Adjusted Funds from Operations (AFFO)
Term of the week
What: Adjusted funds from operations (AFFO) is a metric eREITs use to quantify the residual cash flows available to shareholders.
Why: AFFO provides an even more refined metric for eREITs’ dividend-paying capacity than FFO. Dividend-focused long-term investors should scrutinize AFFO.
How: AFFO includes recurring capital expenditures necessary for maintaining properties and keeping them rented (broker fees, tenant improvements & allowances) and adjustments for straight-line rents, equity-based employee compensation and debt-cost amortization.
Conclusion: AFFO is not a standardized generally accepted accounting principles (GAAP) measure. Different eREITs adopt company- or industry-specific definitions. Thus, investors need to know the specific calculations when comparing eREITs.