Funds from Operations (FFO)

Funds from Operations (FFO) is a financial performance metric primarily used by real estate investment Trusts (REITs) to measure their cash generated from operations. It is calculated by taking Net Income and adding back non-cash items such as Depreciation and Amortization, as well as excluding gains or losses on the sale of properties. This metric provides a clearer picture of a REIT’s operational profitability and Cash Flow, which can be used to assess its ability to pay dividends.

Formula: FFO = Net Income + Depreciation and Amortization – Gains on Sale of Properties

Example: A REIT reports a Net Income of $1 million, Depreciation of $300,000, and gains from property sales of $200,000. The FFO would be calculated as follows:

  • FFO = $1,000,000 + $300,000 – $200,000
  • FFO = $1,100,000

Case: Consider a REIT with the following financial data:

Using the FFO formula:

  • FFO = $5,000,000 + $2,000,000 – $1,000,000
  • FFO = $6,000,000

This indicates the REIT generated $6 million in funds from its operations, which can be used to inform dividend distribution and rEINvestment strategies.