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Adjusted Funds From Operations (AFFO) – Adjusted Funds From Operations (AFFO) is a financial metric commonly used in the real estate investment trust (REIT) industry to assess the cash flow generated by a REIT’s operations. It provides a measure of the REIT’s ability to generate cash from its core business activities after accounting for certain expenses and capital expenditures.

The calculation of AFFO starts with the REIT’s Funds From Operations (FFO), which is a key metric for evaluating the operating performance of REITs. FFO is calculated by taking the net income and adjusting it for certain non-cash items, primarily depreciation and amortization, as well as gains or losses from the sale of real estate assets.

To arrive at AFFO, additional adjustments are made to the FFO figure to account for specific expenses and capital expenditures associated with the REIT’s operations. These adjustments typically include:

1. Capital Expenditures: AFFO deducts the capital expenditures required for the maintenance and improvement of the REIT’s properties. This includes expenses for repairs, renovations, and replacements that are necessary to keep the properties in good operating condition.

2. Straight-line Rent: Many leases in the real estate industry include periodic rent escalations, where the rental income increases over the term of the lease. However, for accounting purposes, the rental income is often recognized evenly over the lease term. AFFO adjusts for the difference between the contractual rental income and the income recognized on a straight-line basis.

3. Non-recurring or Unusual Expenses: AFFO excludes certain non-recurring or unusual expenses that are not expected to occur regularly or are not directly related to the core operations of the REIT. Examples include costs associated with significant legal settlements, restructuring charges, or extraordinary events.

By making these adjustments, AFFO provides a more accurate representation of the cash flow generated by the REIT’s operations and the cash available for distribution to shareholders as dividends or for reinvestment into the business.

AFFO is widely used by investors, analysts, and lenders in the real estate industry to assess the financial performance and sustainability of a REIT’s dividend payments. It helps to evaluate the REIT’s ability to generate cash from its operations while accounting for the necessary capital expenditures and non-recurring expenses.

However, it’s important to note that AFFO, like any financial metric, has limitations and should be used in conjunction with other measures and analysis. Different REITs may make different adjustments when calculating AFFO, so it’s important to understand the specific adjustments made and the context in which AFFO is used when comparing REITs or making investment decisions.

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