Adjusted Funds From Operations (AFFO)

Adjusted Funds From Operations (AFFO) Explained

While Funds From Operations (FFO) provides a snapshot of a REIT’s performance, AFFO goes a step further by accounting for the ongoing expenses that are crucial for the maintenance and enhancement of the property assets.

This includes capital expenditures, leasing commissions, and tenant improvement costs.

Why is AFFO important? Well, it offers a more precise picture of a REIT’s operational performance and cash flow. By using AFFO, investors can better gauge the sustainability of a REIT’s dividend payments.

Opinion: If you’re serious about investing in REITs, understanding AFFO is not an option—it’s a requirement. AFFO provides a more nuanced view than FFO, revealing the REIT’s true income-generating capability.

AFFO is a more refined metric that offers insights into whether a REIT is financially robust enough to sustain its dividend payments—something every smart investor should know.

Key Insights

1. Expense Adjustments: AFFO accounts for key operating expenses like capital expenditures, making it a more refined metric.
2. Dividend Sustainability: AFFO helps assess the sustainability of a REIT’s dividend payments.
3. Investment Evaluation: It serves as a valuable tool for anyone considering investing in REITs.

Example Of Adjusted Funds From Operations (AFFO)

Suppose a REIT has an FFO of $1 million, but it incurs $200,000 in capital expenditures and $50,000 in leasing commissions. The AFFO would be calculated as follows:

AFFO=FFO−CapitalExpenditures−LeasingCommissions

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