Funds from Operations, or more commonly referred to in reports as FFO for short, is a metric used by the majority of REITS investors to measure the performance of a REIT. FFO takes into account a REIT's Net Property Income (revenue collected from rental), minus away the losses or gains from the sales of properties, plus property depreciation. In most cases, FFO will be a sufficient indicator of how well a REIT is doing in terms of generating revenue from its properties.

Although NPI (Net Property Income) can give you an indication of how much revenue a REIT is generating for a particular year, it may not be an accurate indication of its performance as NPI takes into account both revenues collected from rental and revenue from the sale of properties. This means that the sale of disproportionately expensive property can skew the NPI significantly. As such, the investor will not have a feel of actual revenue generated from rentals by looking a the NPI alone. The FFO is a significantly more superior metric to measure the performance of a REIT and should suffice for the majority of REITs investors. However, more discerning investors may prefer a more precise metric known as the AFFO.

By Ridzwan Rahmat

Ridzwan has been analysing REITs and business trusts since 2008, and personally manages a portfolio comprising mainly of SGX-listed REITs. He founded REITsWeek in 2013.

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