The FFO and MFFO Debates

Ask anyone in the real estate investment industry and they will tell you that the metric known as “Funds from Operations,” or FFO, is not perfect.  In fact, there has been an ongoing debate within the publicly traded REIT community for years on this very topic.

The FFO metric was originally adopted by the National Association of Real Estate Investment Trusts (NAREIT) in 1991 and was further clarified in 1995, 1999, and 2002. According to NAREIT:

 “Funds from Operations (FFO) means net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis.”

Still, because the majority of REIT investment managers believe FFO does not provide investors with a clear picture of the company’s true operating performance, many publicly traded REITs supplement this figure with alternative FFO calculations that are sometimes referred to as “Adjusted Funds from Operations (AFFO),” “FFO after Adjustments,” “Recurring FFO,” “Normalized FFO” or “Core FFO.”  However, for the average investor that is trying to make a balanced comparison among REITs, these alternative FFO calculations are only adding to the confusion because there are no consistent guidelines regarding the items that may be included in these calculations.

As it relates to the nontraded REIT industry, a similar debate exists regarding “Modified Funds from Operations,” or MFFO.  The MFFO calculation was adopted by the Investment Program Association in 2010 and has become the standard for supplemental FFO reporting among many nontraded REITs since that time.  In fact, of the 72 nontraded REITs in the industry today, approximately 70% are reporting MFFO consistent with these best practice guidelines.  But just as publicly traded REITs have been using alternative methods of calculating FFO; we are also beginning to see several nontraded REITs move in the direction of providing alternative MFFO calculations. Many investment managers believe MFFO still has its limitations and may not tell the full story.

In response to these discussions, and in an effort to continuously foster transparency, we agree that these alternative FFO calculations may provide valuable supplemental information.  As a result, in order for our readers to be more fully-informed, we have begun to make accommodations for these calculations by including this data in our performance reports and commentary.

However, we note that until further clarifications are made by NAREIT or the Investment Program Association, it is our view that the operating performance of nontraded REITs should be measured using both the NAREIT-defined FFO and IPA-defined MFFO metrics and they remain the foundation for our peer-to-peer comparisons and LifeStage classifications.