Distinguishing Revenue and FFO
Distinguishing Revenue and FFO
Revenue and FFO (Funds from Operations) are two financial metrics used to assess the performance and financial health of real estate investment trusts (REITs) and other real estate-related businesses. While they both provide important insights into the company's operations, they represent different aspects of the financial picture.
Revenue:
Revenue, also known as total revenue or total income, is a straightforward financial metric that represents the total amount of money generated by a company from its primary business activities. For a real estate company, revenue typically comes from sources like rental income, leasing activities, property management fees, and other operating income directly related to the company's core real estate operations.
Revenue is calculated by adding up all the income generated from these activities during a specific period, such as a quarter or a year, and it is reported on the company's income statement. It is an essential indicator of a company's top-line performance and its ability to generate income from its real estate assets.
FFO (Funds from Operations):
FFO is a specialized financial metric specific to REITs and real estate companies. It is a more comprehensive measure of the company's operating performance, as it adjusts net income for certain non-cash items and real estate-related depreciation. FFO is considered a more accurate representation of a REIT's cash flow potential, as it excludes non-operating items and reflects the cash generated from core operations.
The formula to calculate FFO is generally:
FFO = Net Income + Depreciation of Real Estate - Gains/Losses from Sales of Properties
Since real estate companies often have significant non-cash expenses like depreciation, which reduces their net income, FFO provides a more accurate picture of their cash flow generation ability. Additionally, gains or losses from selling properties are excluded from FFO because they are considered one-time events and not indicative of the company's ongoing operations.
In summary, while revenue represents the total income generated from core real estate activities, FFO provides a more accurate measure of a real estate company's cash flow potential by adjusting net income for non-cash items and excluding certain one-time gains/losses. Both metrics are important for investors and analysts to evaluate the financial performance and stability of real estate companies.
See Nareit Funds From Operations White Paper - 2018 Restatement (Dec. 2018) (discussing the use of non-GAAP reporting measures within the context of the REIT industry's use of FFO and providing that: "Nareit’s definition of FFO does not specify whether FFO should be attributed to the company or to common shareholders. In 2015, in a series of Comment Letters issued to REITs[internal citation omitted] , the staff of the Division of Corporation Finance of the SEC raised concerns that, while the great majority of REITs measured FFO in accordance with Nareit’s definition, REIT filings reflected some variations in the securities to which the reported FFO was applicable (e.g., all equity securities, all common shares.) Noting that while each of these metrics may represent FFO as defined by Nareit, the SEC cautioned that accurate labeling with respect to applicable securities is very important.").