What's the difference between FFO and AFFO?

FFO (Funds From Operations) adds depreciation and amortization back to net income and removes gains on property sales — the NAREIT-defined starting point. AFFO goes further by subtracting recurring maintenance CapEx, straight-line rent adjustments, tenant improvements, and leasing commissions. AFFO better reflects the cash a REIT actually has available to pay dividends and reinvest.

Is AFFO the same as free cash flow?

It's the REIT-industry equivalent. Standard free cash flow subtracts all CapEx; AFFO subtracts only the recurring portion (excluding growth/redevelopment CapEx). Both attempt to isolate cash that's truly available to shareholders, but AFFO is the metric REIT analysts and dividend investors actually use.

What's a healthy AFFO payout ratio?

For most equity REITs, 70-85% is the comfort zone. Above 90% leaves little buffer for vacancy, refinancing, or rate shocks — dividend cuts often follow. Below 65% suggests room to raise the dividend or fund acquisitions internally. Mortgage REITs and net-lease REITs sometimes operate higher (85-95%) given more predictable cash flows.

Why isn't AFFO a GAAP measure?

AFFO is a non-GAAP figure published by individual REITs and is computed differently by every company. SEC Reg G requires reconciliation to a GAAP metric (usually net income). Always check the company's supplemental disclosure — what one REIT calls 'recurring CapEx' another may capitalize as growth investment.

How does AFFO compare to NAV for valuation?

AFFO drives the price-to-AFFO multiple (current REIT averages: 15-22x for high-quality names). NAV (Net Asset Value) is the property-level replacement value of the portfolio. Most analysts use both: P/AFFO for cash-flow valuation, NAV premium/discount for sentiment and asset-quality signals.

What counts as 'recurring' CapEx?

Maintenance spending required to keep the existing portfolio operational at current occupancy — roof repairs, HVAC replacement, parking lot resurfacing, common-area refresh. Excluded: development of new buildings, major repositioning, and discretionary value-add renovation. The split is judgment-driven, which is why analysts often build their own AFFO estimates.

Finance

AFFO Calculator

Adjusted Funds From Operations — the gold standard cash flow metric for REITs.

Net Income ($)

Depreciation & Amortization ($)

Gains on Property Sales ($)

Recurring CapEx ($)

Straight-Line Rent Adj ($)

Tenant Improvements ($)

Leasing Commissions ($)

Shares Outstanding

Formulas:
FFO = Net Income + D&A − Gains on Sales
AFFO = FFO − Recurring CapEx − SLR Adj − TIs − Leasing Commissions

Real-estate accounting has a structural quirk: GAAP depreciation makes a profitable apartment tower look like a money-losing business on the income statement. That's why every REIT analyst — and the dividend investors who follow them — anchors on AFFO instead of net income. AFFO answers the question that actually matters: after the buildings have been kept standing and the leases re-signed, how much cash is left for the dividend?

Why AFFO exists in the first place

Buildings depreciate on the income statement on a 27.5-to-39-year schedule. In reality, well-maintained commercial real estate often appreciates. FFO (Funds From Operations), defined by NAREIT in 1991, fixes the most obvious distortion by adding depreciation back. But FFO still overstates distributable cash because every REIT has ongoing maintenance obligations: HVAC swaps, parking lots, roof membranes, common-area refreshes, and the tenant improvements and leasing commissions paid whenever space is re-leased. AFFO subtracts those recurring costs.

The full ladder from net income to AFFO

Net Income
+ Depreciation & Amortization (real estate)
− Gains on Property Sales (non-recurring)
= FFO (NAREIT definition)
− Recurring Maintenance CapEx
− Straight-Line Rent Adjustment
− Tenant Improvements (TI) for re-leasing
− Leasing Commissions
= AFFO

Walkthrough: $5M net income example

Net income: $5.0M, D&A: $3.0M, Gains on sales: $0.5M → FFO = $7.5M
Recurring CapEx $800K + SLR adj $200K + TIs $300K + leasing commissions $150K = $1.45M of AFFO drags
AFFO = $6.05M | AFFO/share on 10M shares = $0.605
Maximum safe dividend at 85% payout ≈ $0.51/share

Reading the AFFO payout ratio

The single most important REIT-quality signal: Dividends per share ÷ AFFO per share. Three zones:

60-80% (healthy): Headroom for vacancy, refinancing surprises, and modest growth.
80-95% (tight): Acceptable for very stable property types (triple-net retail, healthcare with strong tenants) but vulnerable to shocks.
Above 95% or above 100% (red flag): Dividend is being paid out of debt or asset sales, not operating cash. Historical pattern: cuts typically follow within 18 months.

Where each REIT sector falls on AFFO multiples

Sector	Typical P/AFFO	Typical payout
Industrial / logistics	22-28x	65-75%
Data centers	22-32x	60-70%
Self-storage	18-25x	65-80%
Apartments	17-22x	70-85%
Net-lease retail	15-20x	80-90%
Office	8-13x	75-95%
Mortgage REITs (book-value)	N/A	85-100%

Three traps that fool first-time REIT investors

1. Headline FFO without AFFO. Many REITs prefer FFO in press releases because it's higher. Always re-do the AFFO math from the supplemental package — recurring CapEx assumptions are where management discretion lives.

2. Treating gains on sales as "AFFO." One-time disposition gains should be stripped out; they aren't repeatable. A REIT funding its dividend with asset sales is liquidating, not earning.

3. Ignoring lease-up CapEx during downturns. Office REITs in 2024-25 saw TI packages and free rent balloon as concessions to backfill vacant space. Those costs are recurring; they belong in AFFO.

FAQ

How is AFFO different from CAD or FAD?

Cash Available for Distribution (CAD) and Funds Available for Distribution (FAD) are essentially synonyms for AFFO — different REITs picked different names in the 1990s. NAREIT now informally treats them interchangeably.

Should I use trailing or forward AFFO?

For valuation multiples, consensus forward AFFO is more common because the income stream is forward-looking. For dividend safety, use trailing twelve-month AFFO — you want proof, not projection.

Does AFFO include G&A expense?

Yes — it's already inside net income, so it flows through the ladder. AFFO is after corporate overhead.

Why subtract straight-line rent?

GAAP averages contractual rent escalators across the lease term, recognizing more revenue early than is actually collected. The SLR adjustment removes that non-cash revenue so AFFO reflects real cash inflows.

Can a REIT have AFFO higher than FFO?

Theoretically yes (negative adjustments), but extremely rare. Almost always AFFO < FFO because real CapEx and re-leasing costs are positive.

How does AFFO interact with the 90% distribution rule?

REITs must distribute 90% of taxable income to keep REIT status — but taxable income is much lower than AFFO because depreciation is fully deductible. So the 90% rule is rarely the binding constraint; AFFO payout discipline is.

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Sources

Educational only; not investment advice. Reviewed by Tobias Lindqvist on March 1, 2026.