Adjusted Funds From Operations (AFFO) Explained
Adjusted Funds From Operations (AFFO): Adjusted Funds From Operations (AFFO), or Cash Available for Distribution (CAD), is FFO minus recurring maintenance capital expenditures (maintenance CapEx) and tenant improvements, adjusted for straight-line rent. It represents the true recurring cash flow available to pay dividends.
Institutional Analysis & Context
While FFO adds back all depreciation, physical buildings still require real cash expenditures to replace aging HVAC systems, repair roofs, and provide tenant improvement (TI) allowances upon lease renewal. AFFO subtracts these recurring capital outlays and removes non-cash straight-line rent adjustments. Institutional investors consider AFFO the single most accurate gauge of dividend safety.
Formula & Calculation Breakdown
| Metric Component | Definition & Application |
|---|---|
| FFO | Standard NAREIT Funds From Operations |
| Maintenance CapEx | Cash spent maintaining existing property condition and structural integrity |
| Tenant Improvements (TIs) | Cash allowances granted to tenants to build out custom interior spaces |
| Straight-Line Rent | Non-cash revenue booked under GAAP spreading multi-year contractual rent bumps evenly |
Real-World Calculation Example
Flagship REITs Exemplifying This Metric
Analyze how top public REITs perform across this dimension in the live market:
Frequently Asked Questions
What is the difference between FFO and AFFO?
FFO measures overall operating cash generation by adding back depreciation. AFFO goes one step further by subtracting real maintenance CapEx and tenant improvements, revealing the actual discretionary cash remaining to fund dividend checks.
What is a safe AFFO payout ratio for REITs?
An AFFO payout ratio below 80% is considered safe and fortress-grade. Payout ratios between 80% and 90% are standard for triple-net REITs, while ratios exceeding 95% flash dividend cut warning signs.
Why is AFFO also called Cash Available for Distribution (CAD)?
Because AFFO precisely measures the net disposable cash flow remaining in the company treasury after all recurring real estate upkeep has been funded, directly defining dividend capacity.