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AFFO Calculator — Adjusted Funds From Operations

Created by Wei Bin Loo
Reviewed by Dominik Czernia, PhD and Steven Wooding
Last updated: May 17, 2024


With this AFFO calculator, you can easily calculate the adjusted funds from operations of a company. The adjusted funds from operations (AFFO) is a metric that will help you analyze the real estate investment trust's (REIT) ability to pay its dividend. Please check out our FFO calculator to understand more about this topic.

This article will help you understand what is AFFO and how to calculate the metric using the AFFO formula. We will also demonstrate some practical examples to help you understand this topic.

What is AFFO?

Adjusted funds from operations, or AFFO for short, are variations of the famous cash flow metric funds from operations (FFO). Both are built to replace the conventional operating cash flow used in other companies. This is because, compared to the operating cash flow, the AFFO and FFO can better reflect the operational activities of a real estate investment trust (REIT).

The AFFO, however, is better at reflecting the ability of the REIT to pay its dividends to its investors as it takes into account the recurring expenses needed to maintain the operation of the properties owned by the REITs. This concept will be further explained in the following sections.

Be sure also to check out our dividend calculator if you are interested in knowing more about dividend-paying stocks!

How to calculate AFFO? AFFO vs. FFO

Now that you understand the AFFO meaning, we can talk about using the AFFO calculator.

To understand the AFFO formula, let's take REIT Alpha with the following information as an example:

  • Net income: $500,000
  • Depreciation and amortization: $150,000
  • Gains from property sales: $125,000
  • Losses from property sales: $80,000
  • Interest income: $75,000
  • Rent increases: $50,000
  • Capital expenditures (capex): $60,000
  • Routine maintenance: $35,000

There are six steps in the AFFO calculation:

  1. Determine the net income.

    The net income can be found on the REIT's income statement. It is usually located at the bottom line. The net income for REIT Alpha is $500,000. You can use the net income calculator to find it yourself.

  2. Determine the depreciation and amortization.

    The depreciation and amortization, D&A, is the depreciated value of the assets of REIT Alpha. This value is also in the income statement. We explain this topic in more detail in the depreciation calculator.

    The D&A for REIT Alpha is $150,000.

  3. Determine the gains and losses from property sales.

    The gains from property sales are the earnings generated from selling properties, while the losses from property sales are those made from selling properties at a loss.

    Thus, the REIT Alpha's gains and losses are $125,000 and $80,000 respectively.

  4. Determine the interest income.

    Next, we need to calculate the interest income, which is $75,000 for REIT Alpha.

  5. Calculate the funds from operations (FFO).

    Now, we need to calculate the FFO with the formula below:

    FFO = net income + D&A + losses - gains - interest income

    Hence, the FFO for REIT Alpha is $500,000 + $150,000 + $80,000 − $125,000 − $75,000 = $530,000.

  6. Calculate the adjusted funds from operations (AFFO).

    The last step is to calculate the AFFO using the AFFO formula below:

    AFFO = FFO + rent increases - capex - routine maintenance

    Thus, the AFFO for REIT Alpha is $530,000 + $50,000 − $60,000 − $35,000 = $485,000.

What is the difference between FFO and AFFO?

Now, it is time for us to discuss the difference between FFO and AFFO meaning and which one is usually preferred when analyzing REITs.

  • FFO, or funds from operations, is commonly interpreted as the cash flow from the operation of REITs. This is because it includes most of the operational activities within a REIT, such as leasing and acquisition. The FFO takes into account the net income, the interest cost, and the depreciation and amortization.

  • However, most times, the AFFO is still considered a superior metric to analyze a REIT's performance. This is because besides considering all the components that the FFO does, the AFFO also considers the recurring operational cost for the properties that the REIT holds, such as routine maintenance.

FAQ

What is a REIT?

REIT stands for a real estate investment trust. REITs are companies that own and operate income-producing properties. These can include residential or commercial properties. They usually reward their investors by paying out high dividends.

Can AFFO be negative?

Yes, the AFFO can be negative. A negative AFFO usually means that the REIT is performing poorly and is not generating enough cash to pay its investors after adjusting for recurring expenses.

What is a good AFFO?

There is no hard and fast rule on a good AFFO. It depends on the industry that the REIT is in since different industries require different adjustments. Hence, the best way to assess this metric is to compare it to the industry mean.

What is FFO?

FFO stands for funds from operations. FFO is normally being interpreted as cash flow from operation for REITs. Compared to AFFO, the FFO does not take into account the recurring maintenance.

What is the AFFO if the FFO is $1,000 with $500 rent increase?

The AFFO will be $1,500 if you assume no routine maintenance costs and capital expenditures (capex). You can calculate this by using this AFFO formula:

AFFO = FFO + rent increase − maintenance − capital expenditure

How do I calculate AFFO?

To calculate AFFO:

  1. Determine the FFO.

  2. Find the rent increases.

  3. Estimate the capital expenditures (capex).

  4. Determine the routine maintenance costs.

  5. Apply the FFO formula:

    AFFO = FFO + rent increase − maintenance − capital expenditure

Wei Bin Loo
Related calculators
Funds from operations (FFO)
Net income
$
Depreciation and amortization
$
Gains from property sales
$
Losses from property sales
$
Interest income
$
FFO
$
Adjusted funds from operations (AFFO)
Rent increases
$
Capital expenditures
$
Routine maintenance amounts
$
AFFO
$
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