Funds From Operations (FFO)

Funds from operations is the REIT industry's earnings measure: net income with real estate depreciation added back and gains or losses from property sales stripped out. It exists because GAAP net income is close to useless for REITs — accounting rules depreciate buildings toward zero over decades while well-maintained real estate often holds or gains value, so reported earnings systematically understate what a REIT actually generates.

FFO is the denominator that replaces earnings in REIT valuation: analysts quote P/FFO where they would quote P/E elsewhere, and dividend safety is judged against FFO payout ratios, not earnings payout ratios. A REIT paying out 110% of net income may be paying a comfortable 70% of FFO.

Adjusted FFO (AFFO) goes a step further, subtracting the recurring capital spending — roof repairs, tenant improvements, leasing commissions — that FFO ignores. AFFO is the better proxy for distributable cash, and the FFO-to-AFFO gap widens for property types that chew through maintenance capital.