Today, when it comes to accessing the performance of your REIT assets, one key factor to consider is FFO. “FFO” is a term that stands for Funds from Operations. It focuses on assessing the cash generated from your Real Estate Investment Trust (REIT). FFO is pretty important for real estate financial modeling, as it helps investors to calculate the cash flow from the operations of a REIT.
That said, one effective way to understand how accessing the performance of REIT with FFO works is by enrolling in the right real estate financial modeling course. A good example is this Real Estate Analyst course, a micro-degree that’ll provide you with the analytical skills necessary to use FFO the right way. Read on to discover how Funds from Operations (FFO) work for measuring REIT performance:
What exactly is Funds from Operations (FFO)?
Net income and earnings per share are two essential factors that investors often use to access the performance of their stocks. Unfortunately, these metrics might not be effective when it comes to accessing the value of real estate investment trusts.
Instead, an effective approach involves the use of FFO. FFO works by helping to measure and value the cash flow from your REIT operations. This approach will assist your company to measure the following things:
- Your net amount of cash
- Equivalents cash flow into your portfolio (usually from regular, ongoing business operations)
So, how exactly can FFO be used to calculate the value of REIT operations’ cash flow?
To calculate the value of cash flow, you need the following factors:
- Net income (check the bottom of your income statement) (N)
- Depreciation (D)
- Amortization (A)
- Losses on property sales (L)
- Gains on sales of assets (G)
- Interest income (I)
To obtain the FFO value, all you need is to add the net income to depreciation, amortization, and losses from property sales. Next, you will have to deduct gain from property sales and interest income from the value gotten.
Mathematically, FFO can be calculated with the following formula:
FFO = Net Income + (Depreciation + Amortization + Losses on asset sales) – (Gains on asset sales + Interest income)
Is FFO a good metric to consider when evaluating REITs?
There are a few reasons why using Funds from Operations for assessing the value of your REITs is worth it. FFO in real estate financial modeling is pretty reliable because it focuses on more factors when compared to other conventional REIT valuation methods. It uses the net income as the baseline for the calculation but doesn’t account for depreciation in assets. Instead, it adds the depreciation value back to the net income. This is great because most real estate investments tend to go up in value with time.
Check out this Real Estate Analyst course today
To better understand how Funds from Operations or FFO work for REIT valuation, you may want to check this Real Estate Analyst course. This course will also help you better understand a lot of other things regarding real estate investment, REIT modeling, and REIT valuation.