DEFINITION of Funds from Operations per Share (FFOPS)
Funds from operations per share (FFOPS) is a measure of the cash generated by a real estate investment trust (REIT). REITs are a type of public offering or trust that holds a portfolio of income producing properties and mortgages. Shareholders receive a piece of the profits through periodic dividend payments.
The base formula is calculated by taking the sum of net income, depreciation, and amortization and subtracting it by gains on sales of the property. To get the per share value, divide the previous formula by the total number of outstanding shares. It's worth noting the funds from operations per share differs from cash from operations per share, a key component of a cash flow statement.
BREAKING DOWN Funds from Operations per Share (FFOPS)
Funds from operations per share mirror earnings per share that publicly traded companies report on a quarterly basis. The former represents the value of earnings from the REIT, whereas the latter illustrates a company's earnings power. Investors often view funds from operations per share as a similar barometer of financial health as earnings price share. Some even derive basic market valuations from the price to funds from operations ratio, just as a fundamental investor focuses on price to earnings multiples. Therefore, both funds from operations and funds from operations per share are crucial metrics to evaluate profitability and share prices. Investors can find FFO and FFOPS in the footnotes of a quarterly financial statement.
In general, the calculation makes adjustments to net income to offset performance changes from accounting methods. Take depreciation for instance. Under normal circumstances, accountants depreciate tangible assets that lose value over time. However, REITs often gain value as time progresses which means depreciation superficially depresses net income. The metric also adjusts for gains on the sale of properties to account for non-recurring profit streams. Adding this layer of extra earnings power yields greater returns and dividends per share. REITs are required to pay out 90% of all taxable income as dividends. It's important to recognize FFOPS can be just as easily manipulated.
Adjusted Funds from Operations
Funds from operations per share are the industry standard for determining earnings growth of a real estate investment trust. But some analysts prefer adapting the equation for rent increases and certain capital expenditures. The result is the adjusted funds from operations (AFFO). It is considered a more accurate measure of residual cash flow and earnings potential than the traditional funds from operations per share.