Adjusted FFO (AFFO) — Deducting Recurring Capital Expenditures from FFO
Computing AFFO by deducting recurring maintenance capital expenditures and straight-line rent adjustments from FFO — providing a more accurate measure of cash available for distribution.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| FFO (Starting Point — From FFO Reconciliation) | Calculation | 460,500,000.00 | - |
| Less: Straight-Line Rent Adjustment (Non-Cash Revenue Component) | Adjustment (-) | - | 48,500,000.00 |
| Less: Recurring Maintenance CapEx (Roof Replacement, HVAC, Parking) | Adjustment (-) | - | 65,000,000.00 |
| Less: Amortization of Deferred Financing Costs (Non-Cash Interest) | Adjustment (-) | - | 8,500,000.00 |
| Add: Non-Cash SBC Expense (Stock-Based Compensation) | Adjustment (+) | 12,000,000.00 | - |
| AFFO (Adjusted Funds From Operations) | Metric Result | 350,500,000.00 | - |
💡 Accountant's Note
Adjusted FFO (AFFO) — sometimes called 'cash available for distribution' (CAD) or 'funds available for distribution' (FAD) — is the most rigorous REIT performance metric. FFO is criticized for not subtracting recurring capital expenditures (which are real cash outflows that are needed just to maintain the property's current condition). AFFO corrections: (1) SUBTRACT: Straight-line rent adjustment (the non-cash SL rent component inflates FFO; AFFO removes this to reflect actual cash rents), (2) SUBTRACT: Recurring maintenance capex (roof repairs, parking lot resurfacing, HVAC replacement — cash outflows required to maintain the property), (3) SUBTRACT: Amortization of above-market leases/below-market leases (non-cash items that affect FFO), (4) SUBTRACT: Deferred financing cost amortization (non-cash interest), (5) ADD: Non-cash stock-based compensation (non-cash expense that reduces GAAP income and FFO). AFFO is NOT standardized — each REIT defines it slightly differently. This makes cross-REIT comparison challenging — some REITs use generous AFFO definitions (subtracting minimal capex) to show high AFFO payout ratios; conservative REITs deduct realistic capex.
Practitioner & Systems Framework
💻 ERP Architecture
AFFO calculation requires tracking of both GAAP metrics and the non-GAAP adjustments. The most contentious adjustment is 'recurring maintenance capex' — REITs have an incentive to classify as much capex as possible as 'non-recurring' or 'expansion' capex (not deducted from AFFO) rather than 'maintenance' capex (deducted). Industry practice: gross AFFO adjustments are presented in a detailed table in the quarterly earnings supplemental package (typically a 30–50-page PDF). Analysts build their own AFFO estimates based on their own capex normalization assumptions.
⚠️ Audit Flags
AFFO is non-GAAP — auditors don't audit AFFO itself, but the underlying components are audited. The SEC reviews AFFO presentations for: (1) Consistency of 'recurring' vs. 'non-recurring' capex classification, (2) Whether adjustments are legitimate non-cash items, (3) Is AFFO reconciled to FFO and then to GAAP net income? The SEC requires each non-GAAP measure to be reconciled all the way to the most directly comparable GAAP measure.
📄 Required Documentation
FFO reconciliation (from GAAP net income), AFFO reconciliation (from FFO), recurring vs. non-recurring capex classification methodology, SL rent adjustment schedule, above/below-market lease amortization, non-cash SBC expense, AFFO per share computation, prior period AFFO comparison, and SEC disclosure review of non-GAAP presentation.
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