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Funds From Operation (FFO)

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Funds From Operation (FFO)

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    What are Funds From Operations?

    In 1991, Nareit created a supplemental measure of REIT operating performance named Nareit Funds From Operations (FFO) in order to promote a uniform widely-accepted supplemental industry-wide standard measure of equity REIT operating performance. The primary reason Nareit developed FFO was to address the artificial nature of historical cost depreciation and amortization of real estate and real estate-related assets mandated by U.S. Generally Accepted Accounting Principles (GAAP). 

    How do you calculate FFO?

    Net income (calculated in accordance with GAAP), excluding:

    • Depreciation and amortization related to real estate.
    • Gains and losses from the sale of certain real estate assets.
    • Gains and losses from change in control.
    • Impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity

    Why is FFO important?

    Nareit believes that public confidence in the quality of GAAP-reported results are of paramount importance to the REIT industry. Nareit also believes that certain non-GAAP supplemental information relating to operating performance can be valuable in explaining and clarifying GAAP financial results for REIT investors. Non-GAAP measures, including FFO, should be considered only in addition to, not as a substitute for, the information prepared in accordance with U.S. GAAP and should never be used to obscure or diminish the prominence of GAAP-reported results.

    What are the benefits of using FFO?

    FFO has gained wide acceptance by REITs and the investment commiunity. Nareit believes—and investors have confirmed— that FFO prepared in accordance with Nareit’s definition, presented in conjunction with the financial statements prepared in accordance with GAAP, has been fundamentally beneficial, improving the understanding of operating results of REITs as real estate companies among the investing public and enhancing the ability to compare the operating results of one REIT with another. The SEC staff has accepted Nareit’s definition of FFO as a performance measure and does not object to its presentation on a per share basis.

    Nareit's FFO White Paper

    Nareit's FFO white paper is a distillation and consolidation of Nareit guidance on FFO.