Adjusted Funds from Operations

Adjusted funds from operations (AFFO) is a supplemental performance measure used in REIT analysis. It adjusts funds from operations for selected costs and accounting items to help explain recurring operating performance. There is no single standardized AFFO formula, so the company’s definition is part of the number, not a footnote to skip.

How adjusted funds from operations is calculated

AFFO often starts with FFO and deducts recurring property expenditures and adjustments for straight-line rent. Straight-line accounting spreads rent across a lease term, which can differ from the cash received in a particular period. Other adjustments depend on the company. Nareit’s AFFO definition explains these common starting points and the absence of a standardized calculation.

For a real reporting example, Realty Income publishes a reconciliation from net income through its adjusted measures. That reconciliation lets readers trace the additions and deductions rather than rely on the AFFO label alone. The company also cautions against treating FFO or AFFO as substitutes for cash-flow analysis. See its Q2 2026 supplemental report, particularly the AFFO reconciliation and glossary.

A simple AFFO example

Suppose a hypothetical REIT reports quarterly FFO of $1.20 per share. Its calculation deducts $0.10 for recurring property expenditure and $0.05 for a rent-accounting adjustment, with no other adjustments. AFFO would be $1.05 per share.

If dividends for that same quarter were $0.84 per share, the AFFO payout ratio would be 80%: $0.84 divided by $1.05. The calculation describes that quarter using those assumptions. It does not establish the next dividend or the company’s cash balance.

How income investors use AFFO

Read the reconciliation alongside the financial statements. Ask whether an excluded expense recurs, whether the definition changed, and whether comparisons use the same period and per-share basis. Two companies can report AFFO while making different adjustments, limiting direct comparisons.

AFFO is useful evidence, but the label alone cannot settle questions about cash requirements, financing or future earning power.

Fly High perspective

Fly High uses the earnings measure the company identifies as the source of its dividend. AFFO is not automatically the correct measure for every REIT. The formal Fly High coverage calculation combines two reported actual quarters with the following two quarters of independent analyst consensus, using a consistent earnings definition. A single-quarter AFFO payout ratio is not that formal calculation.

This article is for education and information, not individualized investment, tax, or legal advice.