO. Though FFO is commonly used, it does not deduct for [capital expenditures](https://www.investopedia.com/terms/c/capitalexpenditure.asp) required to maintain the existing portfolio of properties, so it doesn't quite measure the true residual cash flow. Professional analysts prefer AFFO because it takes into consideration additional costs incurred by the REIT—and additional income sources too, like rent increases. Thus, It provides for a more accurate base number when estimating [present values](https://www.investopedia.com/terms/p/presentvalue.asp) and a better predictor of the REIT's future ability to pay [dividends](https://www.investopedia.com/terms/d/dividend.asp). This is a non-GAAP measure.

## How to Calculate Adjusted Funds From Operations (AFFO)

Before calculating the AFFO, an analyst must first determine the REIT's funds from operations (FFO). The FFO measures cash flow from a specified list of activities. FFO reflects the impact from the REIT's leasing and acquisition activity, as well as interest costs. FFO takes into account the REIT's net income, including [amortization and depreciation](https://www.investopedia.com/ask/answers/06/amortizationvsdepreciation.asp), but it excludes the [capital gains](https://www.investopedia.com/terms/c/capitalgain.asp) from property sales. The reason these gains are not included is that they are one-time events and generally do not have a long-term effect on the REIT's future earnings potential.

The formula for FFO is:

**FFO = net income + amortization + depreciation - capital gains from property sales**

Once the FFO is determined, the AFFO can be calculated. Though there is no one official formula, calculations for AFFO typically would be something like:

**AFFO = FFO + rent increases - capital expenditures - routine maintenance amounts**

> **Fast Fact**
>
> Traditional metrics used in evaluating equities, such as earnings-per-share (EPS) and price-to-earnings ratio (P/E), are not reliable in estimating the value of a REIT.

## Practical Example: Calculating AFFO for a REIT

As an example of the AFFO calculation, assume the following: a REIT had $2 million in net income over the last reporting period. During that time, it earned $400,000 from the sale of one of its properties and lost $100,000 from the sale of another. It reported $35,000 of amortization and $50,000 of depreciation. During the period, net rent increases were $40,000; capital expenditures were $75,000 and routine maintenance amounted to $30,000.

Given this information the FFO can be calculated as:

FFO = $2,000,000 + $35,000 + $50,000 - ($400,000 - $100,000) = $1,785,000

From this, the AFFO is calculated as:

AFFO = FFO + $40,000 - $75,000 - $30,000 = $1,720,000

> **Article Sources**
>
> 1.  Nareit. “[Glossary of REIT Terms](https://www.reit.com/what-reit/glossary-reit-terms).”
>     
> 2.  Stephanie Krewson-Kelly, R. Brad Thomas. “[The Intelligent REIT Investor,](https://www.google.com/books/edition/The_Intelligent_REIT_Investor/jpfCDAAAQBAJ?hl=en&gbpv=1)” Pages 133, 139-140. Wiley, 2016.
>     
> 3.  Nareit. “[Nareit Funds From Operations White Paper - 2018 Restatement](https://www.reit.com/sites/default/files/2018-FFO-white-paper-%2811-27-18%29.pdf).” Pages 1, 4-5.
>     
> 4.  CFI: “[Adjusted Funds From Operations (AFFO)](https://corporatefinanceinstitute.com/resources/commercial-real-estate/adjusted-funds-from-operations-affo/).”