Funds from operations, or FFO, and cash flow from operations, or CFO, answer different questions about a real estate investment trust. FFO starts with net income, while CFO—under the indirect method used by most listed companies—reconciles net income to the cash generated or consumed by operating activities. REIT investors who confuse the two can draw the wrong conclusion from an earnings report.
FFO is a real estate industry measure developed by Nareit to address a specific feature of REIT accounting. Under US GAAP, the historical cost of a building is allocated across its estimated useful life through depreciation, even though the property’s market value may follow a very different path. In simplified terms, FFO takes net income, adds back depreciation and amortisation related to real estate and removes certain gains or losses from property sales. Nareit’s definition also covers qualifying impairment write-downs and gains or losses arising from changes in control. The result is a supplemental measure intended to make recurring operating performance easier to compare across equity REITs.
CFO is not specific to real estate. It is the operating section of a company’s cash flow statement and measures the net cash generated or used by its operating activities. Under the indirect method, it adjusts net income for non-cash items and changes in operating assets and liabilities, including receivables, payables and accrued expenses. The direct method instead reports major classes of operating cash receipts and payments, although most companies use the indirect presentation.
Working-capital movements are one of the main reasons CFO and FFO can diverge. FFO does not adjust for every short-term movement in receivables, payables or accrued items because it was designed to measure recurring real estate operating performance, not cash timing. CFO captures those movements. A REIT can therefore report rising FFO while CFO falls, or the reverse, simply because rent, supplier payments or other operating items were collected or paid at different points in the reporting period.
A related but separate comparison is EBITDA—earnings before interest, tax, depreciation and amortisation. EBITDA removes depreciation and amortisation more broadly and measures earnings before financing costs and tax. FFO begins with net income, after interest and tax have already been recognised, and reverses depreciation and amortisation connected with real estate while making the other adjustments required by Nareit’s definition.
FFO is therefore more directly focused on the performance attributable to a REIT’s investors after financing costs. EBITDA is useful when comparing businesses before differences in debt structure and tax, but it says less about what remains after a highly leveraged property company has paid interest. That is one reason FFO is generally more prominent than EBITDA in equity REIT reporting.
AFFO, or adjusted funds from operations, is commonly presented as a further refinement of FFO. It usually deducts recurring expenditure needed to maintain properties and their revenue streams and removes non-cash accounting effects such as straight-line rent adjustments. Straight-line rent is not itself a maintenance cost: it is an accounting adjustment that spreads contractual rent across the lease term, even when the cash collected varies from year to year.
Unlike Nareit FFO, AFFO has no single standardised formula. Individual REITs may make different adjustments for maintenance expenditure, leasing commissions, tenant improvements, non-cash compensation, financing costs and rent accounting. AFFO can therefore be useful when assessing an individual REIT’s recurring cash generation and dividend capacity, but it may be less reliable for comparisons between companies unless their reconciliations are examined carefully.
The mechanics become clearer with real numbers. Essex Property Trust reported net income available to common stockholders of $408.3 million for 2022. Its reconciliation added $539.3 million of depreciation and amortisation, removed $111.8 million of gains excluded from FFO and included further adjustments for co-investment depreciation, impairment and non-controlling interests. The resulting FFO attributable to common stockholders and unitholders was $923.4 million—more than twice the net-income figure, largely because of the real estate depreciation add-back.
The distinction also appeared directly in the market reaction to Digital Realty Trust’s second-quarter 2026 results. The data-centre REIT increased its full-year core FFO guidance to between $8.15 and $8.20 per share, from its previous range of $8.00 to $8.10. Digital Realty’s shares then jumped by double digits on 24 July. Investors were reacting to stronger results and an improved outlook under the REIT sector’s preferred operating measure—not to an equivalent percentage increase in operating cash flow or net income.
The practical distinction is straightforward. FFO indicates how a REIT’s recurring property operations performed after removing real estate depreciation and specified non-recurring gains or losses. CFO shows the net cash generated or consumed by operating activities, including working-capital timing effects that FFO does not capture. AFFO attempts to move closer to recurring cash available after maintaining the property portfolio, but its calculation varies between companies.
None of the three measures replaces the others. A REIT can look strong on FFO while producing weaker operating cash flow, or report healthy CFO while facing substantial recurring capital requirements. The most reliable assessment comes from reading the measures together—and understanding exactly what each one was designed to show.
