Payout ratio versus FFO payout ratio in a REIT filing, and they rarely land in the same place

The ratio a REIT leads with in its own deck is usually the one that tells the better story, so the burial order matters as much as the numbers themselves.

One thing worth adding to the AFFO point: straight-line rent is a meaningful distortion in long-lease net lease names specifically because the gap between contractual cash rent in year one and the GAAP straight-lined average can be substantial, and that difference flows through FFO as if it were collected income. Take a ten-year lease where cash rent starts at 90k annually but averages 100k over the term after bumps. GAAP books 100k from day one, so FFO includes 10k that has not arrived in the account yet. AFFO pulls that back out, which is why AFFO yields on net lease REITs often look worse than FFO yields by more than the capex adjustment alone would explain.

The figure I would also pull alongside payout ratios is the weighted average lease term against the debt maturity schedule. A 95 percent AFFO payout becomes a different kind of problem if a meaningful slug of leases expire in the same window as a refinancing, because the REIT cannot rely on rent continuity as a cushion when it goes back to the debt market.

What is the sector for the name you are watching, and do the lease expirations cluster anywhere near a debt wall?

The gap you are describing is real, and the assumption doing the most work is that depreciation on real property behaves like depreciation on a truck. The GAAP framework assumes the building loses value as it ages; most real property in a supply-constrained market does the opposite. FFO corrects for that by adding depreciation back, which is why analysts price dividend sustainability against it rather than net income.

That said, FFO still flatters certain REITs. Straight-line rent is the one worth watching alongside it. When a REIT signs a long-term lease with scheduled escalators, GAAP requires it to recognize rent on a straight-line basis over the lease term, which means reported income includes rent not yet collected in cash. AFFO strips that out. In a data center or net lease book with long weighted-average lease terms, the spread between FFO and AFFO can be substantial, and your 10 to 15 point figure is consistent with what shows up in those filings.

The practical test is whether the REIT leads with AFFO or buries it. Operators with strong cash conversion tend to surface AFFO prominently and walk through the bridge. Operators where AFFO tells a tighter story tend to lead with FFO and put AFFO in a supplemental table two thirds of the way through the press release. That placement is itself information.

One risk you did not name: tenant improvement obligations are often disclosed in the lease expiration schedule rather than the AFFO bridge, and in a portfolio with near-term lease rollovers the recurring capex assumption embedded in AFFO can be stale relative to what renewal terms actually cost. The AFFO figure is only as good as the capex estimate, and that estimate is set by management.

What is the weighted-average lease term on the book you are looking at, and how recently did management update the recurring capex assumption in the AFFO reconciliation?

AFFO is where I spend most of my time, because recurring capex assumptions are where management gets creative.

AFFO being 10 to 15 points below FFO matters most when the lease structure creates lumpy capex rather than steady capex, because a REIT can smooth its TI obligations across quarters in its own presentation while the actual cash hits all at once. What's the weighted average lease term on the portfolio you're looking at, because short WALT means TI cycles come around faster and that AFFO cushion compresses even further than the headline figure suggests?

Realty Income buried AFFO in a footnote for two years while I held it, and I never ran the number myself until 2024.