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![]() ![]() ![]() ![]() Funds From Operations Exampleįor an example of an REIT FFO calculation, let's say XYZ Property Group had $5M in net income, $1M in depreciation expenses, $500K in amortization expenses, $250K in interest income, $1M in gains of the sales of assets, and no losses on the sale of assets. The FFO measure captures this tendency by adding back the depreciation that was subtracted in calculating net income. Important: Real estate assets often appreciate in value, as opposed to depreciating. Gains on asset sales is a field typically found in the "other income" section, while interest income is commonly included under revenues. Interest income, which also contributed towards net income, are also subtracted. Gains on sales of assets is adjusted, similarly to losses on sales, but by way of subtraction. Step 3: Subtract Gains on Sales of Assets & Interest Income These values were deducted in reaching net income, and by adding these values back we are essentially adjusting them out of the calculation of FFO. These items can be found in the operating expenses section of the interest statement. Step 2: Add Back Depreciation, Amortization and Losses on Sales of Assets This is the REIT's profit, or "bottom line," which can be found at the bottom of the income statement. If you do need to calculate funds from operations, start by collecting all data needed from an income statement. In many cases, investors will not need to do their own FFO calculations because a REIT's FFO is typically included in the footnotes section of the income statement. The calculation for FFO can be made by retrieving accounting data found on the income statement and inserting this data into the FFO formula.įFO = Net Income + Depreciation + Amortization + Losses on Sales of Asset - Gains on Sales of Assets - Interest Income How To Calculate FFO Furthermore, FFO is not based upon Generally Accepted Accounting Principles (GAAP) FFO originates from the National Association of Real Estate Investment Trusts (NAREIT). Important: FFO should not be confused with cash flow from operations, which is found on the company's statement of cash flows. Interest income is also removed in calculating FFO. Since real estate companies commonly use FFO as a benchmark for performance, investors may also use FFO to evaluate a REIT equity investment before buying shares.įFO is a useful tool for evaluating performance of an REIT because it only includes items central to business operations, and excludes non-cash items like depreciation and amortization, while also adjusting-out gains and losses on property sales. FFO is commonly used to evaluate the operating performance of a real estate investment trust (REIT), a business that primarily operates income-producing real property. Funtap/iStock via Getty Images What Is Funds From Operations (FFO)?įunds from operations (FFO) is a measure of the amount of cash flow generated by a company's business operations. ![]()
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