How the FFO Calculator works
Funds From Operations (FFO) is the real estate industry's standard measure of operating performance, published by Nareit (the National Association of Real Estate Investment Trusts) as an alternative to GAAP net income. GAAP requires REITs to depreciate their buildings every year, even though well-located, well-maintained real estate often holds or gains value over time. That non-cash depreciation charge can make a profitable REIT look far less profitable than it actually is. FFO corrects for this by adding depreciation and amortization back to net income and removing gains or losses from occasional property sales, leaving a figure that better reflects the cash a company's real estate portfolio actually generates from ongoing operations.
The formula
The standard Nareit definition is:
FFO = Net Income + Depreciation & Amortization + Losses on Sale of Property − Gains on Sale of Property
Depreciation and amortization are added back because they are non-cash accounting charges rather than real cash outflows. Gains from selling property are subtracted (and losses added back) because one-off sale transactions are not part of a REIT's recurring operating income and would otherwise distort period-to-period comparisons. This calculator implements that core formula; it does not adjust for items such as impairment write-downs or a company's share of unconsolidated joint ventures, which some REITs include in their own FFO reconciliations.
FFO per share and the payout ratio
Once total FFO is known, dividing it by the diluted weighted-average shares (and share-equivalent units) outstanding gives FFO per share — the REIT-industry equivalent of earnings per share, and the figure most often used to size the price-to-FFO valuation multiple. Dividing total dividends paid by FFO gives the FFO payout ratio, which shows what share of operating funds is being distributed to shareholders versus retained for reinvestment, debt reduction, or a buffer against downturns.
Worked example
Take a REIT with $5,000,000 of net income, $3,200,000 of depreciation & amortization, no losses on property sales, and a $400,000 gain on a property sale. FFO = $5,000,000 + $3,200,000 + $0 − $400,000 = $7,800,000. With 10,000,000 diluted shares outstanding, FFO per share = $7,800,000 / 10,000,000 = $0.78. If the REIT paid $2,000,000 in dividends, the payout ratio is $2,000,000 / $7,800,000 ≈ 25.6% — a conservative payout with substantial FFO retained.
Reading the payout ratio
- Under roughly 70-90%: dividends are comfortably covered by operating funds, leaving room for reinvestment or dividend growth.
- 90-100%: the dividend is fully or almost fully funded by FFO, with little cushion if operating performance dips.
- Above 100%: the REIT is distributing more than it generated from operations during the period, which is not sustainable from FFO alone and typically relies on other funding sources.
These are general reference bands, not investment recommendations — sustainable payout levels vary by REIT sector, growth stage, and capital structure.