How to Explain FFO and AFFO in REIT Interviews

If you recruit REITs or real estate coverage, FFO and AFFO will show up. Saying "it is like EBITDA for REITs" is a start. Knowing why EPS fails, what AFFO subtracts, and what neither metric forgives is the real interview answer.

The short answer

"FFO adjusts GAAP net income for real estate depreciation and gains or losses on property sales so earnings reflect recurring property results better than EPS. AFFO starts from FFO and subtracts recurring CapEx and other items to approximate cash available after maintaining the portfolio. Neither is NOI, and neither is a free pass to ignore leverage or CapEx quality."

Why not EPS?

GAAP depreciation on buildings is large and often a poor proxy for economic decline in the period. Property sale gains also muddy recurring earnings. FFO exists to reduce that noise for listed real estate so investors can compare operating results across REITs more cleanly than raw EPS.

Formulas you should say out loud

FFO ~ Net Income

Real estate depreciation and amortization

Gains on sale of property

Losses on sale of property
(+/- other defined adjustments)

AFFO ~ FFO - Recurring CapEx - straight-line rent adjustments +/- other
(definitions vary by REIT; always ask what they subtract)

In an interview, say "definitions vary" once, then pick a clean sketch. Do not invent a boutique AFFO formula you cannot defend.

Map to other metrics

Worked mini example

Suppose GAAP net income is $80m. Real estate D&A is $120m. Gain on sale is $30m. Recurring CapEx is $25m. Ignore other adjustments for the interview sketch.

FFO ~ 80 + 120 - 30 = 170
AFFO ~ 170 - 25 = 145

Now the follow-up: if "recurring CapEx" is understated by $15m because the REIT labeled renovation spend as growth, AFFO quality is worse than the headline. That is the kind of judgment interviewers want.

Valuation use in interviews

Public REITs often trade on P/FFO or P/AFFO. Your job is to say:

1. What the metric includes
2. What it still misses (leverage, AFFO quality, development spend, working capital)
3. Why sector growth and risk still matter when comparing multiples

Do not recite "REITs trade on FFO" and stop. Say how you would pressure-test the multiple.

Interview traps

1. Treating FFO as cash automatically (working capital and debt paydown still exist)
2. Ignoring AFFO CapEx definitions that look aggressive
3. Comparing FFO multiples across sectors with no growth or risk context
4. Confusing FFO with REPE deal IRR metrics
5. Forgetting that interest sits inside net income, so FFO is not "pre-interest earnings"

Follow-ups you should expect

30-second verbal

"FFO adds back real estate D&A and adjusts property sale gains and losses to improve on EPS for REITs. AFFO takes FFO toward cash by subtracting recurring CapEx and similar items. I use them for public REIT comps, and I still read leverage and CapEx quality underneath."

Practice drills

Drill 1: derive FFO and AFFO from a three-line NI bridge without notes.
Drill 2: explain why a high P/FFO REIT might still be expensive if AFFO CapEx is light.
Drill 3: contrast NOI vs FFO in one minute for a mixed REIT/REPE interviewer.
Drill 4: list three things FFO does not tell you about risk.

Related

REIT vs REPE, NOI vs EBITDA, Maintenance vs Growth CapEx.

Practice on SheetRank

Build cases until NOI, leverage, and cash uses feel automatic. When a REIT interview asks FFO, you will sound like someone who already reconciles earnings to cash, not someone who memorized one acronym.