Adjusted Funds From Operations (AFFO) is a financial metric used in the real estate investment trust (REIT) and real estate industry to measure the cash generated by a real estate company’s operating activities. AFFO is considered a more refined measure than Funds From Operations (FFO) as it adjusts for certain non-cash and non-operating items that are included in FFO. AFFO is often used by investors and analysts to assess the cash flow available for distribution to shareholders and to evaluate the financial health of a real estate investment.

Here are key points about Adjusted Funds From Operations (AFFO):

1. **Funds From Operations (FFO):**
– FFO is a measure commonly used in the real estate industry to define the cash generated by a REIT’s core operations. It starts with net income and adds back non-cash items, such as depreciation and amortization, and excludes gains or losses from sales of properties. FFO is considered a key performance indicator for REITs.

2. **Adjustments in AFFO:**
– AFFO builds upon FFO by making additional adjustments to provide a more accurate representation of the cash generated and available for distribution. Common adjustments include deducting capital expenditures for maintenance, leasing costs, and other items that may not be reflective of ongoing operating expenses.

3. **Capital Expenditures:**
– One of the significant adjustments in AFFO is the deduction of capital expenditures required to maintain the existing real estate portfolio. Unlike FFO, which excludes capital expenditures related to property acquisitions, AFFO considers the capital expenses needed to sustain the properties.

4. **Leasing Costs:**
– AFFO often deducts leasing costs associated with tenant improvements and leasing commissions. These costs are considered necessary for maintaining and leasing the properties.

5. **Debt Costs:**
– Some versions of AFFO may adjust for debt-related costs, such as amortization of debt issuance costs. These adjustments provide a clearer picture of the cash available for distribution to shareholders after accounting for debt-related expenses.

6. **Dividends and Distributions:**
– AFFO is often used to assess the sustainability of dividends or distributions paid to shareholders. By focusing on cash-generating activities and excluding certain non-cash items, AFFO aims to provide a more accurate measure of a REIT’s ability to support its dividend payments.

7. **Investor and Analyst Use:**
– Investors and analysts use AFFO to evaluate the financial performance and cash-generating capability of a real estate investment. It is particularly relevant for income-focused investors who are interested in the ability of a REIT to generate cash for distributions.

8. **Calculation:**
– The formula for calculating AFFO can vary between companies, but a common approach is to start with FFO and then make specific adjustments for capital expenditures, leasing costs, and other non-operating items.

\[ \text{AFFO} = \text{FFO} – \text{Adjustments} \]

It’s important to note that different companies and analysts may use variations in the calculation of AFFO, and there is no standardized method for its calculation. Therefore, it’s essential to understand how AFFO is calculated for a specific company and its relevance to the company’s financial goals and investor communication.