Funds from operations (FFO) is a supplemental measure widely used to evaluate equity real estate investment trusts. Nareit's definition starts with GAAP net income and adjusts for items that can make conventional earnings less informative for real-estate operating performance.
At a high level:
FFO = GAAP net income + real-estate depreciation and amortization - qualifying property-sale gains + qualifying property-sale losses + other Nareit adjustments
The exact reconciliation matters. Nareit's definition also addresses real-estate impairment and the REIT's share of unconsolidated partnerships and joint ventures.
Why REIT investors use FFO
Buildings are depreciated under GAAP even though the economic value of real estate does not necessarily decline on the accounting schedule. REITs also buy and sell properties as part of normal portfolio management, so gains on asset sales can make one period's net income look unusually high.
FFO removes several of those effects to provide another view of recurring operating performance. It is especially useful for comparing a REIT with its own prior periods and with peers using a consistent Nareit-based definition.
FFO is not cash flow
FFO is not the same as cash from operations, free cash flow, or cash available for dividends. It does not automatically deduct recurring capital expenditures, leasing commissions, tenant improvements, or every cash item needed to maintain a property portfolio.
That distinction is one reason analysts also use Adjusted Funds From Operations.
Example
Suppose a REIT reports:
- GAAP net income of $180 million;
- $140 million of real-estate depreciation and amortization; and
- a $30 million gain from selling depreciable real estate.
Ignoring other adjustments:
FFO = $180m + $140m - $30m = $290m
The calculation does not mean the REIT generated $290 million of distributable cash. It means the selected accounting items were removed from GAAP net income under the FFO framework.
Per-share FFO
REITs frequently report FFO per diluted share. Investors should verify the share-count convention, treatment of preferred securities and noncontrolling interests, and whether the figure is Nareit FFO, core FFO, normalized FFO, or another adjusted variant.
Do not compare an issuer's customized "core FFO" directly with another issuer's Nareit FFO without reconciling the adjustments.
Investor interpretation
FFO is most useful alongside:
- Net Operating Income;
- Same-Store NOI;
- occupancy and rent growth;
- interest expense and leverage;
- recurring capital expenditures; and
- property acquisitions and dispositions.
FFO supplements GAAP results. It does not replace GAAP net income or the cash-flow statement.
Sources
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