Which financial metric is commonly used to evaluate a REIT's performance?

Funds From Operations (FFO) is a critical financial metric used to evaluate a REIT's performance. This metric provides a clearer picture of a REIT's profitability and cash flow by stripping away the effects of depreciation and gains or losses on the sale of properties, which can distort the overall profitability.

FFO essentially reflects the cash generated from the REIT's operations and is calculated by taking the net income and adding back depreciation and amortization, as well as any losses on sales of properties. This measure is particularly relevant for real estate because it accounts for the unique financial structures and asset longevity within the industry, allowing investors to gain insights into the recurring income a REIT is generating from its core operations.

Being able to focus on cash flow from real estate operations helps investors assess a REIT's ability to pay dividends and finance growth, making FFO a widely accepted benchmark in the real estate investment sector. Thus, using FFO facilitates informed investment decisions regarding the performance and financial health of a REIT.