# Adjusted Funds From Operations — AFFO

## What Are Adjusted Funds From Operations â€” AFFO?

Adjusted funds from operations (AFFO) refers to the financial performance measure primarily used in the analysis of real estate investment trusts (REITs). The AFFO of a REIT, however subject to shifting methods of computation, is generally equal to the trust's funds from operations (FFO) with adjustments made for recurring capital expenditures used to keep up with the quality of the REIT's underlying assets. The calculation takes in the adjustment to GAAP straight-covering of rent, leasing costs, and other material factors.

## Understanding Adjusted Funds From Operations â€” AFFO

Regardless of how industry professionals choose to compute adjusted funds from operations (AFFO), being a more accurate measure of residual cash flow for shareholders than simple FFO is considered. However FFO is usually used, it does not deduct for capital expenditures required to keep up with 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 extra costs incurred by the REIT â€” and extra income sources too, like rent increases. In this manner, It provides for a more accurate base number when estimating present values and a better predictor of the REIT's future ability to pay dividends. This is a non-GAAP measure.

## Working out Adjusted Funds From Operations â€” AFFO

Before computing the AFFO, an analyst must initially determine the REIT's funds from operations (FFO). The FFO measures cash flow from a specified rundown 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, however it excludes the capital gains from property sales. The reasons these gains are not included is that they are one time events and generally don't 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. However there is nobody official formula, calculations for AFFO typically would be something like:

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

Traditional metrics used in evaluating equities, for example, earnings-per-share (EPS) and price-to-earnings proportion (P/E), are not reliable in estimating the value of a REIT.

## Example of an Adjusted Funds From Operations â€”

## AFFO Calculation

As an example of the AFFO calculation, assume the accompanying: 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 data 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

## Features

- However nobody official measure exists, an AFFO formula is along the lines of AFFO = FFO + rent increases - capital expenditures - routine maintenance sums.
- Adjusted funds from operations (AFFO) is a financial measure used to estimate the value of a real estate investment trust (REIT).
- AFFO is based on funds from operations (FFO), however is considered preferable, because it takes costs into consideration, in this manner more accurately estimating the REIT's present values and ability to pay dividends.