If you're interested in real estate investment trusts (REITs), you'll likely run across the acronym FFO. It's important to understand what a REIT's FFO tells you. Think net income or operating income, sort of. With most companies, net income is a useful number to evaluate, reflecting the profits left over from sales after all expenses have been subtracted. With REITs, though, net income isn't as meaningful. (Remember, REITs are Real Estate Investment Trusts, special kinds of corporations that must pay out at least 90% of their taxable income in dividends.)
According to accounting rules, the value of REIT properties is decreased over time, with depreciation charged against net income, reducing it. In reality, however, these properties are probably not falling in value, and may even be appreciating. So, a REIT's net income tends to understate its health. This is why, with REITs, you should look at the "funds from operation," or FFO, instead. The FFO ignores the effect of depreciation and other non-cash charges to help you see a REIT's true performance.
To learn more about REITs, read these two Fool articles: "REITs: The Other White Meat" and "ConsideredREITs? Buffett Has." And drop by the NAREIT website, too.
And if you're in the market for investments which, like REITs, kick out significant income (often via dividends), grab a free sample of our Motley Fool Income Investor newsletter. It recommends several such investments each month, many of which are REITs.
Finally, here are some recent articles about specific REITs:
- Lawrence Meyers: A REIT to Beat
- David Meier: One REIT That's Not Boring
- Reitnut: The Essential REIT
