Funds from Operations. Funds from Operations or FFO is one of the main metrics used to understand and analyze REITs. Like EBIT or EBITDA, it came about as investors and analysts began looking for a better way to understand a REIT's income statement. As REITs are very asset intensive and growth is driven by assets, one result is that there are massive amounts of depreciation each year. The problem is that with a manufacturing company, or even a technology company, you can make the case that as assets are being utilized, they will likely lose value over time. However, in real estate, that is not necessarily true. Most assets will appreciate over time, and so the depreciation that is on the income statement, in addition to being a non-cash charge, is also very misleading. In addition, another item that appears on the income statement frequently, due to the recycling of older assets, are gains and losses on real estate sales. These can also be misleading as they represent purely accounting gains and losses and not actual cash flow. As a result, an organization in the US called Nareit or the National Association of REITs adopted the term Funds from Operations, which addresses both depreciation and gains and losses on real estate transactions. It has been formally accepted by the SCC and is now reported in financial statements. It is not, however, a gap term, and there is still some non-uniformity in how it is calculated. A standard definition of FFO is net income plus depreciation and amortization plus losses minus gains on the sale of real estate assets. Again, please keep in mind that there are now many versions of this metric floating around similar to EBIT and EBITDA. One good question is why we begin this calculation with net income and not operating income. The name of the metric is Funds from Operations. The original analytical purpose behind FFO was to see if REITs were generating enough cash to pay dividends. Since dividends come after interest payments, we need to start with an earnings number that is also after interest. Now, since most REITs don't pay taxes, tax is not an issue.