Funds From Operations (FFO)

Funds From Operations (FFO) is a financial metric commonly used in real estate investment trusts (REITs) to measure the cash generated by a REIT's real estate operations. It reflects the net income generated from a REIT's core business activities, excluding certain non-cash items like depreciation and amortization.

Example #1

Imagine you own shares in a REIT. To calculate FFO, you would start with the net income of the REIT, then add back the depreciation and amortization expenses. The resulting FFO figure helps investors assess the REIT's cash flow from its real estate assets.

Misuse

An example of misuse of FFO could be a REIT manipulating its reported FFO figures by not accurately accounting for all expenses related to its real estate operations. This could mislead investors into believing the REIT is performing better than it actually is. Consumers and investors need to be vigilant against such manipulation to make informed investment decisions.

Benefits

One key benefit of using FFO is that it provides investors with a clearer picture of a REIT's cash flow potential, as it excludes non-cash items that can distort traditional earnings measures. This helps investors better evaluate the REIT's ability to distribute dividends and sustain its operations.

Conclusion

Understanding Funds From Operations (FFO) is crucial for investors interested in REITs, as it offers a more accurate representation of the cash flow derived from a REIT's real estate assets. By focusing on cash generated from operations, FFO helps investors make more informed decisions regarding their investments in REITs.

Related Terms

Net IncomeDepreciationAmortizationCash Flow