The Funds From Operations (FFO) is a supplemental measure of a real estate company operating performance. FFO is different from corporate "earnings" as typically reported in the financial press. The National Association of Real Estate Investment Trusts, or NAREIT, defines FFO as net income (computed in accordance with generally accepted accounting principles) excluding gains or losses from sales of property or debt restructuring, and adding back depreciation of real estate.
Historically, commercial real estate maintains its residual value to a much greater extent than certain other assets, such as machinery, computers or other personal property. As a result, the current depreciation used for all of these assets in normal earnings measures may actually exceed the real depreciation of commercial real estate, which may in fact appreciate over time. Accordingly, a company with physical assets consisting primarily of commercial real estate may not require as much cash flow as other companies to maintain and replace its physical assets. FFO recaptures that cash flow and presents it as part of a REIT's annual performance.