REIT Dividends and FFO

Ordinary earnings make REITs look worse than they are, because accounting rules subtract depreciation on buildings that often gain value. That is why REIT investors use funds from operations instead. Here is how FFO works and how to judge dividend safety.

Why earnings mislead for REITs

Accounting rules make companies subtract depreciation, spreading a building’s cost over many years as if it were wearing out. But well-kept real estate often holds or gains value. That makes REIT net income look small, and payout ratios based on earnings look alarming. In our data, Realty Income paid dividends equal to about 236% of its reported earnings.

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