FFO Calculator (Funds From Operations)

FFO is what NAREIT introduced in 1991 to fix REIT financial statements. Under GAAP, real estate is depreciated straight-line over 27.5 to 39 years. But buildings often appreciate over time rather than depreciate. The depreciation expense on the income statement makes net income artificially low and obscures actual cash earnings.

The formula (NAREIT definition):

FFO = Net Income + Depreciation & Amortization on Real Estate - Gains on Property Sales + Losses on Property Sales

Some companies also adjust for impairments and joint venture share of FFO. The variations are small; the core idea is constant: take net income, undo the depreciation that does not reflect economic reality, undo the one-time effects of property sales.

Why subtract gains on property sales. Selling a building for more than book value generates a one-time gain. That is non-recurring income, not from operations. Excluding it gives a cleaner picture of what the REIT earns from operating the portfolio. (Same logic applied to losses, in reverse.)

FFO per share is the headline number. Most REITs report FFO per share quarterly. P/FFO is the equivalent of P/E for REITs — apartment and industrial REITs typically trade at 15-22× FFO; retail and office often trade at 10-15× FFO; healthcare 12-18×; data centers 18-30×.

FFO vs AFFO. FFO is the broadly-defined NAREIT figure. AFFO (Adjusted FFO) goes further by subtracting recurring capex and other items. Both are used; AFFO is generally considered more conservative for dividend coverage analysis.

Common mistakes.

• Forgetting depreciation on non-real-estate assets (computers, vehicles) — those should NOT be added back. Only RE depreciation.
• Confusing gains on debt extinguishment with property gains. Debt extinguishment goes through net income but is separate from property sale gains.
• Adding back amortization of in-place leases. The NAREIT definition includes lease intangible amortization, but some REITs adjust differently.

Worked example. A diversified REIT:

• Net income: $180M
• D&A on real estate: $220M
• Gains on property sales: $15M (sold a building above book value)
• Losses on property sales: $0

FFO = 180 + 220 - 15 = $385M

If shares outstanding are 100M, FFO per share = $3.85. At a market price of $58, P/FFO = 15.1×.

The “FFO multiple expansion” trade. Apartment REITs often see P/FFO expand when interest rates fall (cheaper financing → higher property values → multiple expansion). Office REITs in the post-COVID era saw P/FFO compression as remote work questioned office demand. The multiple itself reflects the market’s view of forward FFO sustainability.

Reporting nuance. Public REITs report FFO in supplemental disclosures (often a separate document from the 10-Q). Always read the FFO reconciliation table in the supplement to understand what the company is including or excluding. NAREIT compliance is voluntary; some REITs report a non-NAREIT “core FFO” with extra adjustments.