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FFO (Funds From Operations) Explained

FFO adds back real estate depreciation and removes property-sale gains from net income, the REIT sector's core earnings number

Why Net Income Falls Short for REITs

Every public company reports net income under GAAP accounting rules, and for most industries that number is a reasonable stand-in for how the business actually performed. Real estate investment trusts are the exception. GAAP requires real estate to be depreciated on a fixed schedule - typically straight-line over 27.5 to 39 years for buildings - as if the asset were steadily wearing out, the way a delivery truck or a factory machine does.

Commercial real estate doesn't usually work that way. A well-located, well-maintained apartment complex or shopping center often holds its value or appreciates over time, even as GAAP marches its book value toward zero. Because depreciation is a large non-cash expense, it can drag a REIT's net income down to a small number, or even a loss, in years when the underlying properties are performing perfectly well. Relying on net income alone would make profitable REITs look distressed.

That mismatch is why the REIT industry adopted a supplemental measure back in the 1990s: Funds From Operations, or FFO. The trade group Nareit standardized the definition so investors could compare one REIT's operating performance to another's on a more consistent basis. Today, FFO (or a close variant of it) is the single most widely quoted performance metric in REIT earnings releases - more prominent, in most cases, than net income itself.

The Nareit FFO Formula

Nareit's standard definition starts with net income and makes two main adjustments:

• Add back real estate depreciation and amortization. Because it's a non-cash bookkeeping charge rather than an actual cash cost of running the properties, it gets added back.
• Subtract gains (and add back losses) on the sale of depreciable real estate. Selling a property is a one-time event, not a recurring source of operating income, so it's backed out to keep FFO focused on ongoing operations.

In short: FFO = net income + real estate depreciation/amortization - gains on property sales (with losses on sales added back, and adjustments made for the company's share of unconsolidated joint ventures). Companies also typically exclude impairment write-downs on depreciable property, for the same reason they exclude sale gains - they're not part of a property's ordinary operating results.

Here's a simplified, illustrative example. Suppose a REIT reports GAAP net income of $50 million for the quarter. Its real estate depreciation and amortization for the period is $40 million, and it also booked a $10 million gain from selling an older shopping center. FFO would be:

$50M (net income) + $40M (D&A) - $10M (gain on sale) = $80M FFO

Notice FFO is well above net income here - that's the normal pattern, since depreciation add-backs are usually larger than any sale gains being subtracted.

FFO Per Share, the REIT World's EPS

Just as earnings per share turns net income into a number investors can compare across companies of different sizes, REITs divide total FFO by diluted shares (and, in an UPREIT structure, operating partnership units) to get FFO per share. Continuing the example above, if that REIT had 100 million diluted shares outstanding, FFO per share would be $0.80 for the quarter.

FFO per share is the figure you'll see headlined in a REIT's earnings release and compared to the prior-year quarter to gauge growth. It's also the denominator behind Price-to-FFO, the REIT sector's version of the price-to-earnings ratio.

What FFO Still Doesn't Capture

FFO is a big improvement over net income for judging a REIT's operating performance, but it isn't a perfect measure of cash actually available to pay dividends. It doesn't subtract the routine capital expenditures a property needs to stay competitive - a new roof, parking lot resurfacing, apartment-unit turnover costs - nor does it adjust for the accounting quirk of straight-line rent. That's the gap that AFFO (Adjusted FFO) is designed to close, and it's why serious REIT analysis usually looks at both numbers together rather than FFO alone.

Where FFO Comes From

FFO isn't disclosed on the standard GAAP income statement - companies publish it voluntarily, typically in the earnings press release (filed with the SEC as an 8-K, exhibit 99.1) alongside a reconciliation table that starts at net income and walks down to FFO. Many REITs report a further-adjusted version - Core FFO, Normalized FFO, or similar - that strips out one-time items management doesn't consider representative of the run rate. See how to read a REIT earnings supplement for a walkthrough of that full package.

Not every REIT reports FFO. Mortgage REITs, which own loans and securities rather than physical property, generally don't - depreciation isn't a factor in their business, so they use other measures like distributable earnings instead. See equity vs. mortgage REITs for that distinction. On this site, each equity REIT's profile page shows the company's own reported FFO per share, sourced directly from its latest 8-K - never estimated. See the glossary for quick definitions of related terms.

FFO's History and How It's Tracked Over Time

Nareit first published its FFO definition in 1991 and has refined it since, most notably in 2018 to clarify the treatment of impairment write-downs, but the core structure - add back real estate depreciation, exclude gains on property sales - has stayed consistent throughout. When a REIT owns a stake in a property through an unconsolidated joint venture rather than outright, it includes only its proportionate economic share of that venture's FFO in its own reported figure, rather than the venture's full results, keeping the metric aligned with what the REIT actually owns.

Many REITs also issue annual FFO-per-share guidance, typically given as a range, at the start of the year and update it each quarter as results come in. Comparing actual FFO-per-share growth to that guidance range, and watching how the range itself gets revised over the year, is one of the simplest ways to track whether a REIT is performing in line with its own stated expectations.

See it in the data: See Realty Income's reported FFO per share → Browse the REIT directory →

Research and education only — nothing here is investment advice. Figures such as the 90% distribution rule are general and can change; always confirm against a company's filings.