FFO and AFFO calculation: a REIT example step by step

Why REITs use FFO instead of net income

Accounting depreciates buildings every year as if they wore out on a straight line. Well-maintained property often holds or gains value, so for a landlord, depreciation makes net income look much smaller than the cash the rents bring in. In the example, real estate depreciation of $96.0 million is larger than the whole net income of $84.0 million. EPS of $1.05 against a $1.50 dividend would suggest the REIT pays out far more than it earns. FFO corrects for this, and it is the base of the main REIT valuation multiple, price to FFO.

The FFO formula

Nareit, the US REIT industry association, defines FFO in broad terms as:

FFO = net income + real estate depreciation and amortization + impairments of depreciable real estate − gains on property sales (+ losses)

with the same adjustments for the REIT's share of joint ventures. In the example: 84.0 + 96.0 + 6.0 + 4.0 − 18.0 = $172.0 million. Divided by 80 million diluted shares, FFO per share is $2.15.

Two details matter. Only real estate depreciation is added back, not the depreciation of office equipment or software. And the gain on selling a building is removed, because a one-off sale is not recurring rental income.

Worked example: FFO, AFFO and payout of a fictional REIT

All amounts are in USD millions except the per-share figures and the share price. The REIT and its numbers are fictional.

Worked example: FFO, AFFO and payout of a fictional REIT

	A	B	Formula in B
1	Fictional REIT, 2026 (USD millions)	Amount
2	Net income	84.0
3	+ Real estate depreciation & amortization	96.0
4	+ Share of JV real estate depreciation	6.0
5	+ Impairment of depreciable real estate	4.0
6	− Gain on sale of properties	18.0
7	FFO	172.0	=B2+B3+B4+B5-B6
8	Diluted shares (millions)	80
9	FFO per share ($)	2.15	=B7/B8
10	EPS ($)	1.05	=B2/B8
11	− Straight-line rent (GAAP rent − cash rent)	7.0
12	− Maintenance capex	14.0
13	− Tenant improvements	9.0
14	− Leasing commissions	5.0
15	+ Stock-based compensation	3.0
16	+ Amortization of loan fees	1.0
17	AFFO	141.0	=B7-B11-B12-B13-B14+B15+B16
18	AFFO per share ($)	1.76	=B17/B8
19	Dividend per share ($)	1.50
20	Payout ratio on FFO	69.8%	=B19/B9
21	Payout ratio on AFFO	85.1%	=B19/B18
22	Payout ratio on EPS	142.9%	=B19/B10
23	Share price ($)	32.00
24	P/FFO	14.88x	=B23/B9
25	AFFO yield	5.51%	=B18/B23

This guide is educational, not investment advice. Real REITs define AFFO in different ways, so always read the company's own reconciliation.

From FFO to AFFO

FFO still contains non-cash items and ignores money a landlord must keep spending. AFFO, sometimes called funds available for distribution (FAD), adjusts for both:

• Straight-line rent: accounting spreads rent increases evenly over a lease, so in the early years GAAP rent is higher than the cash billed. The $7.0 million difference is subtracted.
• Recurring capex: maintenance capex ($14.0 million), tenant improvements ($9.0 million) and leasing commissions ($5.0 million) to keep and re-let space are subtracted.
• Non-cash costs such as stock-based compensation ($3.0 million) and the amortization of loan fees ($1.0 million) are added back.

172.0 − 7.0 − 14.0 − 9.0 − 5.0 + 3.0 + 1.0 = $141.0 million, or $1.76 per share.

AFFO has no standard definition

FFO follows Nareit's definition, so it is broadly comparable across US REITs. AFFO does not: each REIT chooses its own adjustments, and some deduct only part of their capital spending. Before you compare AFFO between REITs, read each company's reconciliation table in its earnings release and, if needed, rebuild AFFO with the same items for all of them. A REIT that deducts much less capex than its peers for similar buildings is flattering its AFFO.

Payout ratio and dividend coverage

Divide the dividend per share by each earnings measure:

• on EPS: 1.50 ÷ 1.05 = 142.9%, which looks alarming but is distorted by depreciation
• on FFO: 1.50 ÷ 2.15 = 69.8%
• on AFFO: 85.1%, the best test of whether the dividend is covered by recurring cash

An AFFO payout ratio above 100% means the REIT pays out more than its buildings generate after upkeep, and must fund the gap with debt, asset sales or new shares. US REITs must distribute at least 90% of their taxable income, which is why payout ratios are high across the sector.

P/FFO and AFFO yield

FFO per share is the REIT version of EPS, so the usual multiple is price to FFO: at a share price of $32.00, P/FFO = 32.00 ÷ 2.15 = 14.88x. The AFFO yield, AFFO per share ÷ price, is 5.51%: the recurring cash per share as a percentage of what you pay for it. Compare both with peers of the same property type, because office, industrial, residential and data center REITs trade on very different multiples. To value the buildings themselves, the next step is NAV from cap-rated NOI, explained in the cap rate calculation guide.

Common mistakes

• Adding back all depreciation. Only real estate depreciation belongs in FFO. Depreciation of furniture, IT and software stays deducted.
• Leaving gains on sale in FFO. A building sold at a profit is a one-off. Remove the gain, and add back a loss.
• Comparing AFFO across REITs at face value. There is no standard definition. Rebuild it with the same adjustments for every REIT you compare.
• Judging the dividend on EPS. Depreciation makes EPS payout ratios above 100% common for REITs. Use AFFO.
• Using basic instead of diluted shares. FFO per share is normally reported on diluted shares, and P/FFO comparisons should use the same basis.