Adjusted Funds From Operations - AFFO

AFFO is mostly relevant in real estate transactions. A building is bought and managed and rented. Lease payments are collected, the janitor is paid, and funds flow from the operation of this building, or set of buildings, which in the case of an AFFO, is generally in the form of a REIT, or real estate investment trust.

The AFFO element flows directly from the net after expenses of operation and taxes, as well as capital expenditures, i.e., the cost of that lit tennis court on the roof, as it relates to whatever cash is flowing back to investors.

In the case of a REIT, where multiple buildings are involved, included in the calculation of building cash flow are gains from properties that have been sold out of the portfolio for cash to some other buyer.

The key idea with AFFO: the concept, or calculation, drives entirely from cash flow, rather than accounting earnings, which might add in things like depreciation and amortization and other non-cash charges.