Funds From Operations (FFO) is a key financial metric used primarily to evaluate the operating performance of Real Estate Investment Trusts (REITs) and other property-based companies. It measures the cash generated from core business activities ó such as rent collection and property management ó and excludes non-cash or non-recurring items that can distort a companyís profitability. FFO provides a more accurate picture of a REITís ability to generate sustainable income from its assets.

The formula to calculate Funds From Operations is as follows:

FFO = Net Income + Depreciation & Amortization ñ Gains from Property Sales

This adjustment is important because traditional accounting methods require real estate assets to be depreciated over time, even though property values typically appreciate. By adding back depreciation and amortization, FFO neutralizes these non-cash charges. Similarly, it subtracts any gains from the sale of properties to focus on recurring income rather than one-time profits.

For example, if a REIT reports a net income of ?100 crore, depreciation of ?20 crore, and a gain on property sale of ?10 crore, its FFO would be ?110 crore (?100 + ?20 ñ ?10). This figure better reflects the cash flow potential of the REITís ongoing operations.

Investors and analysts often use FFO per share ó calculated by dividing total FFO by the number of outstanding shares ó to assess a REITís performance and compare it with peers. It also helps determine whether dividend payouts are sustainable since REITs are required to distribute a significant portion of their income to shareholders.

In summary, Funds From Operations (FFO) is a crucial metric for assessing the true profitability and cash-generating capacity of real estate companies. It eliminates accounting distortions, offering investors a clearer view of recurring earnings and long-term financial health.