AFFO subtracts what funds-from-operations ignores: roof replacements, tenant improvements, leasing commissions. It also strips the straight-line rent accounting that books average rent rather than cash rent over a lease term.
Because it approximates distributable cash, AFFO is the right denominator for testing whether a REIT's distribution is covered. A payout above AFFO is being funded by borrowing or by issuing units.
Example: Harbor Row has $140M of FFO, less $26M of recurring capital spending and $5M of straight-line rent, giving $109M of AFFO, or $2.48 a share against a $2.40 distribution.
Related: funds-from-operations, maintenance-capex, free-cash-flow, dividend, dividend-discount-model