Funds From Operations Multiple (FFO)
Definition - What does Funds From Operations Multiple (FFO) mean?
A funds from operations (FFO) multiple is the multiple of the FFO per share of a particular organization. This is calculated by dividing the price of the shares by the FFO per share.
The FFO multiple is a very important concept in real estate investment trust (REIT) valuation. This measurement tool is helpful to entrepreneurs, investors, analysts and others who are interested in investing in an REIT by evaluating its share prices.
Every business and industry has some specific measurement tool to evaluate their performance and analyze the returns and costs. Similarly, in the field of REITs, FFO and the FFO multiple are the specific measurement tools.
Divestopedia explains Funds From Operations Multiple (FFO)
Funds from operations is calculated first by adding the depreciation and amortization expenses to the net income of the organization for that year and then subtracting gains or losses from disposition of assets, if any. After this, FFO has to be divided by the number of shares of that organization and then it has to be used as the denominator for the price of the shares.
The calculation is as follows:
FFO Multiple = Price of the shares / FFO per share;
Where, FFO per share = (Net Income + Amortization + Depreciation - Gains/Losses from the sale of assets (if any)) / Number of shares outstanding
In the field of REIT valuation, the price-to-earnings (P/E) ratio and earnings per share (EPS), which are the traditional financial metrics, do not help much as they are observed over a longer period of time. Therefore, investors and prospective investors discovered that the best option for measuring an REIT's performance and share values is to use the FFO multiple in place of the P/E ratio or EPS.
Shareholders and prospective investors of an REIT first check the FFO multiple and the capital structure of the organization in order to understand the return perspective of the organization.
Example: XYZ REIT reports on December 31 a revenue of $14,000,000; property maintenance expenses of $2,500,000; property insurance and taxes of $4,700,000; depreciation of $2,100,000; amortization of $450,000; a gain on sale of assets of $200,000; a net income of $4,450,000; and the price of the shares is $50 while the number of shares outstanding is 400,000.
FFO Multiple = $50 / $17 = 2.94;
Where, FFO per share = ($4,450,000 + $450,000 + $2,100,000 - $200,000) / 400,000 = $17