Adjusted Funds From Operations (AFFO) Explained: 2025 Guide for Australian Investors

Adjusted Funds From Operations (AFFO) has become the gold standard for evaluating real estate investment trusts (REITs) in Australia. As property markets evolve and investor scrutiny intensifies in 2025, understanding AFFO is now essential for anyone looking to navigate the world of listed property trusts or commercial real estate funds.

Why AFFO Matters More Than Ever in 2025

Traditionally, Australian investors relied on net profit or distributions to gauge the health of a REIT. However, these metrics can be distorted by accounting treatments, capital expenditures, or one-off gains. AFFO cuts through this noise, providing a clearer, cash-focused measure of a trust’s true earning power.

In 2025, several factors are driving the AFFO conversation in Australia:

• Regulatory changes: ASIC and APRA have emphasised greater disclosure and transparency for listed property funds, prompting managers to highlight AFFO in their reporting.

• Market volatility: With commercial property valuations under pressure and interest rates remaining unpredictable, investors are demanding more reliable, recurring income figures.

• Institutional adoption: Super funds and wealth managers now routinely use AFFO as a key benchmark for property allocations.

What Exactly Is AFFO? How Is It Calculated?

Adjusted Funds From Operations is an evolution of the classic Funds From Operations (FFO) metric. While FFO adjusts net income for non-cash items like depreciation, AFFO takes things further by also factoring in:

• Capital expenditures required to maintain or improve properties

• Leasing costs and straight-line rent adjustments

• Other recurring, non-discretionary outlays

This means AFFO offers a more conservative—and, many argue, more accurate—picture of the cash available to distribute to investors. Here’s a simplified formula:

AFFO = FFO – Capital Expenditures – Straight-Line Rent Adjustments – Leasing Costs

Example: Suppose a listed office REIT in Sydney reports the following in 2025:

• Net income: $80 million

• Depreciation/amortisation: $25 million

• FFO: $105 million

• Capital expenditures: $15 million

• Leasing commissions: $5 million

• Straight-line rent adjustment: $3 million

Its AFFO would be $105m – $15m – $5m – $3m = $82 million. This is the realistic pool of cash that could potentially be distributed to unitholders.

2025 Trends: How AFFO Shapes Property Investing Strategies

The Australian property sector is navigating a new normal in 2025. Remote work trends, higher construction costs, and ESG upgrades are all putting pressure on REIT cash flows. Here’s how AFFO is being used by savvy investors:

• Yield comparisons: Investors are comparing AFFO yields across different REITs to spot undervalued opportunities. A high distribution payout ratio but low AFFO can signal risk.

• Distribution sustainability: With some trusts tempted to maintain high payouts, AFFO acts as a reality check—highlighting when distributions outpace true recurring cash flow.

• Impact of ESG capex: New environmental standards (like NABERS and Green Star upgrades) mean more recurring capex. These are now routinely deducted in AFFO calculations, giving a clearer view of post-upgrade cash generation.

• International comparisons: Global funds are increasingly benchmarking Australian REITs on AFFO, aligning local disclosure with international best practice.

For example, Charter Hall and Dexus now provide detailed AFFO reconciliations in their annual reports, helping investors assess the real cash payout potential after factoring in sustainability-driven upgrades.

Key Considerations and Limitations

While AFFO is a powerful tool, it’s not infallible. Australian investors should be mindful of:

• No universal standard: AFFO isn’t defined by accounting standards like IFRS, so calculation methods can vary between REITs. Scrutinise the footnotes!

• Management discretion: What’s considered ‘recurring’ capex or one-off can be subjective. Aggressive adjustments could paint an overly rosy picture.

• Not a substitute for due diligence: AFFO is a starting point, not the whole story. Consider property quality, lease expiry profiles, tenant risk, and sector trends.

In 2025, with new ASIC guidance on REIT reporting transparency, expect to see even more detailed AFFO disclosures and reconciliations in financial statements. This empowers investors to make more informed, apples-to-apples comparisons.

The Bottom Line

In the fast-evolving world of Australian property investment, Adjusted Funds From Operations is no longer just a specialist metric—it’s an essential lens for understanding the true, sustainable earning power of REITs. As regulatory scrutiny and investor expectations rise in 2025, those who master AFFO will be better positioned to spot value, avoid traps, and build smarter portfolios.