What It Is:
How It Works/Example:
Using the formula above, we can calculate Company XYZ's FFO as follows:
$2,500,000 + $2,000,000 - $200,000 = $4,300,000
REITs and similar trusts typically disclose FFO in the footnotes to their financial statements (and in many cases in the headlines of their press releases), and they are required to show their calculations.
Why It Matters:
Many analysts prefer to examine FFO instead of net income when measuring a REIT's financial performance. Similar to EPS (earnings per share), FFO per share is a carefully scrutinized metric that is often used as a barometer to gauge a REIT's profitability per unit of shareholder ownership. Meanwhile, the interpretation of price/FFO multiples may generate valuation insights similar to those generated by P/E multiples. As such, FFO is a key driver of share prices.
Though FFO is widely considered to be the most popular method of quantifying a real estate firm's profitability, it's important to remember that FFO can often be susceptible to manipulation, accounting changes, and restatements. Nevertheless, FFO remains the industry standard in determining investment-trust profitability for shareholders.