Adjusted Funds From Operations (AFFO) is a measure of the cash a real estate investment trust (REIT) generates from running its properties, after setting aside the routine spending required to keep those properties rentable. It starts from Funds From Operations (FFO), which is net income with real-estate depreciation added back and gains or losses on property sales removed. AFFO then goes a step further, deducting recurring capital expenditures — roofs, HVAC systems, parking lots — along with tenant improvements and leasing commissions, because that money genuinely leaves the business. Neither FFO nor AFFO is a GAAP or IFRS measure, and AFFO has no industry-wide definition, so each REIT decides for itself what counts as recurring.
Why it matters
Real-estate depreciation is a large accounting charge that assumes buildings wear out on a schedule, so a REIT's net income can look small even when rent is flowing in steadily. FFO corrects for that, but it can swing the other way and flatter the picture, because buildings really do need money spent on them. AFFO sits conceptually between the two: it treats depreciation as an accounting estimate while acknowledging that upkeep is a real cash cost. Because AFFO aims to approximate the cash a property portfolio actually throws off, it is commonly compared against a REIT's distributions to see whether payouts are being covered by property operations or by something else, such as borrowing or asset sales.
How it's calculated
Start with net income. Add back real-estate depreciation and amortisation, and strip out gains or losses on property sales and impairment write-downs — that produces FFO, as defined by Nareit, the US REIT industry association. From FFO, deduct recurring capital expenditures (maintenance capex), tenant improvement allowances and leasing commissions. Common further adjustments include straight-line rent, an accounting smoothing of scheduled rent increases across a lease term rather than cash actually received. Each REIT publishes its own reconciliation from net income in its earnings release or supplemental package, and the adjustments differ from one issuer to the next.
Cross-border note. Canadian REITs are commonly mutual fund trusts under the Income Tax Act rather than making a US-style REIT election under the Internal Revenue Code. They generally report under IFRS, which permits carrying investment property at fair value instead of depreciating it, so the depreciation add-back behind FFO can mean something different. REALPAC publishes FFO/AFFO guidance in Canada; Nareit defines FFO in the US.
FAQ
What is the difference between FFO and AFFO?
FFO adds real-estate depreciation back to net income and removes gains or losses from selling properties. AFFO starts from FFO and then subtracts the recurring cash a REIT must spend to keep buildings earning rent — maintenance capex, tenant improvements, leasing commissions — plus non-cash adjustments such as straight-line rent. FFO follows a definition published by Nareit and is reported fairly consistently; AFFO has no such common definition, so each REIT sets its own.
Can I compare AFFO across two different REITs?
Only with care. Because there is no standard definition, one REIT may classify a capital expenditure as recurring while another treats the same spending as an expansion project and excludes it — which raises reported AFFO. The comparison is more meaningful when each REIT's own reconciliation from net income, published in its supplemental disclosures, is read alongside the figure and the adjustments are checked.
Why do REITs report AFFO instead of just earnings per share?
Under US GAAP, buildings are depreciated on a fixed schedule, producing a large non-cash charge against net income every year regardless of whether the property's value or rent-earning ability actually declined. That makes standard EPS a poor description of what a property portfolio generates in cash. AFFO is an attempt to describe the cash left after real upkeep costs. It is a supplemental, non-GAAP measure — it does not replace the audited financial statements.