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Sectors

REITs: AFFO replaces FCF

By Oliver Wakefield-Smith, Founder, Digital Signet. Verified against primary filings; see /sources.
Sector caveat
Do not compute Standard FCF for a REIT. The depreciation add-back is so large that FCF is misleading; AFFO is the industry-standard alternative.

NAREIT FFO formula

FFO = Net income + real-estate depreciation - gains on sales of property.

AFFO derivation

FFO$1,200
Less: recurring CapEx (maintenance)($180)
Less: straight-line rent adjustment($45)
AFFO$975

Why real-estate depreciation is large

Office and apartment buildings depreciate under MACRS over 27.5-39 years, but market values are typically flat to rising. The GAAP charge is therefore a non-cash bookkeeping artefact. Damodaran addresses the real-estate exception directly[Damodaran].

See also