Motley Fool Income Investor selection American Financial Realty Trust (NYSE:AFR) is once again taking a lashing from the market, down almost 5% following its fourth-quarter and fiscal 2005 earnings report.

I won't be surprised if such volatility, for good or bad, continues. American Financial Realty does not follow the standard REIT playbook, so it can't be modeled in the same way as other REITs can. The company's unorthodox operations create a bit more uncertainty than usual -- and many investors dislike uncertainty above all else.

The typical REIT buys specific properties and collects rent on the space that it leases out. For the most part, REITs only buy or build space that they plan to lease. But while American Financial has core properties that it purchases to own and lease out, it will also buy multiple buildings from its customers at once, then sell off the properties that it considers non-core.

Since its largest customers are financial companies such as Bank of America (NYSE:BAC), Wachovia (NYSE:WB), and Regions Financial (NYSE:RF), the properties purchased are generally office space and branches. In general, the company holds onto the office space and some of the branches but sells the rest.

This comes through in the financials. Some of REIT investors' primary metrics are funds from operations (FFO) and the dividend coverage that those funds provide. On this score, American Financial doesn't perform so well. Based on the standard NAREIT definition of FFO, the company delivered $0.37 FFO per share (or $46.8 million) for fiscal 2005 and paid out $1.08 per share (or $138 million) in dividends. Clearly, it can't keep up such lofty payouts.

However, this is where we get into the gains that American Financial receives from selling its non-core properties. After adjusting for these sales and a number of non-cash items that impact all REITs, we can see that the company earned $134.4 million in adjusted FFO and paid out $138 million in dividends. The dividend still isn't covered, but the spread is not nearly as troublesome, and the company's adjusted guidance for 2006 of $149.2 million to $163.7 million would easily cover the dividend. The biggest remaining questions: Can the company sustain this dividend, and can it move toward having most of its FFO come from its core operation of renting properties, rather than from gains on sales of non-core properties?

Amerrican Financial has several positive aspects. The company is showing that it can sell non-core properties at a profit. In addition, 90% of the company's debt is fixed, and the company generally uses variable-rate debt on a short-term basis while it arranges fixed-rate financing on its acquisitions. The net asset value (NAV) estimates that I have seen for the company are also in the $14 to $15 range. However, it is important to note that the company is highly leveraged, with a debt-to-total market cap (i.e., enterprise value) ratio of around 67%.

Buying and selling a fair volume of properties quarter after quarter makes American Financial's numbers harder to follow than those of the typical REIT, where acquisitions and dispositions are fewer and less frequent. Furthermore, the income from those sales is inherently less stable than funds earned from an REIT's highly rated customers. American Financial Realty's business is significantly riskier than the average REIT's, but I'm just not convinced that there's as much risk in the business as its current stock price reflects.

Step REIT up for further Foolishness:

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Nathan Parmelee owns shares in American Financial Realty Trust but does not own shares in any of the other companies mentioned. The Motley Fool has a disclosure policy.