Glossary term
Funds From Operations (FFO)
Funds from operations is a supplemental performance measure commonly used to evaluate REIT operating performance.
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What Is Funds From Operations (FFO)?
Funds from operations, or FFO, is a supplemental performance measure commonly used by real estate investment trusts. It adjusts net income to better reflect recurring real estate operating performance by adding back real estate depreciation and amortization and excluding certain gains or losses from property sales and other items.
FFO was developed by Nareit to improve comparability among equity REITs. It is not the same as net income, cash flow from operations, or free cash flow.
Key Takeaways
- FFO is commonly used to evaluate REIT operating performance.
- It starts with GAAP net income and makes real estate-specific adjustments.
- It adds back real estate depreciation and amortization.
- It excludes certain gains and losses from property sales.
- Investors should check whether a company reports Nareit FFO, adjusted FFO, core FFO, or another version.
How FFO Works
Real estate depreciation can reduce accounting earnings even when property values may not decline in the same way as other depreciating assets. FFO adjusts for that issue by adding back depreciation and amortization related to real estate.
FFO also excludes certain gains or losses from sales of depreciable real estate because those gains and losses may not reflect recurring operating performance. The goal is to focus on ongoing property-level earnings power.
A simplified version of the formula is:
Net income is the GAAP starting point. Real estate depreciation and amortization are added back. Gains on sales of depreciable real estate are removed because they are generally not considered recurring operating performance.
FFO Compared With Related Measures
Measure | What it shows | Main caution |
|---|---|---|
Net income | GAAP earnings | Includes real estate depreciation |
FFO | REIT operating performance measure | Supplemental, not GAAP |
AFFO | Often adjusts FFO for recurring capital needs | No single standardized definition |
Cash flow from operations | GAAP cash flow statement measure | Includes working capital effects |
Limits and Misunderstandings
FFO is useful, but it is not cash available for dividends. Recurring capital expenditures, leasing costs, tenant improvements, debt service, and working capital can all affect actual cash available.
It is also not a universal metric for every business. FFO is most relevant for REITs and real estate companies, not ordinary operating companies.
Because companies may present adjusted versions, users should reconcile the measure to GAAP financial statements and understand every adjustment.
The Bottom Line
Funds from operations is a key REIT performance measure that adjusts GAAP earnings for real estate-specific accounting effects. It is useful for comparing REITs, but it should be read with cash flow, debt, dividends, and capital spending needs.