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How to calculate ffo from cfo?

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Answer # 1 #

In fact, the measurement itself was developed by NAREIT, the REIT lobby, in an attempt to reconcile accounting (GAAP) net income to a measure of profit most useful for the analysis of REITs.

Today, most REITs provide FFO reconciliations in their filings. Here is an example of a funds from operation reconciliation as reported by BRE Properties in their 10K:

Unlike many non-GAAP measurements, FFO does have a quasi “official” formula. Most REITs adhere to NAREIT’s definition and provide FFO reconciliations in their filings:

Though often misunderstood, FFO is not designed to be a measure of cash flow because it excludes working capital, capital expenditures and other cash flow adjustments

Funds from operations is similar – but not identical – to cash from operations – it is a reconciliation starting with net income and adds back items similarly to the indirect cash flow method of arriving at cash from operations.

However, it is NOT designed to be a measure of cash flow because it excludes working capital, capital expenditures and other cash flow adjustments.

By ignoring working capital it has similarities to EBITDA – but it’s not exactly EBITDA either – the big difference is that EBITDA attempts to capture profitability from operations, while FFO is levered and captures the affect of taxes and preferred dividends.

While net operating income (NOI) is a very useful profit measure for analyzing real estate down to the property level, it ignores general & administrative expenses, taxes and leverage (interest expense) – all are expenses that FFO does factor into its calculation.

“Because real estate values have historically risen or fallen with market conditions, management considers FFO [which ignores accounting depreciation and gains/losses] an appropriate supplemental performance measure”

FFO is a superior metric over EBITDA, net income, or cash from operations because REITs have distinct characteristics that make it harder to analyze if investors solely rely on the other aforementioned common measures of profits.

Specifically, REITs are highly levered, generate significant non cash income / losses from property sales.  In BRE Properties’ 10K, they provide the rationale for using FFO: “Because real estate values have historically risen or fallen with market conditions, management considers FFO [which ignores accounting depreciation and gains/losses] an appropriate supplemental performance measure”

Over time, analysts and REITs themselves have begun using slightly altered versions of FFO, generally called “adjusted FFO” or AFFO.  The reason for this is that FFO included things like nonrecurring items and notably omitted key outflows like capital expenditures.

While there remains some inconsistency across how these are calculated, the most common calculation is:

While NAREIT recognizes that many analysts add to the official definition of FFO in this way, it is not an officially recognized metric by NAREIT.

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Konark Awdhut
SUPERVISOR GREASE REFINING
Answer # 2 #

Funds from operations (FFO) is the actual amount of cash flow generated from a company’s business operations.

To calculate the net FFO, one must add the non-cash expenses or losses that are not actually incurred from the operations, such as depreciation, amortization, and any losses on the sale of assets, to net income. Then subtract any gains on the sale of assets and interest income.

FFO is commonly used by companies that engage in Real Estate Investment Trusts (REITs), a business that primarily operates on income-generating real estate transactions. REIT companies are involved in commercial real estate – selling, leasing, and financing office space and apartment buildings, warehouses, hospitals, shopping centers, hotels, and timberlands.

Here is the formula to calculate FFO:

FFO = Net Income + (Depreciation expense + Amortization expense + Losses on sale of assets) – (Gains on sale of assets + Interest income)

For example:

Big Time Real Estate Company declared a net income of $10M last year, a depreciation expense of $2M, an interest amortization expense of $1M, an interest income of $500,000, and a gain on the sale of various assets of $1M. The actual cash flow from business operations (FFO) for Big Time Real Estate Company comes out to $11.5M.

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These finance terms are costs that need to be added back to net income to determine the actual earnings generated from the company’s core business operations. Non-operating expenses are excluded from the main business functions and, therefore, should be added back to net income.

Depreciation – Depreciation is an expense allocated to cover capital expenditures (the acquisition of Property Plant and Equipment PP&E, or any fixed assets).  Depreciation is a non-cash expense because it is only created for accounting purposes and does not match the timing of when cash was used to buy the asset.

Amortization – Loan and capital expense payments spread out over a specific period of time.

Losses on the sale of assets – Loss is incurred when an asset is eliminated, and the selling price is lower than the net book value of the asset sold. This is another non-cash expense.

Gains on the sale of an asset and interest income are deducted from net income to calculate the actual cash flow from operations. The earnings are not from the main operations of the business.

Gains on the sale of assets – Gain obtained when an asset is sold, and the selling price is higher than the net book value of the asset.

Interest income – Earnings from the interest of marketable securities, long-term investments, or cash maintained in interest-paying checking accounts.

FFO measures the business’s operational efficiency or performance, especially for most REIT companies. The reason for this is that real estate values are proven to rise and fall with macroeconomic conditions. Any operating results computed when using the cost accounting method do not usually serve as an accurate measurement of performance.

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Rajan Goyal
SUPERVISOR CEMETERY WORKERS
Answer # 3 #

Funds from operations (FFO) is a measure of the amount of cash flow generated by a company's business operations. 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.

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.

FFO 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. Interest income is also removed in calculating FFO.

The calculation for FFO can be made by retrieving accounting data found on the income statement and inserting this data into the FFO formula.

The FFO formula is:

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.

If you do need to calculate funds from operations, start by collecting all data needed from an income statement.

This is the REIT's profit, or "bottom line," which can be found at the bottom of the income statement.

These items can be found in the operating expenses section of the interest statement. 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.

Gains on sales of assets is adjusted, similarly to losses on sales, but by way of subtraction. Interest income, which also contributed towards net income, are also subtracted. Gains on asset sales is a field typically found in the "other income" section, while interest income is commonly included under revenues.

For 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.

Starting with $5M net income, add $1.5M in depreciation and amortization, then subtract the $1M in gains on the sales of assets and the $250k in interest income. FFO for XYZ Property Group comes out to be $5.25M.

Funds from operations (FFO) is a primary means of gauging how profitable a REIT's operations are and can be used in a similar manner to net income or earnings per share (EPS). Instead of viewing valuation on a Price/Earnings basis, REIT stocks are usually viewed on a Price/FFO basis.

A main reason that FFO is better for measuring performance of a REIT, compared to using net income or EPS, is that adjusts-out depreciation and amortization expenses. Real estate assets are generally appreciating assets, which means that depreciation expense may not be truly indicative economically. Adding back depreciation usually provides a more clear picture of REIT financial performance.

When evaluating funds from operations, a REIT investor may compare current FFO with the historical FFO numbers for the same company. They may also use FFO in conjunction with other financial metrics, such as debt-to-income ratio to evaluate REITs. REIT investors may also use a variation of FFO called 'adjusted funds from operations', or AFFO.

Adjusted funds from operations (AFFO) is a related metric that considers a REIT's capital expenditures (capex). Considering capex adds another level of detail in terms of measuring actual cashflow, as compared to FFO.

The calculation of AFFO for a particular REIT may not be standardized, given some variability in defining the capex number. AFFO can effectively be used to better measure a REIT's ability to pay dividends from its net earnings.

FFO and EBITDA are similar in that both metrics are used as an alternative to net income, and both adjust-out depreciation and amortization. The main difference between FFO vs EBITDA is that FFO is used to measure free cash flow from operations while EBITDA attempts to measure profitability from operations.

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Yossi Bluck
Engine Driver
Answer # 4 #

FFO is calculated by adding depreciation, amortization, and losses on sales of assets to earnings and then subtracting any gains on sales of assets and any interest income.

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Abner Plotkin
Chief Administrative Office
Answer # 5 #

In fact, the measurement itself was developed by NAREIT, the REIT lobby, in an attempt to reconcile accounting (GAAP) net income to a measure of profit most useful for the analysis of REITs.

Today, most REITs provide FFO reconciliations in their filings. Here is an example of a funds from operation reconciliation as reported by BRE Properties in their 10K:

Unlike many non-GAAP measurements, FFO does have a quasi “official” formula. Most REITs adhere to NAREIT’s definition and provide FFO reconciliations in their filings:

Though often misunderstood, FFO is not designed to be a measure of cash flow because it excludes working capital, capital expenditures and other cash flow adjustments

Funds from operations is similar – but not identical – to cash from operations – it is a reconciliation starting with net income and adds back items similarly to the indirect cash flow method of arriving at cash from operations.

However, it is NOT designed to be a measure of cash flow because it excludes working capital, capital expenditures and other cash flow adjustments.

By ignoring working capital it has similarities to EBITDA – but it’s not exactly EBITDA either – the big difference is that EBITDA attempts to capture profitability from operations, while FFO is levered and captures the affect of taxes and preferred dividends.

While net operating income (NOI) is a very useful profit measure for analyzing real estate down to the property level, it ignores general & administrative expenses, taxes and leverage (interest expense) – all are expenses that FFO does factor into its calculation.

“Because real estate values have historically risen or fallen with market conditions, management considers FFO [which ignores accounting depreciation and gains/losses] an appropriate supplemental performance measure”

FFO is a superior metric over EBITDA, net income, or cash from operations because REITs have distinct characteristics that make it harder to analyze if investors solely rely on the other aforementioned common measures of profits.

Specifically, REITs are highly levered, generate significant non cash income / losses from property sales.  In BRE Properties’ 10K, they provide the rationale for using FFO: “Because real estate values have historically risen or fallen with market conditions, management considers FFO [which ignores accounting depreciation and gains/losses] an appropriate supplemental performance measure”

Over time, analysts and REITs themselves have begun using slightly altered versions of FFO, generally called “adjusted FFO” or AFFO.  The reason for this is that FFO included things like nonrecurring items and notably omitted key outflows like capital expenditures.

While there remains some inconsistency across how these are calculated, the most common calculation is:

While NAREIT recognizes that many analysts add to the official definition of FFO in this way, it is not an officially recognized metric by NAREIT.

While FFO is used widely when analyzing REITs, the traditional property-level real estate measures of profit are also very important, namely:

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So Scott
WEIGHT TESTER