AFFO (Adjusted Funds From Operations) and FFO (Funds From Operations) are metrics used by REITs (Real Estate Investment Trusts) to measure the amount of cash generated by their operations. FFO adjusts net income for depreciation and gains/losses on sales of properties, while AFFO further adjusts FFO for capital expenditures, routine maintenance, and other non-cash items to give a clearer picture of the actual cash flow available for distribution to shareholders.
Funds From Operations (FFO):
\[ \text{FFO} = \text{Net Income} + \text{Depreciation and Amortization} \\ + \text{Losses from Property Sales} - \text{Gains from Property Sales} \\ - \text{Interest Income} \]
Adjusted Funds From Operations (AFFO):
\[ \text{AFFO} = \text{FFO} + \text{Rent Increases} \\ - \text{Capital Expenditures} - \text{Routine Maintenance} \]
Let's take REIT Alpha with the following information:
FFO Calculation:
\[ \text{FFO} = 500,000 + 150,000 + 80,000 \\ - 125,000 - 75,000 = 530,000 \]
AFFO Calculation:
\[ \text{AFFO} = 530,000 + 50,000 \\ - 60,000 - 35,000 = 485,000 \]