Investment Banking Basics Practice Test

What does Funds From Operations (FFO) for REITs do with depreciation and gains on sale?

FFO adds back depreciation and subtracts gains on sale of properties FFO subtracts depreciation and adds gains FFO ignores depreciation and gains FFO is net income

Correct Answer:

FFO adds back depreciation and subtracts gains on sale of properties

Explanation:

Funds From Operations (FFO) for REITs focuses on recurring operating performance by adjusting GAAP net income for items that distort true cash generation. Depreciation is a non-cash charge that lowers net income but does not affect cash, so FFO adds it back. Gains on the sale of properties come from transactions rather than ongoing operations, so FFO subtracts those gains to avoid inflating earnings from one-time events. This combination shows a clearer picture of how the REIT’s core real estate operations are actually performing, though FFO is not the same as cash flow from operations or net income.

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