FFO vs. AFFO: How to Actually Read a REIT's Earnings

Real estate investment trusts (REITs) are required to disclose net income under U.S. Generally Accepted Accounting Principles (GAAP), just like any other public company. But almost every REIT also reports two non-GAAP figures — Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO) — and pays close attention to analyst questions about them. Understanding what these numbers do and don't capture is essential for anyone evaluating a REIT's dividend.

Why GAAP Net Income Falls Short for REITs

Under GAAP, companies depreciate buildings on a straight-line schedule over decades, which assumes the asset steadily loses value. In practice, well-located, well-maintained commercial real estate has often appreciated over long periods, particularly before the rate-driven valuation resets seen in recent cycles. Because depreciation is a large non-cash expense for property owners, it can make net income look artificially low or volatile, especially in the period right after a REIT sells a property and books a one-time gain or loss. Nareit, the trade association representing U.S. REITs, developed FFO in the 1990s specifically to give investors a more consistent operating metric.

What FFO Adds Back

Nareit's standard definition of FFO starts with GAAP net income and makes a small number of specific adjustments:

• Add back depreciation and amortization related to real estate assets.
• Exclude gains and losses from the sale of real estate.
• Exclude any impairment write-downs on depreciable real estate.
• Make adjustments for unconsolidated partnerships and joint ventures on a similar basis.

Because it follows a published methodology, FFO is reasonably comparable from one REIT to another, which is why it appears in nearly every REIT earnings release, investor presentation, and annual report filed with the SEC.

AFFO: Getting Closer to Cash Available for Dividends

FFO is a useful starting point, but it still doesn't fully reflect the cash a REIT can actually distribute to shareholders. That's where AFFO comes in. There is no single official definition of AFFO — each company designs its own calculation — but common adjustments subtracted from FFO include:

• Recurring capital expenditures needed to maintain properties, such as roof repairs, HVAC replacement, or tenant leasing costs.
• Straight-line rent adjustments, since GAAP recognizes rental income evenly over a lease term even when actual cash rent steps up or down.
• Amortization of below- and above-market lease intangibles.
• Stock-based compensation and certain other non-cash items, in some presentations.

The result is meant to approximate the cash flow a REIT generates after the spending required just to keep its existing portfolio running — a number closer to what's actually available to pay dividends or reinvest in new acquisitions.

Why the Distinction Matters for Dividend Investors

REITs are required to distribute at least 90% of their taxable income to shareholders to maintain their tax status, a rule enforced by the Internal Revenue Service. That taxable income figure is calculated differently from both GAAP net income and FFO/AFFO, which is part of why dividend coverage can look confusing from the outside. As a practical shortcut, many analysts compare a REIT's declared dividend to its AFFO per share to gauge whether a payout is being comfortably covered by operating cash flow or is instead being supported by debt, asset sales, or new equity issuance. A payout ratio meaningfully above 100% of AFFO for several consecutive quarters can be a signal worth investigating further, though it is not automatically a red flag — it depends on the REIT's growth stage, leverage, and access to capital.

Where to Find These Numbers

Public REITs disclose FFO and AFFO reconciliations, starting from GAAP net income, in their quarterly earnings releases and in the Management's Discussion and Analysis section of their SEC filings, which are searchable free of charge through the SEC's EDGAR system. Nareit also publishes its full white paper defining FFO, which is a useful primary-source reference for how the standardized portion of the calculation works.