Funds From Operations (FFO)

Funds From Operations (FFO) is the standard earnings measure for real estate investment trusts (REITs). It starts from net income, adds back depreciation and amortization on real estate, and removes gains or losses from property sales. The result is a much better picture of the recurring cash a REIT's property portfolio actually generates.

FFO exists because GAAP earnings systematically understate REIT profitability. Accounting rules require buildings to be depreciated over decades, creating a large non-cash charge — even though well-maintained properties often hold or gain value. A REIT can report thin net income while producing substantial distributable cash.

FFO, AFFO, and Valuation

Adjusted FFO (AFFO) goes one step further by subtracting recurring maintenance capital expenditures and straight-line rent adjustments. AFFO is the best approximation of the cash actually available for dividends, which is why analysts judge REIT payout safety against AFFO rather than earnings per share.

For valuation, price-to-FFO (P/FFO) plays the role that the P/E ratio plays for regular companies. Comparing a REIT's P/FFO against peers in the same property type — industrial, residential, data centers, retail — is the core of REIT relative valuation.