What Is FFO in Real Estate: A Practical Guide to Calculation and Use
Funds From Operations (FFO) is the real estate industry’s preferred method for gauging recurring earnings because it adjusts net income for non-cash depreciation and excludes one-time gains or losses from asset sales. In short, FFO reveals more about a portfolio’s ongoing cash-generating power than GAAP net income. This practical guide walks property, portfolio, and asset managers through FFO calculation, FFO per share, and Adjusted FFO, and shows how to utilize these REIT performance metrics in real decisions.
Key takeaways:
- FFO adjusts GAAP net income to better reflect the recurring earnings power of income-producing real estate.
- Standard formula: FFO = Net income + Depreciation & amortization − Gains on property sales.
- FFO per share enables peer comparisons and supports dividend coverage and valuation analysis via P/FFO.
- Adjusted FFO (AFFO) refines FFO by subtracting recurring capex and non-cash rent adjustments to approximate distributable cash.
- Use FFO/AFFO alongside leverage, interest coverage, and property-level metrics; FFO is not free cash flow.
Understanding Funds From Operations in Real Estate
Funds From Operations (FFO) is a real estate industry metric designed to measure the recurring cash-generating capacity of income-producing properties by adjusting net income for depreciation, amortization, and one-time gains or losses from property sales.
FFO = Net Income + Depreciation & Amortization − Gains on sales of property
FFO is widely used by REITs to present a clearer picture of operating performance because non-cash depreciation often understates economic earnings for long-lived properties, skewing net income lower than reality. Although FFO is a non-GAAP measure, it has become a de facto standard for peer comparison, payout analysis, and trend tracking in public REIT reporting.
Why FFO Matters for Real Estate Investment Trusts
FFO captures the recurring, cash-generating ability of a REIT’s portfolio better than net income by reversing non-cash depreciation and excluding episodic asset sales. Investors commonly analyze FFO to evaluate dividend sustainability and compare valuations using price-to-FFO (P/FFO) multiples rather than P/E.
Comparison at a glance:
| Metric | What it measures | Includes depreciation? | Includes gains/losses on sales? | Typical use |
|---|---|---|---|---|
| Net income | Bottom-line GAAP profit after all expenses | Yes | Yes | Accounting profitability, tax context |
| NOI | Property-level earnings before interest and corporate costs | No | No | Asset/market performance, cap rate analysis |
| FFO | REIT-level recurring earnings power | Added back | Excluded | Dividends, P/FFO valuation, peer comparison |
Step 1: Gathering the Necessary Financial Data
Collect the following from the REIT’s financials and footnotes to ensure an accurate FFO calculation:
- Net income (GAAP)
- Real estate-related depreciation and amortization
- Gains or losses on property sales, and any disclosed impairments or nonrecurring items
You’ll typically find these in quarterly (10-Q) and annual (10-K) filings and in earnings releases where companies reconcile FFO to GAAP net income.
A simple tracking checklist:
| Item | Where to find | Tip |
|---|---|---|
| Net income | Income statement | Confirm period alignment (quarter vs. year) |
| Depreciation & amortization | Income statement and footnotes | Separate real estate D&A from corporate/other |
| Gains/losses on sales | Income statement and disposition notes | Identify if realized and recurring vs. one-time |
| Impairments/nonrecurring | Footnotes and MD&A | Note direction: add back non-cash charges, exclude one-offs |
Step 2: Calculating FFO Using the Standard Formula
Standard formula: FFO = Net Income + Depreciation & Amortization − Gains on property sales
Why these adjustments?
- Depreciation and amortization are added back because real estate depreciation is non-cash and often understates ongoing earnings.
- Gains from property dispositions are subtracted to remove non-recurring events and focus on operating performance.
Step-by-step:
- Start with GAAP net income.
- Add all real estate-related depreciation and amortization.
- Subtract realized gains (or add losses) from property sales.
- Adjust for impairments or other disclosed non-cash/nonrecurring items as applicable.
Worked example:
- Net income: $120M
- Depreciation & amortization: +$40M
- Gain on property sale: −$10M
- FFO: $150M
Illustrated:
| Component | Amount | FFO impact |
|---|---|---|
| Net income (GAAP) | 120 | Start |
| + Depreciation & amortization | 40 | +40 |
| − Gain on sale | (10) | −10 |
| FFO | 150 | Result |
Step 3: Determining FFO Per Share for Investors
FFO per share makes firm-to-firm comparisons easier by normalizing FFO for share count:
- Basic FFO per share = FFO available to common shareholders ÷ weighted average common shares
- Diluted FFO per share uses the diluted weighted average share count under industry standards, consistent with NAREIT’s reporting guidelines.
Example:
- FFO available to common: $150M
- Weighted average basic shares: 100M → Basic FFO/share = $1.50
- Weighted average diluted shares: 105M → Diluted FFO/share ≈ $1.43
Use FFO per share to evaluate dividend coverage and to compare valuations via P/FFO across peers.
Step 4: Adjusting FFO to Calculate Adjusted FFO
Adjusted FFO (AFFO) is a refined metric that starts with FFO, then subtracts routine capital expenditures, straight-line rent adjustments, and other recurring items to approximate the cash a REIT could actually distribute to shareholders in a given period.
Typical formula: AFFO = FFO − Recurring capital expenditures − Straight‑lining adjustments. These deductions often include maintenance capex and leasing-related costs.
Common AFFO adjustments:
- Maintenance capex: recurring spend to keep properties income-ready.
- Leasing commissions and tenant improvements: cash outlays tied to re-leasing.
- Straight-line rent and other non-cash revenue smoothing: reverse to reflect cash rent.
- Non-cash compensation or amortization of deferred items: remove accounting noise.
- Normalization for recurring but volatile items (e.g., routine storm repairs where applicable).
Step 5: Applying FFO Metrics for Analysis and Decision-Making
Practical uses:
- Dividend payout ratio: Dividends per share ÷ FFO per share; stress-test for sustainability.
- Valuation: Compare P/FFO (and P/AFFO) multiples across peers and time.
- Trend analysis: Track multi-year FFO/AFFO and per-share growth vs. share issuance/buybacks.
- Portfolio diagnostics: Tie shifts in FFO to occupancy, rent spreads, and capital intensity.
Cautions:
- FFO is not free cash flow and doesn’t capture all capital needs; use it alongside AFFO, leverage, interest coverage, and property-level metrics.
A simple diligence flow:
- Pull 3–5 years of FFO/AFFO and reconciliations.
- Normalize one-offs; confirm share counts.
- Compute payout ratios and growth rates.
- Benchmark P/FFO vs. peers and history.
- Sensitize rent/occupancy to test coverage.
Pro tip: Platforms like Propertese centralize portfolio financials, automate reconciliations, and integrate with your ERP to standardize FFO/AFFO workflows across assets—explore our real estate investment management software for how this works in practice.
Where to Find Reliable FFO Information and Reports
Public REITs publish FFO and reconciliations to GAAP net income in quarterly earnings releases and in 10-K/10-Q footnotes; reviewing those reconciliations and the underlying adjustments is essential for accurate analysis. Company investor relations pages and reputable analyst platforms also aggregate FFO figures, but always cross-check with the issuer’s own reconciliation tables.
Frequently Asked Questions about FFO in Real Estate
What is the standard definition of FFO?
Funds From Operations (FFO) starts with net income, adds back real estate depreciation and amortization, and excludes gains or losses on property sales to show recurring earnings power.
How is FFO different from net income and NOI?
FFO adjusts net income for non-cash depreciation and one-time gains, while NOI reflects property-level income before interest and corporate costs; FFO offers a broader, REIT-level performance perspective.
Why do investors prefer FFO over other performance metrics?
It removes accounting distortions to clarify a REIT’s capacity to generate cash from operations and support dividends over time.
What are the common limitations of using FFO?
FFO isn’t a cash flow measure, can vary in calculation across firms, and doesn’t fully capture capital needs—using it alongside AFFO and other metrics is advisable.
How does Adjusted FFO improve upon basic FFO?
Adjusted FFO (AFFO) subtracts recurring capital costs and non-cash rent smoothing from FFO, providing a closer estimate of cash available for dividends and reinvestment.