AFFO (Adjusted Funds From Operations)
Definition
AFFO refines FFO into a proxy for recurring distributable cash flow by subtracting recurring (maintenance) capital expenditures — the real cash cost of keeping properties competitive, which FFO's depreciation add-back ignores — and by removing non-cash revenue items, chiefly straight-line rent adjustments; many definitions also strip amortization of above/below-market leases and add back non-cash compensation.
Unlike FFO, AFFO has no single standardized industry definition, so each REIT's calculation differs and analysts often compute their own. It is sometimes called FAD (funds available for distribution) or CAD (cash available for distribution).
Because dividends must be paid in cash, AFFO is the preferred basis for assessing dividend coverage and payout sustainability: an AFFO payout ratio near or above 100% flags a dividend at risk.
Why interviewers ask
The natural follow-up after FFO: 'what's the difference between FFO and AFFO, and which is better for judging the dividend?' The expected answer — deduct recurring capex and straight-line rent; AFFO is closer to true cash flow but non-standardized — shows real-estate fluency beyond memorized definitions.
Related terms
Interviews don't test definitions — they test recall under pressure.
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