Adjusted Funds From Operations (AFFO) is calculated as:
AFFO = FFO + rent increases – capital expenditures – routine maintenance amounts
For reference, the formula for Funds from Operations (FFO) is:
FFO = net income + depreciation & amortization + property sales losses – property sales gains – interest income
Compared to FFO, AFFO provides a more accurate measurement of cash flows generated from a real estate company’s core operations. AFFO accounts for routine maintenance to maintain the quality of the assets as well as capital expenditures to renovate the assets or to purchase new assets. AFFO also accounts for the additional income from rent increases. As a result, AFFO provides a more accurate cash flow number that can be used to calculate present value and forecast a REIT’s ability to pay dividends.