REITs: why FFO replaces EBIT
REITs use Funds From Operations (FFO) and Adjusted FFO (AFFO) because GAAP depreciation on income-producing real estate does not reflect economic wear. Nareit defines FFO as Net Income plus real-estate depreciation and amortization, plus impairments, minus gains on sale of property[Nareit].
FFO definition
Net Income (GAAP) + Real-estate depreciation & amortization + Impairment of real estate - Gains on sale of real estate + Losses on sale of real estate = FFO
AFFO adjustments
AFFO strips out recurring capex and straight-line rent adjustments to better approximate distributable cash. There is no single industry-standard definition; each REIT discloses its own. Read the supplemental package.
When EBIT still comes up
- Covenant tests on a REIT's unsecured-debt indenture often reference EBIT or fixed-charge coverage. Read the indenture for the precise covenant definition.
- EBITDAre (EBITDA for real estate) is a Nareit-defined alternative that adds back gains and losses on sale of property.