What Does FFO Mean in Real Estate?

What Does FFO Mean in Real Estate?

Funds From Operations (FFO) is a key financial metric used in real estate, particularly for Real Estate Investment Trusts (REITs), to measure their operating performance. It provides a more accurate representation of a property company's profitability than net income under Generally Accepted Accounting Principles (GAAP).

Formula for FFO

FFO = Net Income + Depreciation & Amortization - Gains on Sales of Properties

• Net Income: The company’s profit after all expenses.
• Depreciation & Amortization: Added back because real estate assets typically appreciate over time, but GAAP accounting requires depreciation.
• Gains on Sales of Properties: Subtracted because they are one-time events and do not reflect recurring operational performance.

Why FFO Matters in Real Estate

1. Better Measure of Cash Flow: Since real estate companies hold long-term assets that appreciate rather than depreciate, FFO adjusts for accounting rules that may distort earnings.
2. REIT Performance Indicator: REIT investors use FFO per share as a key measure of dividend sustainability and growth potential.
3. Comparable Across REITs: Because GAAP net income includes non-cash charges, FFO standardizes earnings measurement across REITs.

FFO vs. Other Metrics

• Adjusted Funds From Operations (AFFO): A refinement of FFO that deducts capital expenditures and straight-line rent adjustments to give a more accurate picture of available cash flow.
• EBITDA vs. FFO: EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a broader measure, while FFO is tailored for real estate companies.

Application in Multifamily & Commercial Real Estate

For multifamily real estate investors, FFO helps compare the financial health of REITs that own apartment communities. A growing FFO per share suggests higher rental income, strong occupancy, or well-managed expenses. Since your platform analyzes multifamily market trends, you could use FFO data from public REITs to benchmark advertised occupancy trends against reported financial performance.