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Glossary > Finance > Investments > Real Estate Investment Trusts (REITs)
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Adjusted Funds From Operations (AFFO)

Adjusted Funds from Operations (AFFO) is a financial metric used in real estate investment, especially within Real Estate Investment Trusts (REITs), to calculate a more accurate picture of the cash generated by the operations of the real estate assets. It reflects the actual cash available for distributing dividends to shareholders after accounting for capital expenditures necessary to maintain the property's value.

Example #1

For example, if a REIT reports net income of $1 million, but during the same period, it spent $200,000 on property improvements, the AFFO would be $800,000 ($1 million - $200,000 = $800,000). This adjusted figure gives a clearer view of the cash flow available for distribution.

Example #2

Another example is if a REIT incurs financing costs related to property acquisitions, these costs may initially impact net income but should be added back to calculate the AFFO accurately.

Misuse

Misuse of AFFO may occur when companies manipulate the calculation to present a rosier financial picture than reality. For instance, excluding necessary maintenance costs or including one-time gains can inflate the AFFO figure. Consumers and investors should be cautious of such practices as they can mislead regarding the true financial health of the REIT and affect investment decisions negatively.

Benefits

Using AFFO provides a more transparent view of a REIT's financial performance by adjusting for capital expenditures. This metric helps investors understand the actual cash flow available for distributing dividends, assisting them in making informed investment decisions based on the real financial health of the company.

Conclusion

In the interest of transparency and consumer protection, understanding and scrutinizing AFFO calculations can empower investors to make sound investment choices. By focusing on the actual cash flow available for distribution, consumers can avoid potential pitfalls related to misleading financial information.

Related Terms

Cash FlowDividendIncome Statement

Last Modified: 4/29/2024
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