What is Funds from Operations (FFO)?
Funds from Operations (FFO) is a measure of cash generated by a real estate investment trust (REIT). It is important to that is not the same as Cash from Operations, which is a key component of the indirect-method cash flow statement.
How Does Funds from Operations (FFO) Work?
The formula foris:
Let's assume Company XYZ is a REIT that owns several properties. Last year, Company XYZ's income statement looked like this:
Using the formula above, we can calculate Company XYZ'sas follows:
$2,500,000 + $2,000,000 - $200,000 = $4,300,000
REITs and similar trusts typically disclose financial statements (and in many cases in the headlines of their press releases), and they are required to show their calculations.in the footnotes to their
Why Does Funds from Operations (FFO) Matter?
In general, the adjustments Generally Accepted require REITs to depreciate their Principles ( ) properties over time. However, many REIT properties actually appreciate over time, and for this reason, the required expense tends to make appear artificially low. also adjusts for (or losses) on the sale of properties because they are not recurring and therefore do not contribute to the REIT's ongoing dividend-paying capacity (REITs are required to pay out 90% of their taxable income in dividends). Some go a step further and calculate Adjusted from Operations (AFFO), which adjusts capital expenditures. for rent increases and certainmakes to are intended to compensate for methods that may distort a trust's true performance. This is especially true of .
Many prefer to examine instead of when measuring an REIT's financial performance. Similar to ( ), per share is a carefully scrutinized metric that is often used as a barometer to gauge an REIT's profitability per unit of shareholder ownership. Meanwhile, the interpretation of price/ multiples may generate valuation insights similar to those generated by P/E multiples. As such, is a key driver of share prices.
Though real estate firm's profitability, it's important to remember that can often be susceptible to manipulation, changes and restatements. Nevertheless, is widely considered to be the most popular method of quantifying a remains the industry standard in determining -trust profitability for shareholders.