Hong Life CalculatorsUnderstanding the AFFO calculator — concept and principle
This calculator works out adjusted funds from operations (AFFO) for a real estate investment trust (REIT), plus AFFO and FFO per share, the dividend payout ratio on AFFO, price to AFFO and the AFFO yield. Use it to judge how well a REIT's dividend is covered by recurring cash flow and to compare valuations.
How it is calculated
- AFFO = FFO − recurring capital spending − leasing costs and tenant improvements − straight-line rent adjustment.
- AFFO per share = AFFO ÷ shares outstanding; FFO per share likewise.
- Payout = dividend per share ÷ AFFO per share.
- P/AFFO = share price ÷ AFFO per share; AFFO yield = AFFO per share ÷ price.
- AFFO ÷ FFO shows how much of FFO survives the adjustments.
The principle
FFO, as defined by Nareit, adds depreciation back to net income because real estate often holds its value better than accounting depreciation suggests. But buildings still need roofs, HVAC systems and refurbishments, and new leases need tenant improvements and commissions. These recurring costs are real cash outflows. Straight-line accounting also spreads rent increases evenly over a lease, so early-year reported rent is higher than cash received. AFFO removes these items to get closer to the cash available for dividends. There is no single official AFFO definition, so methods differ between companies.
Worked example
Default inputs: FFO $84,000,000, recurring capex $10,000,000, leasing costs $4,000,000, straight-line adjustment $3,000,000, 60,000,000 shares, dividend $1.00, price $25.
- AFFO = 84 − 10 − 4 − 3 = $67,000,000.
- AFFO per share = 67,000,000 ÷ 60,000,000 ≈ $1.12; FFO per share = $1.40.
- Payout = 1.00 ÷ 1.1167 ≈ 89.6%.
- P/AFFO = 25 ÷ 1.1167 ≈ 22.4; AFFO yield ≈ 4.47%.
- AFFO ÷ FFO = 67 ÷ 84 ≈ 79.8%.
| Funds from operations (FFO) | Adjusted funds from operations (AFFO) |
|---|---|
| 2.1e+07 | $4,000,000 |
| 4.2e+07 | $25,000,000 |
| 6.3e+07 | $46,000,000 |
| 8.4e+07 | $67,000,000 |
| 1.05e+08 | $88,000,000 |
| 1.26e+08 | $109,000,000 |
| 1.68e+08 | $151,000,000 |
How to read the result
A payout below 100% of AFFO means the dividend is covered by recurring cash flow; a payout near or above 100% leaves little room for error. P/AFFO works like a price-earnings ratio for REITs: lower means cheaper relative to cash flow, but compare within the same property sector. A low AFFO ÷ FFO means heavy maintenance or leasing costs.
Common mistakes
- Comparing AFFO between REITs that define it differently.
- Subtracting all capital spending, including growth projects, instead of only recurring spending.
- Ignoring straight-line rent, which can flatter early-year results.
- Using FFO payout ratios as if they were AFFO ratios.
Frequently asked questions
What is the difference between FFO and AFFO?
FFO adds back depreciation and removes property-sale gains; AFFO then subtracts recurring capital and leasing costs and adjusts rent to a cash basis.
What is a typical AFFO payout?
It varies by sector; the key question is whether it stays comfortably below 100% over time.
Why use AFFO instead of net income for REITs?
Net income is reduced by large depreciation charges that may not reflect the real economic decline of property.
Sources: Nareit, "Funds From Operations (FFO)" (glossary, reit.com)