I am a big investment lover, this one is for those who love to invest in real estate. Before I tell you anything, you tell me that; Do you know what is “Funds from operation”?
I guess you right! Some of you know a bit about it, and some of you don’t have any idea.
Is that I’m sounding true?
Well, I know already that you don’t know actually, that’s why you are reading this.
So, let me give you the idea about the FFO(funds from operation). I will explain you everything, but you have to trust me and come along with me this way.
Come! Dive in with me…!
What Is FFO(funds from operation)?
Funds from the operation: It is a figure generated in the form of cash from the operations or the investment. It is calculated by adding reimbursement and depreciation to earnings, subtracting the profit on sales, which is also referred as the per-share basis.
It is a component of a direct method cash flow system.
How it works actually?
If you want a practical suggestion for this, then I am going to explain you right with the example.
Know the formula first!
( Funds from operation: Net income + Depreciation + Amortization ー Profit on sale of the property )
This is the formula, you fill in your characters and find out the value, that is funds from operation.
Another way to calculate funds from operation is as follows:
( Funds from operation = Net income – Interest Income + Interest expense + Depreciation – profit on asset sales + losses on asset sales )
Let me explain you with the example.
XYZ firm has net income outcome of 400,000 dollars, depreciation of 100,000 dollars, and a profit of 200,000 dollars.
The funds from operation come out to be = 3900,000 dollars.
This is how you calculate ffo(funds from operation)
Funds from the operation concept are compared with the stock price of the company. It can be used in place of price-earning ratio that includes the additional counting factors.
For the analysis of a REIT, the funds from operations concept is needed. It is because when the underlying assets are appreciating in value, the depreciation should not be factored into the operational results, this is a common situation when dealing with real estate assets rather than depreciating.
The funds from operations concept are always a better indicator of the operational results of a business than the net income, but the one thing that you should keep in mind is that; Accounting of the chicanery can impact a variation of the attitude of the financial statements.
Therefore, rather than a single measure that can potentially be twisted, it is always advisable to rely on mixed measurements.
This is how to calculate the ffo(funds from operation)
Even if for some kind of capital expenditures that are recurring in nature, it is nearly possible to fit the formula into it; Depreciation related to recurring expenditures to maintain a property (such as interior painting, carpet replacements, or parking lot resurfacing) should be included in the funds from operation calculation.
This altered format will result in lower profitability figures. This amended report of the concept is known as the adjusted funds from operations. This is all about the ffo(funds from operation).
Breaking the Funds From Operation
Funds from operation are the value or the money generated by the REIT ( Real Estate Investment Interest), but one must not get confused with the REIT cash flow from the operations.
The real estate organizations or the Realtors use the funds from operation as an operational performance benchmark.
The national association real estate investment trust NAREIT establish this figure originally. It is also called as the first gap measure.
Many financial organizations have stated that for presenting the operative result, the funds from operation( FFO) is the best ever overture.
Now, you must be thinking why?
It is because, the real estate world rises and falls with economic conditions, and any result which is calculated with the help of accounting method are not the appropriate measure to calculate the performance.
This is how to break the funds from operation. This is how you can calculate the ffo(funds from operation)
The Concluding Words…
In the above article, we have talked about the FFO(funds from operation). I have not only given you the definition, also I have explained; What actually it is?
I have explained with the two different formulas with the examples. It depends on you, the way you want to calculate the ffo(funds from operation).
If you ask me, I always chose the second option. This is how you do with the funds from operation. Also, you got the idea about; Why it matters and breaking the funds from operation.
This is all about ffo(funds from operation). Think I have tried to my level best to make you understand this. If you have any unanswered questions in your mind, you can ask me without any second thought.
If you have some others hacks, kindly share! You are welcomed.