Chartered Financial Analyst Level 2

Explanation

For evaluating a REIT's dividend-paying capacity, adjusted funds from operations (AFFO) is the most appropriate metric because:

• Net income (Option A) is not suitable due to accounting treatments like depreciation, which doesn't reflect the actual cash flow from real estate operations
• Funds from operations (FFO) (Option B) is better than net income but still includes maintenance capital expenditures that are necessary for property upkeep
• Adjusted funds from operations (AFFO) (Option C) is the best measure as it:
  • Starts with FFO
  • Subtracts recurring capital expenditures needed to maintain the property portfolio
  • Adjusts for straight-line rents and other non-cash items
  • Provides a more accurate picture of the cash available for dividend distribution

AFFO better reflects the sustainable dividend-paying capacity of a REIT by accounting for the ongoing capital requirements to maintain the quality and income-generating ability of the real estate portfolio.