FFO (Funds From Operations)
Definition
Funds From Operations is the REIT industry's standard earnings measure, defined by Nareit as net income (computed under GAAP) excluding gains or losses from sales of depreciable real estate and impairments of depreciable real estate, plus real-estate-related depreciation and amortization, with adjustments for unconsolidated joint ventures.
The rationale: GAAP depreciation assumes buildings lose value on a schedule, but well-maintained real estate often holds or gains value, so net income systematically understates a REIT's recurring cash-generating power. Adding back real estate D&A and stripping lumpy sale gains yields a cleaner recurring measure.
FFO per share is the REIT analog of EPS, and P/FFO the analog of P/E. Companies also report 'Core' or 'Normalized' FFO with company-specific adjustments — comparability requires checking definitions.
Why interviewers ask
'Why don't you use net income or EPS for REITs?' is the standard real-estate gaming question, and FFO is the answer — you should be able to state the Nareit build (net income + RE depreciation − gains on sales) from memory. It sets up the follow-ups on AFFO and P/FFO multiples.
Related terms
Interviews don't test definitions — they test recall under pressure.
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