Which of the following best describes "Funds From Operations" (FFO)?

"Funds From Operations" (FFO) is a key financial metric specifically used in the context of Real Estate Investment Trusts (REITs) to evaluate the cash generation capabilities of the organization. This measure reflects the cash generated from operations, which is vital for assessing the operating performance and profitability of a REIT.

FFO is typically calculated by taking net income and adding back depreciation and amortization, along with adjustments for any gains or losses from the sale of properties. This adjustment is crucial as it acknowledges that real estate often appreciates in value, and the depreciation reported in financial statements does not accurately represent the cash flow situation of the REIT.

Understanding FFO is important for investors and analysts as it provides a clearer insight into a REIT’s ability to generate cash that is available for distribution to shareholders, making it a more relevant measure of operational performance compared to traditional profitability metrics such as net income.