Funds From Operations Calculator

FFO Calculator

Net Income: dollars

Depreciation and Amortization: dollars

Gains from Property Sales: dollars

Losses from Property Sales: dollars

Interest Income: dollars

1. What is the Funds From Operations Calculator?

Definition: This calculator computes the funds from operations ($ FFO $), a metric used primarily for Real Estate Investment Trusts (REITs) to measure cash generated from core operations, adjusted for non-cash items and certain revenues.

Purpose: Helps investors and analysts evaluate the financial health and cash flow sustainability of REITs, providing a more accurate picture than net income alone.

2. How Does the Calculator Work?

The calculator follows a five-step process to compute FFO:

Formula:

$$ FFO = NI + D\&A + Losses - Gains - II $$

Where:

$ FFO $: Funds From Operations (dollars)
$ NI $: Net Income (dollars)
$ D\&A $: Depreciation and Amortization (dollars)
$ Losses $: Losses from Property Sales (dollars)
$ Gains $: Gains from Property Sales (dollars)
$ II $: Interest Income (dollars)

Steps:

Step 1: Determine $ NI $. Input the net income from the income statement.
Step 2: Determine $ D\&A $. Input the depreciation and amortization from the income statement.
Step 3: Determine $ Losses $ and $ Gains $. Input the losses and gains from property sales.
Step 4: Determine $ II $. Input the interest income from non-core activities.
Step 5: Calculate $ FFO $. Add $ NI $, $ D\&A $, and $ Losses $, then subtract $ Gains $ and $ II $.

Note: The formula used here follows the example provided, subtracting interest income. Some definitions (e.g., NAREIT) may exclude interest income differently; this calculator adheres to the given specification.

3. Importance of FFO Calculation

Calculating FFO is crucial for:

REIT Performance: Provides a standardized measure of cash flow for real estate investment trusts, excluding non-operational items.
Valuation Analysis: Helps assess the ability to sustain dividends and support property investments.
Financial Comparison: Enables comparison of REITs by focusing on operational cash flow.

4. Using the Calculator

Example 1 (REIT Alpha): $ NI = \$500,000 $, $ D\&A = \$150,000 $, $ Gains = \$125,000 $, $ Losses = \$80,000 $, $ II = \$75,000 $:

Step 1: $ NI = \$500,000 $.
Step 2: $ D\&A = \$150,000 $.
Step 3: $ Gains = \$125,000 $, $ Losses = \$80,000 $.
Step 4: $ II = \$75,000 $.
Step 5: $ FFO = 500,000 + 150,000 + 80,000 - 125,000 - 75,000 = \$530,000 $.
Result: $ FFO = \$530,000 $.

An FFO of $530,000 indicates strong operational cash flow for REIT Alpha.

Example 2: $ NI = \$1,000,000 $, $ D\&A = \$200,000 $, $ Gains = \$300,000 $, $ Losses = \$50,000 $, $ II = \$100,000 $:

Step 1: $ NI = \$1,000,000 $.
Step 2: $ D\&A = \$200,000 $.
Step 3: $ Gains = \$300,000 $, $ Losses = \$50,000 $.
Step 4: $ II = \$100,000 $.
Step 5: $ FFO = 1,000,000 + 200,000 + 50,000 - 300,000 - 100,000 = \$850,000 $.
Result: $ FFO = \$850,000 $.

An FFO of $850,000 reflects solid cash flow after adjustments.

Example 3: $ NI = \$300,000 $, $ D\&A = \$80,000 $, $ Gains = \$50,000 $, $ Losses = \$20,000 $, $ II = \$30,000 $:

Step 1: $ NI = \$300,000 $.
Step 2: $ D\&A = \$80,000 $.
Step 3: $ Gains = \$50,000 $, $ Losses = \$20,000 $.
Step 4: $ II = \$30,000 $.
Step 5: $ FFO = 300,000 + 80,000 + 20,000 - 50,000 - 30,000 = \$320,000 $.
Result: $ FFO = \$320,000 $.

An FFO of $320,000 suggests moderate operational cash generation.

5. Frequently Asked Questions (FAQ)

Q: What is funds from operations?
A: Funds from operations ($ FFO $) is a metric used by REITs to measure cash generated from core operations, adjusted for non-cash items and certain revenues.

Q: Why adjust for gains and losses from property sales?
A: These adjustments exclude one-time gains or losses to focus on recurring operational cash flow.

Q: Can FFO be negative?
A: Yes, if net income and losses are insufficient to offset depreciation, gains, and interest income, $ FFO $ can be negative.