Funds From Operations (FFO)

A non-GAAP (Generally Accepted Accounting Principles) metric used to measure a company’s recurring operating earnings. FFO is most commonly used to provide investors with a more accurate picture of the operating performance of their real estate or infrastructure company investment. It excludes the impact of certain items, including depreciation and amortization, as well as one-time income or losses from asset sales, that affect a company’s net income for tax purposes.

Exclusion of these items can more accurately reflect income produced from business activities during a certain period and provides a better reflection of a company’s recurring income. It can offer additional insight into a company’s ability to pay and maintain its dividend.

For example, current GAAP depreciation and amortization practice implicitly assumes that the value of assets diminish predictably over time. In actuality, these values rise or fall with market conditions. Depreciation and amortization must be added back to net income to reconcile this issue.