Learn what funds from operations means and why real-estate investors use it to look past depreciation effects in property-heavy businesses.
Funds from operations (FFO) is a cash-flow-oriented performance measure widely used in real estate, especially for REIT analysis, to adjust earnings for property-related accounting distortions such as depreciation.
The idea is that conventional net income can understate operating performance for property-owning businesses because real estate depreciation does not always track economic value loss in a simple way. FFO therefore adjusts reported earnings to create a more useful operating metric for many real-estate investors. It is still not the same as free cash flow, and analysts often compare it with other measures before valuing a REIT.
A REIT with modest net income may still report stronger FFO after adding back real estate depreciation and making standard FFO adjustments.
An investor says, “FFO is the same as cash sitting in the bank.” Is that right?
Answer: No. FFO is an analytical performance measure, not a literal cash balance.
Real Estate Investment Trust (REIT): FFO is one of the most common metrics used when analyzing REITs.
Net Operating Income (NOI): NOI and FFO are related but measure performance at different levels.
Capitalization Rate (Cap Rate): Real-estate valuation often combines operating and market-based measures such as NOI, FFO, and cap rates.