Significance of Funds from Operations (FFO)
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Core Ideas
1) Profitability: The funds from operations (FFO) metric was designed specifically to capture the core operating performance of eREITs. Contrary to net income, non-cash expenses, non-recurring items, cash flows reflecting financing rather than operational choices and value accruing to external partners rather than shareholders are removed.
2) Dividends & debt: An eREIT’s ability to pay sustainable dividends and reliably service its debt depends on FFO rather than net income.
3) Valuation: Standard valuation and analysis techniques (e.g. DCF method, dividend payout and debt ratios) can be adapted to eREITs by basing them on FFO rather than net income.