Net income understates a REIT’s real operating performance because of real estate’s outsized depreciation charges — FFO adjusts for that distortion.
How it works
Adding back depreciation and amortization to net income, then subtracting any gains from property sales, gives FFO — the REIT industry’s standard alternative earnings measure.
What this does not include
This does not include AFFO (Adjusted FFO), a further refinement many analysts prefer that also subtracts recurring capital expenditures needed to maintain the properties, giving an even closer approximation of true distributable cash flow.
How to use this calculator
- Enter net income, depreciation and amortization, and gains on property sales.
Frequently asked questions
Why is real estate depreciation considered misleading?
Straight-line depreciation for tax and accounting purposes assumes assets steadily lose value, but well-maintained real estate often holds or gains value over time — the opposite of what depreciation implies.
Is FFO the same as cash flow from operations?
No — FFO is an earnings-based metric derived from net income with specific real-estate-industry adjustments, distinct from the cash flow statement’s operating cash flow line.
Why exclude gains on property sales from FFO?
Because they’re one-time, non-recurring events tied to a specific asset sale, not part of the REIT’s ongoing, repeatable operating performance that FFO is meant to capture.
