Why do REITs use Funds From Operations as a performance measure?
Funds From Operations is another way for REITs to measure performance, taking into account special consideration that must be given to the real estate assets. Since real estate maintains its residual value to a much greater extent than computers or machinery, current depreciation used in normal earnings measures overstates the real depreciation of REIT assets. REITs do not require as much cash flow to maintain and replace their physical assets, which may in fact be appreciating. FFO recaptures that cash flow and presents it as part of a REIT’s annual financial performance. Many securities analysts judge a REIT’s performance according to its FFO per share growth.
