How this calculator works
Real estate investment trusts spend heavily on buildings that wear out slowly, so historical-cost depreciation can depress reported earnings even when the portfolio is performing well. Nareit, the industry association, created funds from operations in 1991 as a supplement to net income. FFO adds back depreciation and amortization of real estate and removes gains and losses from selling property, because a sale is a portfolio decision rather than an operating result. It is not a substitute for net income or cash flow, and REITs calculate variants such as core FFO differently, so compare the same definition across companies.
Formula
FFO = net income + depreciation and amortization of real estate - gains from property sales + losses from property sales. Net income = FFO - depreciation and amortization + gains from property sales - losses from property sales.
Worked example
Net income of $200,000 plus $80,000 of depreciation, less $30,000 of gains on property sales and plus $10,000 of losses gives FFO of $260,000. Removing the sale effects isolates the earnings from operating the properties.
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Frequently asked questions
Why are gains on sales subtracted?
A gain on sale is a one-off result of deciding to sell an asset, not part of operating the portfolio. Including it would make FFO jump whenever management sells a building, which says little about recurring earning power.
Does FFO include interest income?
Nareit does not adjust for interest income, because it is already part of net income and is not a real estate depreciation or sale item. The same applies to interest expense, which stays deducted in FFO.
How does FFO differ from cash flow from operations?
FFO is an earnings-based measure that removes non-cash depreciation and sale effects. Cash flow from operations starts from net income and adjusts for changes in working capital and other non-cash items. FFO also excludes capital spending on the properties, so it can overstate distributable cash if maintenance capital is high.