Funds from Operations

Funds from operations (FFO) is a supplemental measure used to explain REIT operating performance alongside financial statements prepared under generally accepted accounting principles. Nareit’s definition adjusts net income for specified real-estate-related items. FFO is not simply another name for cash flow or cash available for dividends.

Why funds from operations exists

Real-estate depreciation can make accounting earnings difficult to interpret as a description of ongoing property performance. Nareit’s FFO definition addresses this by excluding specified depreciation and amortization, certain sale gains and losses, and other defined items.

Read the complete reconciliation. A company’s adjusted or normalized version may contain further changes. Similar labels should not be assumed to mean identical calculations, and a supplemental metric should not replace the underlying financial statements.

An FFO example

Suppose a hypothetical REIT reports $40 million of net income, $30 million of qualifying real-estate depreciation and a $10 million qualifying gain on a property sale. Assume no other required adjustments. A simplified FFO calculation is $40 million plus $30 million minus $10 million, giving $60 million.

With 20 million shares on the simplified per-share basis, that is $3.00 per share. The result removes the stated accounting items; it does not say the company has $60 million of uncommitted cash. The assumptions must match the actual definition before applying the calculation to a real report.

FFO and AFFO are not interchangeable

AFFO commonly introduces further company-specific adjustments, including recurring property expenditures and certain non-cash items. A dividend divided by FFO can therefore produce a different payout ratio from the same dividend divided by AFFO.

For example, a $2.40 dividend compared with $3.00 FFO gives an 80% payout ratio. Compared with $2.70 of a separately defined AFFO figure, it gives roughly 88.9%. Neither percentage should be quoted without naming its denominator.

Dividend analysis

Use the earnings measure the company identifies as the source of its dividend, rather than automatically choosing FFO because it is widely reported. Keep the earnings definition consistent when combining two actual quarters and two following quarters of independent analyst consensus. FFO is useful context when its construction is understood; its label is not a complete dividend-support conclusion.

This article is for education and information, not individualized investment, tax, or legal advice.