FFO (Funds From Operations)

Funds from operations (FFO) is the standard measure of operating performance used to evaluate real estate investment trusts. Because REITs own depreciable real estate, GAAP net income tends to understate their economic earnings: depreciation is a large non-cash expense that reduces reported income even though well-located real estate often holds or increases its value. FFO addresses this by starting with net income and adding back real estate depreciation and amortization, while also excluding gains or losses from property sales, which are one-time and not part of recurring operations. The definition is standardized by Nareit, the REIT industry association, which helps investors compare REITs on a consistent basis. FFO is commonly expressed on a per-share basis and is the figure REITs most often use to set and describe their dividend coverage, since the 90% distribution requirement is tied to taxable income but dividends are funded from cash flow. Analysts also use a refined metric called adjusted funds from operations (AFFO), which further subtracts recurring capital expenditures and adjusts for straight-lined rents to better approximate the cash actually available for distribution. A REIT whose dividend exceeds its FFO or AFFO may be paying out more than it earns, a potential warning sign.