FFO and AFFO Explained: Essential REIT Valuation Metrics

Funds from operations (FFO) is a REIT's net income with depreciation of its real estate added back and gains or losses from property sales taken out, under the definition set by Nareit, the REIT industry's trade association. Adjusted funds from operations (AFFO) starts from FFO and usually also subtracts the routine capital spending needed to keep properties leased, but each REIT chooses its own adjustments. In the second quarter of 2026, apartment owner Mid-America Apartment Communities (MAA) reported net income of $1.04 a share, FFO of $2.10, and core AFFO of $1.77. Use FFO to compare a REIT's share price with its earnings, and AFFO to see how much of those earnings the dividend takes.

Why do REITs report FFO instead of net income?

Accounting rules make a REIT depreciate its buildings every year, which lowers net income whether or not the properties lose value. Nareit created FFO in 1991 to correct for what it calls the artificial nature of historical cost depreciation of real estate. SEC staff accept Nareit's definition as a performance measure that REITs may report per share, and a REIT that adjusts FFO further has to reconcile its figure to the closest measure under generally accepted accounting principles (GAAP), the standard accounting rules. What REITs are and how they work covers how REITs qualify and pay dividends.

Nareit's definition starts with GAAP net income and removes:

• Depreciation and amortization of real estate.
• Gains and losses from selling certain real estate, or from gaining or losing control of it.
• Write-downs of real estate when the loss reflects a drop in the value of depreciable real estate.

Nareit says FFO is not meant to measure the cash a REIT generates or its capacity to pay dividends, and it points to the cash flow statement for that.

How do you calculate FFO from an earnings release?

Each REIT's quarterly earnings release includes a table that reconciles net income to FFO. MAA's table for the second quarter of 2026, in millions of dollars:

The arithmetic is $120.8 + $161.0 - $35.3 + $0.2 + $3.1 = $249.8 million. The noncontrolling-interest line adds back income that belongs to outside owners of units in MAALP, MAA's operating partnership. MAA counts those units alongside its shares, so it divides FFO by 119.1 million shares and units rather than the 116.1 million shares behind its earnings per share: $249.8 million / 119.1 million = $2.10.

Net income came to $1.04 a share, about half of FFO, mostly because of the $161.0 million of depreciation. A price-to-earnings (P/E) ratio built on that net income would make MAA look about twice as expensive as its price-to-FFO ratio does.

What does AFFO subtract, and why does it vary?

Nareit says REITs and analysts do not agree enough to set a single definition of AFFO, which some companies call funds available for distribution (FAD) or cash available for distribution (CAD). Two releases from the same quarter show how far the results can differ:

• MAA (apartments). MAA first removes items it treats as outside its core business, such as gains and losses on investments and casualty costs, to reach core FFO of $247.5 million, or $2.08 a share. It then subtracts $37.2 million of recurring capital expenditures, the routine replacement spending at its apartment communities, to reach core AFFO of $210.3 million, or $1.77 a share. That spending used about 15% of core FFO.
• Realty Income (single-tenant net leases). Under a net lease, the tenant typically pays most property operating costs, including real estate taxes, insurance, and maintenance, and Realty Income reported no recurring capital expenditures for the quarter. Its largest subtraction was $39.5 million of straight-line rent: accounting rules spread the fixed rent increases in a lease evenly over its term, so the company records some rent before it bills tenants for it. Add-backs of non-cash costs, led by $17.7 million of non-cash financing costs, left AFFO of $1.09 a share, above its FFO of $1.07.

Realty Income cautions that REITs do not all calculate FFO and AFFO the same way, so comparisons between REITs may not be meaningful. Track AFFO for the same REIT across quarters, and read each company's definition in its release before comparing two REITs.

How do you use price-to-FFO and the payout ratio?

Price-to-FFO (P/FFO) is the share price divided by a year of FFO per share. Nareit's REITWatch divides each REIT's price by the average analyst estimate of its FFO for the year:

A low multiple can reflect shrinking earnings rather than a bargain. Office REITs averaged 8.95 times estimated 2026 FFO, against 15.47 for industrial REITs, and the combined FFO of listed office REITs fell 12% from 2022 to 2024. Compare a REIT's P/FFO with other REITs in its sector.

The payout ratio is the dividend per share divided by FFO or AFFO per share:

• MAA: its $1.53 quarterly dividend was 73.6% of core FFO ($2.08) and 86.4% of core AFFO ($1.77).
• Realty Income: the $0.8115 a share it paid in the quarter was 74.5% of AFFO ($1.09).
• All listed equity REITs: they paid $58.1 billion of dividends in 2024 against $78.5 billion of FFO, a payout of 74%.

A payout above 100% of AFFO means the dividend is larger than what the REIT says its properties earned after routine capital spending. AFFO also leaves out spending meant to upgrade properties: MAA's FAD, which subtracts redevelopment and other capital spending as well, was $142.2 million in the quarter, below the $182.5 million it paid in dividends and distributions. Realty Income notes that FFO and AFFO do not measure its ability to make cash distributions, so also compare the dividend with cash from operating activities on the cash flow statement in the REIT's quarterly (10-Q) or annual (10-K) report. REIT dividend yields explained covers other warning signs of a dividend cut.

How else do you judge a REIT's value and debt?

Net asset value (NAV) per share estimates the current market value of a REIT's properties and other assets, minus its debt and other liabilities, divided by its shares. Analysts often value the properties by dividing annual net operating income (NOI, rent minus property operating costs) by a market capitalization rate (cap rate). A REIT with $500 million of NOI valued at a 6.0% cap rate has properties worth $8.33 billion; subtracting $3.0 billion of debt and other liabilities leaves $5.33 billion, or $53.33 for each of 100 million shares. A $45 share price is 15.6% below that estimate. At a 6.5% cap rate, the same NOI supports a NAV of only $46.92, so the result depends on the cap rate you choose; cap rate explained shows how cap rates are figured and what published 2026 rates look like.

Debt. Three measures appear in earnings releases and in REITWatch:

• Debt ratio: total debt divided by debt plus the market value of shares and operating partnership units. For all equity REITs it was 34.4% in the second quarter of 2026.
• Net debt to adjusted EBITDAre: debt minus cash, divided by a year of EBITDAre with company-specific adjustments. EBITDAre is Nareit's version of earnings before interest, taxes, depreciation, and amortization for real estate companies. At June 30, 2026, MAA reported 4.5 times using adjusted EBITDAre for the past 12 months. Realty Income reported 5.4 times using annualized pro forma adjusted EBITDAre, which treats property transactions as occurring at the quarter's start before annualizing the quarter's earnings. Check each company's earnings adjustments and time period; matching periods alone does not make these ratios comparable.
• Interest coverage: how many times a REIT's earnings cover its interest expense. Nareit put the ratio for equity REITs at 4.5 times in the second quarter of 2026.

Occupancy and same-store results. Occupancy is the share of space that is leased or occupied. Same-store NOI compares NOI from properties the REIT owned and operated in both periods, so it leaves out growth from buying or building more. In the second quarter of 2026, MAA's same-store occupancy averaged 95.3% and its same-store NOI fell 1.0% from a year earlier, while Realty Income reported 98.8% occupancy and an average of 8.6 years left on its leases. A REIT can raise FFO by buying properties even while same-store NOI falls, so check both. REIT risks every investor should understand covers interest rate, debt, and sector risks, and how to invest in REITs covers choosing an account and placing an order.