AFFO is an acronym for Adjusted Funds From Operations (AFFO). AFFO is a financial performance measurement mainly used in the analysis of REITs. The AFFO of an REIT is equal to the trust’s funds from operations excluding gains or losses from the sales of property, and adding back real estate depreciation.

The equation for calculating the AFFO is:

AFFO = (Net Income + Amortization + Depreciation – (capital gains from property sales)) + (rent increases – capital expenditures – routine maintenance costs) / outstanding shares

For example, let’s say an REIT with 30 million shares outstanding had $10 million in net income over the previous reporting period. During that time, it earned $5 million from the sale of one of its properties and lost $1 million from the sale of another. The REIT reported $1 million of amortization and $2 million of depreciation. During that time, net rent increases were $50,000 and capital expenditures were $1 million while routine maintenance was $40,000.

The AFFO is calculated as:

AFFO = [($10,000,000 + $1,000,000 + $2,000,000 – ($5,000,000 – $1,000,000)) + ($50,000 – $1,000,000 – $40,000)] / 30,000,000 = $0.267

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