Funds From Operations (FFO)

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Funds From Operations (FFO)

Funds from operations (FFO) is a non‑GAAP metric used to evaluate the operating performance of real estate investment trusts (REITs). It adjusts net income to better reflect the cash-generating ability of real estate assets by adding back noncash charges and excluding nonrecurring items like gains from property sales.

Key takeaways

  • FFO adjusts net income by adding depreciation and amortization and removing gains from property sales and interest income to reflect REIT operating earnings.
  • FFO per share and the price-to-FFO ratio are common valuation tools for REITs.
  • Adjusted funds from operations (AFFO) further deducts recurring capital expenditures and other adjustments to estimate distributable cash.
  • FFO is widely disclosed by REITs (often in footnotes) but is a non‑GAAP measure and can vary by firm.

Formula and components

FFO = (Net Income + Depreciation + Amortization + Property Sales Losses) − Property Sales Gains − Interest Income

Where:
* Net Income (NI) — GAAP net profit.
* Depreciation (D) and Amortization (A) — noncash expenses that reduce GAAP earnings.
* Property Sales Losses (PSL) — one-time losses on asset sales (added back).
* Property Sales Gains (PSG) — gains on asset sales (subtracted).
* Interest Income (II) — generally excluded because it’s not core operating revenue for REITs.

How to calculate FFO (step-by-step)

  1. Start with net income from the income statement.
  2. Add back depreciation and amortization related to investment properties (noncash charges).
  3. Add losses on the sale of properties (treated as nonrecurring).
  4. Subtract gains on the sale of properties (nonrecurring).
  5. Subtract interest income (if the REIT reports it and it’s not part of core operations).
  6. Result = FFO for the period. To get FFO per share, divide by diluted outstanding shares.

Example (simple):
Net income = $100,000; Depreciation = $20,000; Property sale gains = $40,000.
FFO = (100,000 + 20,000) − 40,000 = $80,000.

What FFO reveals

  • Focuses on recurring cash generation from property operations, excluding accounting depreciation that may not reflect actual property values.
  • Helps compare operating performance across REITs that use GAAP depreciation differently.
  • Commonly used to assess dividend sustainability and to compute valuation ratios (price/FFO).

FFO vs. AFFO

  • AFFO (Adjusted Funds From Operations) starts with FFO and subtracts recurring capital expenditures (maintenance capex), straight‑lining of rents, and other recurring items to estimate cash available for distribution.
  • AFFO is generally viewed as closer to a REIT’s distributable cash than raw FFO, but calculations vary by company.

FFO vs. cash flow and other metrics

  • FFO is not the same as cash flow from operations (reported on the statement of cash flows). Cash flow accounts for changes in working capital and all actual cash receipts and payments.
  • FFO also differs from EBITDA: EBITDA excludes interest and taxes but is not tailored to real estate accounting issues like depreciation of investment properties.
  • Treat FFO as an operating performance indicator specific to real estate, not a direct liquidity measure.

Where to find FFO

  • Public REITs typically disclose FFO in quarterly and annual filings—often in the income statement footnotes or supplemental financial information.
  • Because FFO is non‑GAAP, confirm the company’s definition and any adjustments when comparing REITs.

Practical example (summary)

A major mall REIT reported net income of $2.2 billion and added back roughly $1.8 billion of depreciation and amortization to report FFO of about $4.0 billion. FFO per share was materially higher than GAAP diluted EPS, illustrating how FFO can better reflect recurring property income for valuation and dividend analysis.

Bottom line

FFO is an essential metric for analyzing REITs because it neutralizes GAAP depreciation and one‑time property sale effects to highlight recurring real estate operating performance. Use FFO alongside AFFO, cash flow metrics, and an understanding of company-specific adjustments to evaluate dividend sustainability and valuation.