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NAREIT FFO

As the market for real estate investment trusts continues to grow, it is critical that individuals have access to accurate and impartial data to make informed investment decisions. One important figure is Funds from Operations (FFO), which is used by REITs to define the cash flow from their operations, is calculated by adding depreciation and amortization expenses to earnings, and sometimes quoted on a per share basis.

However, there is no consensus FFO definition used by the REIT market. Companies and analysts often release guidance using their own FFO formulas, often with unclear labeling and lacking explanation.

The market is in need of a standard, which is why NAREIT adopted an FFO definition in 1991 intended as an industry-wide uniform measure of REIT operating performance. The definition has continued to be revised and updated, most recently in 2012. NAREIT FFO corrects drawbacks associated with historical cost accounting for real estate assets which assumes that the value of real estate assets will decrease predictably over time. Real estate values actually rise or fall with market conditions, a consideration that NAREIT FFO includes.

NAREIT is committed to increasing the use of the NAREIT-defined FFO and improving the understandability and uniformity of FFO estimates. To begin, NAREIT has urged member companies that provide FFO guidance related to a company-defined version of FFO to provide guidance on NAREIT-defined FFO as well. In addition, NAREIT has developed an FFO survey for analysts which will further clarify which definition is used in their estimates.

STATUS: Not a legislative issue.

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