FFO is where US REIT analysts start. AFFO is where they stop.

1. The Nareit FFO definition (the foundation)

The US REIT industry body Nareit publishes the canonical FFO definition. The current standard, reaffirmed in its 2018 White Paper update, states FFO equals net income computed under US GAAP, excluding depreciation and amortisation of real estate, gains and losses on sales of property, and impairments of depreciable real estate. [Nareit — FFO White Paper, source 1]

This is the number Modules 2 and 3 build to. It strips US-GAAP depreciation out of the income statement, because a REIT's properties don't actually depreciate the way an industrial asset does — most of the time they appreciate. Without the strip-out, US REIT net income would systematically understate the cash the business generates.

2. Why analysts go further: from FFO to AFFO

FFO has a known weakness: it strips D&A but says nothing about the cash a REIT actually has to spend to keep its portfolio earning at the same level. Carpets wear out. HVAC systems need replacing. Tenant inducements get capitalised. Leasing commissions get paid. None of that runs through the income statement; all of it is real cash out the door.

To get to a defensible recurring cash earnings number, US analysts and most US REITs themselves disclose Adjusted FFO (AFFO), which Nareit acknowledges is widely used but does not define centrally — meaning the specific adjustments vary by issuer. [Nareit, source 1] The most common construction, repeated across US REIT 10-K filings, deducts three categories:

You can see a real disclosure of this reconciliation in any US REIT's 10-K filing on SEC EDGAR. A representative example: Equity Residential's most recent 10-K under "Reconciliation of Net Income to FFO, Normalized FFO, and Normalized AFFO." [SEC EDGAR — Equity Residential 10-K filings, source 2] Boston Properties similarly publishes a full FFO-to-AFFO reconciliation in its quarterly supplementals. [Boston Properties IR, source 3]

3. The IFRS REIT side: no published AFFO, but the same logic

European REITs don't report under US GAAP, so the FFO/AFFO terminology doesn't appear in their statements. The European industry body EPRA publishes its own measure — EPRA Earnings — which serves a similar purpose: strip out fair-value movements, gains on disposals, and the tax effect of those items to leave recurring earnings. [EPRA Best Practices Recommendations, source 4]

EPRA Earnings is the European functional equivalent of FFO. But EPRA does not publish an AFFO equivalent. There's no standardised step further, even though the same economic question applies: how much cash is actually available to shareholders after maintenance capex and leasing costs?

This is a gap. Sophisticated European REIT analysts close it the same way US ones do — they reconstruct an AFFO-style number from the disclosed maintenance capex and capitalised leasing costs in the cash-flow statement and the notes. It just doesn't have a name in the EPRA framework.

4. When to use FFO vs AFFO in your model

• FFO — headline metric, peer comparison (P/FFO multiples), dividend payout ratio benchmarks. Easy to compute from Module 2's bridge.
• AFFO — intrinsic value calculations, dividend sustainability stress tests, takeover analysis (private buyers underwrite to AFFO yield, not FFO yield). Requires the additional reconciliation steps above.
• EPRA Earnings (European equivalent) — same role as FFO in European REIT research. Reported directly by EPRA-compliant issuers.
• AFFO-equivalent (constructed) — for European REITs where no published AFFO exists. Reconstruct using disclosed maintenance capex and leasing-cost notes. The skill this bonus lesson teaches.