What Is FFO Per Share?
FFO per share, or Funds From Operations per share, is a key financial metric used primarily by Real Estate Investment Trust (REITs) to measure their operating financial performance within the broader category of real estate finance. It represents the cash flow generated from a REIT's core business operations on a per-share basis, providing a clearer picture of profitability than traditional accounting measures like Net Income. This metric adjusts for non-cash expenses, notably depreciation and amortization, which can significantly distort the reported earnings of real estate companies under Generally Accepted Accounting Principles (GAAP).
History and Origin
The concept of Funds From Operations (FFO) was developed in 1991 by the National Association of Real Estate Investment Trusts (NAREIT) to address a specific challenge in evaluating REITs. Traditional GAAP accounting requires real estate assets to be depreciated over time, implying a decline in value. However, real estate often appreciates in value, making depreciation a significant non-cash expense that can artificially lower a REIT's reported net income and obscure its true operating performance. To provide a more accurate and standardized measure of operating performance for equity REITs, NAREIT introduced FFO.37, 38 This supplemental measure aimed to promote a uniform, widely accepted industry standard.36 The U.S. Securities and Exchange Commission (SEC) staff has since accepted NAREIT's definition of FFO as a performance measure and does not object to its presentation on a per-share basis.35 NAREIT clarified its definition through white papers, including a restatement in 2018, emphasizing that FFO is intended to supplement, not replace, GAAP financial results.34
Key Takeaways
- FFO per share is a crucial metric for evaluating the operating performance and dividend sustainability of Real Estate Investment Trusts (REITs).
- It adjusts GAAP net income by adding back non-cash expenses like depreciation and amortization and excluding gains or losses from property sales.
- NAREIT developed FFO to provide a more accurate representation of the cash generated by a REIT's recurring operations.
- Investors often use FFO per share to compare the performance of different REITs and assess their ability to pay dividends.
- While widely accepted, FFO is a non-GAAP measure and has limitations, particularly concerning the exclusion of recurring Capital Expenditures.
Formula and Calculation
The formula for calculating Funds From Operations (FFO) per share begins with a REIT's GAAP net income and adjusts for non-cash and non-recurring items specific to real estate operations. This results in the total FFO, which is then divided by the number of outstanding shares.
The formula for FFO is:
\text{FFO} = \text{Net Income} + \text{Depreciation} + \text{Amortization} + \text{Losses on Sales of Property} - \text{Gains on Sales of Property} $$[^33^](https://corporatefinanceinstitute.com/resources/accounting/funds-from-operations-ffo/) Once FFO is calculated, FFO per share is determined as follows:\text{FFO per Share} = \frac{\text{FFO}}{\text{Weighted Average Common Shares Outstanding}}
Where: * **Net Income:** The company's profit after all expenses, calculated in accordance with GAAP, usually found on the [Income Statement](https://diversification.com/term/income-statement).[^31^](https://www.reit.com/glossary/funds-operation-ffo), [^32^](https://corporatefinanceinstitute.com/resources/accounting/funds-from-operations-ffo/) * **Depreciation and Amortization:** Non-cash expenses related to real estate assets that are added back because real estate often appreciates rather than depreciates over time.[^29^](https://www.reit.com/glossary/funds-operation-ffo), [^30^](https://www.hellodata.ai/help-articles/ffo-meaning-real-estate) * **Losses on Sales of Property:** Non-recurring losses from the sale of real estate assets are added back to reflect ongoing operations.[^28^](https://corporatefinanceinstitute.com/resources/accounting/funds-from-operations-ffo/) * **Gains on Sales of Property:** Non-recurring gains from the sale of real estate assets are subtracted to reflect ongoing operations.[^27^](https://corporatefinanceinstitute.com/resources/accounting/funds-from-operations-ffo/) * **Weighted Average Common Shares Outstanding:** The average number of shares held by investors over a period, used to calculate per-share metrics. ## Interpreting the FFO Per Share FFO per share is a critical metric for understanding the operational health and income-generating capacity of a REIT. A higher or growing FFO per share generally indicates a stronger [financial performance](https://diversification.com/term/financial-performance) and greater ability to generate recurring income from its property portfolio. Investors use this metric to assess a REIT's ability to cover and grow its dividends, as REITs are legally required to distribute a significant portion of their taxable income as dividends.[^25^](https://breakingintowallstreet.com/kb/reit-modeling/funds-from-operations-ffo/), [^26^](https://quizlet.com/863252234/finance-4520-flash-cards/) When evaluating FFO per share, it's essential to look at trends over time. Consistent growth in FFO per share suggests effective management, successful property acquisitions, or organic growth in rental income. Conversely, a declining FFO per share might signal operational challenges, increasing vacancies, or significant property dispositions without adequate replacement. It also serves as a basis for valuation ratios specific to REITs, such as the Price-to-FFO ratio, which is often used in place of the traditional price-to-earnings (P/E) ratio.[^24^](https://breakingintowallstreet.com/kb/reit-modeling/funds-from-operations-ffo/) ## Hypothetical Example Consider "Horizon Properties REIT," a hypothetical real estate investment trust specializing in commercial office spaces. For the fiscal year ending December 31, 2024, Horizon Properties REIT reports the following: * Net Income: \$50,000,000 * Depreciation and Amortization related to real estate: \$20,000,000 * Gain on sale of a non-operating property: \$5,000,000 * Loss on sale of a smaller office building: \$2,000,000 * Weighted Average Common Shares Outstanding: 100,000,000 First, we calculate the total FFO for Horizon Properties REIT: FFO = Net Income + Depreciation & Amortization - Gains on Sales of Property + Losses on Sales of Property FFO = \$50,000,000 + \$20,000,000 - \$5,000,000 + \$2,000,000 FFO = \$67,000,000 Next, we calculate the FFO per share: FFO per Share = FFO / Weighted Average Common Shares Outstanding FFO per Share = \$67,000,000 / 100,000,000 shares FFO per Share = \$0.67 per share In this scenario, Horizon Properties REIT has an FFO per share of \$0.67. This figure provides investors with a measure of the cash generated by the REIT's ongoing operations, which is more indicative of its ability to pay dividends and manage its portfolio than its reported net income would suggest, especially given the significant non-cash expenses like [depreciation](https://diversification.com/term/depreciation). ## Practical Applications FFO per share is a foundational metric for investors, analysts, and even lenders in the real estate sector. Its practical applications span investment analysis, portfolio management, and corporate decision-making for REITs. * **Investment Analysis:** Investors widely use FFO per share to evaluate a REIT's operating profitability and compare it against peers within the same sector or across different real estate sub-sectors.[^22^](https://www.hellodata.ai/help-articles/ffo-meaning-real-estate), [^23^](https://www.re-leased.com/terms/funds-from-operations) A consistent increase in FFO per share over time often signals a healthy and growing REIT. * **Dividend Sustainability:** For income-focused investors, FFO per share is crucial for assessing a REIT's ability to sustain and grow its dividend payouts. Since REITs are legally required to distribute a high percentage of their taxable income, FFO provides a more accurate measure of the cash available for distributions than net income.[^21^](https://breakingintowallstreet.com/kb/reit-modeling/funds-from-operations-ffo/) * **Valuation:** FFO per share is a key component in deriving valuation multiples like the Price-to-FFO ratio, which analysts use to determine if a REIT's stock is undervalued or overvalued relative to its operating earnings.[^20^](https://corporatefinanceinstitute.com/resources/commercial-real-estate/p-ffo/) * **Financial Reporting and Disclosure:** Publicly traded REITs typically report FFO per share in their earnings releases and supplemental disclosures, often reconciling it back to GAAP net income to provide transparency to the market. The SEC permits the reporting of FFO per share in filings under specific conditions regarding non-GAAP financial measures.[^18^](https://www.reit.com/nareit/advocacy/policy/financial-standards-reporting/nareit-ffo/guidelines-reporting-performance), [^19^](https://www.reit.com/nareit/advocacy/policy/financial-standards-reporting/guidelines-reporting-performance-share-basis) Further details on these conditions can be found in the SEC rule "Conditions for Use of Non-GAAP Financial Measures." * **Strategic Planning:** REIT management teams utilize FFO per share in their internal strategic planning, guiding decisions on property acquisitions, dispositions, and development projects to optimize the company's income-generating capacity.[^17^](https://www.re-leased.com/terms/funds-from-operations) ## Limitations and Criticisms While FFO per share offers a more relevant view of a REIT's operating performance compared to traditional GAAP net income, it is not without limitations. A primary criticism is that FFO does not account for recurring [Capital Expenditures](https://diversification.com/term/capital-expenditures) (CapEx), which are necessary to maintain and re-tenant properties, and are therefore essential for a REIT's long-term operational viability.[^16^](https://www.investing.com/academy/analysis/funds-from-operations/) These ongoing costs, such as roof replacements, HVAC system upgrades, or tenant improvements, directly impact a REIT's true cash flow available for distribution, but are excluded from the FFO calculation. This omission led to the development of a refined metric, [Adjusted Funds From Operations](https://diversification.com/term/adjusted-funds-from-operations) (AFFO), which seeks to address this shortcoming by deducting recurring capital expenditures and other non-cash items like straight-line rent adjustments.[^15^](https://www.youtube.com/watch?v=Lqkibqy3GTE) Another limitation is that FFO is a non-GAAP measure, meaning its calculation may vary slightly between REITs despite NAREIT's guidelines, which can make direct comparisons challenging without careful scrutiny of each company's specific adjustments.[^14^](https://ir.centerspacehomes.com/corporate-overview/press-releases/news-details/2023/Centerspace-Announces-Financial-and-Operating-Results-for-the-Year-Ended-December-31-2022-and-Provides-2023-Financial-Outlook/) Furthermore, FFO is often considered a "levered" metric because it is calculated after interest expenses, meaning it reflects the impact of a REIT's debt structure. It also does not serve as a measure of overall [cash flow](https://diversification.com/term/cash-flow) or liquidity. ## FFO Per Share vs. EPS FFO per share and [Earnings Per Share](https://diversification.com/term/earnings-per-share) (EPS) are both per-share profitability metrics, but they serve different purposes and are applied to different types of companies. For most standard corporations, EPS, derived directly from GAAP net income, is the primary indicator of per-share earnings. However, for REITs, FFO per share is generally considered a more accurate and relevant measure. The key difference lies in the treatment of [depreciation](https://diversification.com/term/depreciation) and gains/losses from asset sales. GAAP mandates the depreciation of real estate assets, which, for a REIT, is a substantial non-cash expense that reduces reported net income and, consequently, EPS. This can artificially depress a REIT's profitability, even if its properties are appreciating in market value.[^12^](https://www.youtube.com/watch?v=-vkEg5mU-k0), [^13^](https://www.realized1031.com/blog/what-is-a-good-ffo-for-a-reit) FFO addresses this by adding back real estate-related depreciation and [amortization](https://diversification.com/term/amortization) to net income. It also excludes one-time gains or losses from the sale of properties, focusing solely on the recurring income generated from the REIT's operational portfolio.[^11^](https://www.sofi.com/learn/content/what-is-ffo/) Therefore, while EPS reflects a company's overall profitability under strict accounting rules, FFO per share provides a more tailored view of a REIT's core operating performance and its capacity to generate distributable [cash flow](https://diversification.com/term/cash-flow) for dividends, which is fundamental to the REIT business model.[^10^](https://breakingintowallstreet.com/kb/reit-modeling/funds-from-operations-ffo/) Investors analyzing REITs typically prioritize FFO per share over EPS due to its more insightful representation of the underlying business. ## FAQs **Q: Why is FFO per share used for REITs instead of traditional EPS?** A: FFO per share is preferred for [Real Estate Investment Trust](https://diversification.com/term/real-estate-investment-trust)s (REITs) because it adjusts for significant non-cash expenses like [depreciation](https://diversification.com/term/depreciation) and non-recurring gains/losses from property sales, which can distort traditional [Earnings Per Share](https://diversification.com/term/earnings-per-share) (EPS) and make it less representative of a REIT's actual cash-generating ability from its ongoing operations.[^8^](https://www.realized1031.com/blog/what-is-a-good-ffo-for-a-reit), [^9^](https://www.sofi.com/learn/content/what-is-ffo/) **Q: Is FFO per share a GAAP measure?** A: No, FFO per share is a non-GAAP financial measure. It was developed by NAREIT to provide a supplemental metric specifically for REITs, but it is not formally recognized under [Generally Accepted Accounting Principles](https://diversification.com/term/generally-accepted-accounting-principles).[^6^](https://www.wallstreetprep.com/knowledge/ffo-funds-from-operations/), [^7^](https://www.sofi.com/learn/content/what-is-ffo/) **Q: What does a high FFO per share indicate?** A: A high or consistently growing FFO per share generally indicates that a REIT is effectively generating strong operational cash flows from its property portfolio. This suggests a healthy underlying business and a greater capacity to cover and potentially increase its [dividend](https://diversification.com/term/dividend) payouts to shareholders.[^4^](https://www.hellodata.ai/help-articles/ffo-meaning-real-estate), [^5^](https://www.re-leased.com/terms/funds-from-operations) **Q: How does FFO per share relate to dividends?** A: FFO per share is a key indicator of a REIT's ability to pay dividends. Since REITs are required to distribute a high percentage of their taxable income, investors often compare the FFO per share to the dividend per share to assess the sustainability of the dividends.[^2^](https://breakingintowallstreet.com/kb/reit-modeling/funds-from-operations-ffo/), [^3^](https://www.fool.com/terms/f/ffo/) **Q: What is Adjusted Funds From Operations (AFFO) and how does it differ from FFO?** A: [Adjusted Funds From Operations](https://diversification.com/term/adjusted-funds-from-operations) (AFFO) is a refinement of FFO. It attempts to provide an even more accurate measure of a REIT's distributable cash flow by subtracting recurring [Capital Expenditures](https://diversification.com/term/capital-expenditures) (maintenance CapEx) and sometimes other non-cash adjustments like straight-line rent. FFO does not deduct these recurring capital expenditures.[^1^](https://www.investing.com/academy/analysis/funds-from-operations/)