Funds From Operations is a REIT earnings measure that adds real-estate depreciation back to net income and strips out gains or losses from property sales.
Published by Quintessentia Network Inc. · Updated 17 July 2026 · Sources & disclosures
Formula
FFO = Net income + real-estate depreciation & amortization − gains on property sales + losses on property sales
What it is
Under US accounting rules, buildings must be depreciated — written down a little each year as a non-cash expense, as if they steadily wear out. That charge is large for a property company, so reported net income can look small even while the buildings hold or gain value. Funds From Operations, defined by Nareit (the US REIT trade association), adds real-estate depreciation and amortization back to net income and strips out one-off gains or losses from selling properties, aiming to show the recurring earnings of the property portfolio. FFO is not a GAAP measure, so the exact adjustments a company made come from its own reconciliation.
Why it matters
FFO explains a puzzle beginners hit early: a REIT's distribution can look far larger than its reported earnings, and non-cash depreciation rather than a real cash cost is often much of the gap. FFO also makes property companies comparable — price divided by FFO per share is the sector's rough analogue of the P/E ratio. What FFO does not do is subtract the money spent keeping buildings leased and standing, so it overstates the cash a REIT truly has left over; AFFO exists to address that. And because FFO is non-GAAP, the reconciliation to net income in the filing is where its real contents can be checked.
How it's calculated
Start with net income as reported under US GAAP. Add back depreciation and amortization on real estate. Subtract gains from sales of depreciable property, and add back losses on those sales. Under the Nareit definition, impairment write-downs of depreciable real estate are also added back, and a company's share of FFO from joint ventures and partnerships is included on the same basis. Reporting FFO is not mandatory, but a company that does present it must also show a reconciliation to the nearest GAAP measure, because FFO is non-GAAP. FFO per share divides FFO by diluted shares — for many REITs, including operating-partnership units exchangeable into shares.
Cross-border note. US REITs report FFO under the Nareit definition, built on US GAAP, where buildings are depreciated. Canadian REITs report under IFRS and mostly carry properties at fair value rather than depreciating them, so little depreciation exists to add back; their FFO instead removes fair-value changes on investment properties, per REALPAC's guidance. Same name, different starting point — the two are not directly comparable.
FAQ
Is FFO the same as cash flow?
No. FFO starts from net income and reverses non-cash depreciation, but it is not the same as operating cash flow on the cash flow statement — it ignores working-capital swings, and it does not deduct the recurring spending needed to keep buildings maintained and leased. AFFO (Adjusted FFO) makes that second deduction. FFO is best read as a depreciation-adjusted earnings measure for property companies, not as spendable cash.
Why not just use net income for a REIT?
US accounting rules depreciate buildings on a fixed schedule, as though they wear out steadily. That is a large non-cash charge, while real property may hold or gain value over the same period, so depreciation can push reported net income well below the portfolio's recurring economics. FFO removes that particular distortion. This does not make net income wrong or useless — the two measures answer different questions, and FFO leaves out real costs that net income captures.
Can two REITs' FFO figures be compared directly?
Only with care. FFO is non-GAAP, so definitions vary: some companies report 'core FFO' or 'normalized FFO' with extra adjustments for items they consider one-off. The Nareit definition is the common reference point, and each company's required reconciliation to net income shows what was actually added back or removed. Comparing the headline labels alone, without reading the reconciliations, can mislead.