Real estate

Ultimate Guide About Funds From Operations 2023

Written By Urban Real Estate Center
Last Updated: Jan 03, 2023 •

The Ultimate Guide to Funds from Operations 2023 is your comprehensive source for understanding the metric used by real estate investment trusts (REITs) to calculate the amount of cash generated from its operations. This guide provides a comprehensive overview of FFO, including what it is, how it's measured, and how investors use it to evaluate REITs and other real estate investments.

We provide detailed information on how to calculate FFO and why it's important in assessing the performance of REITs. We also outline strategies to help readers make more informed decisions with their real estate investments by taking into account FFO when making decisions.

With this guide, investors will better understand FFO and be able to make more informed decisions about their investments in real estate investment trusts and other real estate investments.


What Is Funds From Operations (FFO)?

Funds From Operations (FFO) is a metric used by real estate investment trusts (REITs) to measure the cash flow generated from their operations. Unlike traditional net income, FFO accounts for non-cash expenses such as depreciation and amortization, resulting in a more accurate picture of operating performance. In addition, unlike earnings per share (EPS), FFO is calculated regardless of any sale of assets or interest income. 

Calculating FFO is relatively straightforward and involves three major steps:

  1. Add together net income and non-cash expenses such as depreciation and amortization.
  2. Subtract gains on sales of assets and any interest income.
  3. Divide the result by the total number of outstanding shares.

This will determine the FFO-per-share ratio for that period. REITs use FFO as one way to analyze their current standing in terms of profitability and liquidity. The higher the FFO ratio, the better a REIT is likely to be financially. 


In certain cases, a REIT may choose to adjust its funds from operations (AFFO) figure by subtracting capital expenditures, which can help gauge how much money is available to pay dividends or invest back into its business activities. 


How to calculate FFO?

Calculating Funds from Operations (FFO) is an important measure of financial performance for real estate companies. FFO measures the operational performance of a business before taking into account non-core activities such as gains or losses on sales of properties, capital expenditures, and interest income. This metric lets investors understand how well a company performs with its core operations.

To calculate FFO, start by finding the company's net income and other relevant information from its income statements, such as depreciation and amortization expenses. Next, add the total income and subtract any losses on sales of properties or interest income.

Divide this number by the number of outstanding shares to get the FFO per share. For example, if a company reported $1 million in net income with $200,000 in depreciation costs and no amortization expenses on its income statement, its FFO would be calculated as follows: 

$1 million + ($200,000 + $0 + $0) - $0 - $0 = $1.2 million 

If this company had 1 million outstanding shares, its adjusted FFO per share would equal $1.20. It's important to note that some companies may include certain items in their calculations of FFO, which could affect the final number. For instance, some companies may include gains or losses from discontinued operations when FFO calculation while others do not. 

Understanding how to calculate funds from operations is essential for any investor properly assess a real estate business's health. With an accurate calculation of adjusted funds from operations (FFO), investors can make informed decisions when evaluating a potential investment opportunity and determine whether it is worth pursuing or not.


Why is FFO so Important?

FFO is an important metric for investors looking to understand better the underlying cash flow derived from a REIT's business operations. FFO considers both gains and losses on the sale of properties, ensuring a more accurate measure of the cash flow from operations.

In addition, FFO adds back any non-cash expenses that reduce net income to provide a more reliable indication of the actual cash generated by the property sales and other activities. Investors can then use this information to make an informed decision as to whether or not they should invest in the REIT.

By providing investors with a better understanding of a company's recurring cash flow, FFO helps them determine whether or not it can fund its dividend payments. In addition, it helps them decide if there is enough money left over from those payments for the REIT to invest back into its own business or pay down debt obligations.

Furthermore, FFO can also give investors valuable insight into how well a REIT manages its properties and how efficiently it produces returns for shareholders. It does so by comparing total funds from operations with total net operating income for each period, which can help identify areas where operational efficiency may need improvement.

This can prove invaluable when determining how shrewdly management has been investing in their property portfolio and whether or not they have achieved their desired returns on capital investments made in new projects or acquisitions. 

Overall, FFO provides investors with an important tool for analyzing potential real estate investment trust (REIT) investments. Offering insights into both current and future cash flows available to fund dividends and other activities helps create clarity regarding a company's financial performance and investment opportunities that may be available within it.


Why is FFO a Good Measure of REIT Performance?

FFO is a key performance metric for measuring the success of Real Estate Investment Trusts (REITs). This metric is important because it helps investors better understand the cash generated by a REIT and to separate out one-time gains on the sale of properties.

FFO stands for Funds From Operations, a non-GAAP measure designed to exclude non-cash expenses such as depreciation and amortization from net income. The calculation of FFO is based on the formula: FFO = net income + depreciation + gain/loss on sales - investments in real estate.

Using FFO allows investors to get a more accurate understanding of the amount of cash flow generated by a REIT, as it removes any noncash expenses or gains due to the sales of properties. This helps investors understand how well a REIT manages its investments and how much cash it has for operations and distributions.

FFO can also provide insight into the profitability of specific real estate investments since it considers all costs associated with running and maintaining an investment property, such as taxes, repairs, insurance, and other associated costs. Investors can use this information to make more informed decisions when selecting individual real estate investments.

Additionally, FFO can be used by analysts to compare REITs on an apples-to-apples basis since most REITs report results based on this metric rather than due to GAAP accounting rules which are not consistent across entities.

Both investors and analysts widely accept FFO within the Association of Real Estate Investment Trusts (AREIT) as an accurate measure for evaluating the performance of real estate investments. This is why many investors rely heavily on FFO when deciding whether or not to invest in a particular REIT.



Although it is still early to tell how Funds From Operations will shake out in 2023, we can be sure that it will continue to be an important part of real estate investment trusts (REITs) financial statements. This guide has given you a rundown of what FFO is, how it's calculated, and why it matters. With this information in hand, you'll be able to make informed decisions about REITs and other investments.

Urban Real Estate Center

Learn everything you need to know about Funds From Operations (FFO) in 2023! This comprehensive guide will show you how to evaluate real estate investment trusts and maximize cash flow.