Funds From Operations (FFO)
Candlefocus EditorEssentially, FFO is a metric that measures operating performance for REITs based on income from business activities, excluding items such as gains from the sale of a property or from unrealized appreciation. It is therefore considered to be a more accurate measurement of a REIT’s financial performance.
The calculation of FFO involves adding back write-offs and depreciation charges to the net income figure, and subtracting out the gains from the sale of properties and other non-operations related items. The end result is a figure which measures the amount of cash generated from a REIT’s normal business operations.
FFO is of particular importance to REITs as it eliminates the negative effects of certain nonoperating factors that can skew the net income calculation, such as gains from the sale of properties or tax benefits. It is therefore considered a better gauge of performance that can be used to compare different REITs and assess their overall financial health.
In conclusion, Funds From Operations (FFO) is a key metric used by real estate investment trusts to measure the cash flow from their operations. It is a more accurate measure of a REIT’s financial performance compared to net income, and therefore it is an important figure to look out for when evaluating REITs.