FFO vs Net Income: What’s the Difference and Why It Matters

By the REIT Modeling team · Last updated: May 2026 · ~8 minute read

If you’re new to real estate finance, the first time you hear an analyst say “FFO” instead of “Net Income,” you’ll probably ask the same question every junior asks: aren’t they the same thing?

They’re not. They’re not even close. And if you confuse them — in a model, in a pitch, or in a comparison between two REITs — you’ll end up with a recommendation that’s wildly wrong.

This post is a complete walkthrough of what FFO is, why REIT analysts use it instead of GAAP/IFRS Net Income, and how to calculate it from a real published P&L. We’ll work it line by line for Alstria, a German listed REIT, using its 2010 audited financials.

What FFO actually measures

FFO stands for Funds From Operations. It’s a non-GAAP measure created in 1991 by NAREIT (the National Association of Real Estate Investment Trusts) to address one specific problem with applying standard accounting to REITs:

Standard Net Income for a REIT is misleading because real estate accounting under both US GAAP and IFRS includes large non-cash charges that don’t reflect the underlying cash-earning power of the assets.

Specifically:

• Depreciation on Investment Property (US GAAP) or fair-value adjustments (IFRS). Depreciation of a building over 40 years is a real accounting concept, but it’s economic fiction in most cases — REIT properties typically appreciate, not depreciate. The line item reduces Net Income but doesn’t reflect the actual cash performance of the asset.
• Gains and losses on property sales. When a REIT sells a building for €50m more than book value, that gain shows up in Net Income. But it’s a one-time event, not a recurring cash earnings stream. Including it in Net Income makes the year look better than the underlying business actually is.

FFO solves this by starting from Net Income and stripping out these non-cash and non-recurring items, leaving a number that’s much closer to “the cash this REIT can actually distribute to shareholders.”

The standard NAREIT definition:

FFO = Net Income + Depreciation & Amortization on real estate + Losses (or − Gains) on sales of real estate ± impairment charges and similar adjustments

In practice, the calculation is more nuanced. Different REITs report FFO slightly differently. Sophisticated analysts compute their own “adjusted FFO” using methodologies they trust. We’ll get to that.

Worked example: Alstria 2010

Alstria is a German listed REIT focused on office properties. We’ll use its 2010 audited P&L (publicly available in the annual report). Alstria reports under IFRS, where Investment Property is held at fair value and re-valued each reporting period. So instead of stripping out depreciation, we’re stripping out fair-value adjustments.

Here’s the published 2010 P&L (simplified, EUR thousands):

Reported Net Income: €36.4m. Now let’s adjust to FFO. Three line items need treatment:

1. Net loss from fair-value adjustment on investment property: €(12,804)k. This is the IFRS equivalent of depreciation on real estate — it reduced Net Income by €12.8m, but it’s pure accounting. No cash changed hands. Add it back.

2. Gain/loss on disposal of investment property: €+9,278k. Alstria sold buildings during the year and booked a €9.3m gain. Real cash, but not recurring — the gain shouldn’t be part of “this is what Alstria can earn next year.” Strip it out.

3. Net loss from fair-value adjustments on financial derivatives: €(4,127)k. This is the mark-to-market change on Alstria’s interest-rate swaps. Non-cash. Add it back.

Calculation:

Net Income                                  36,400
+ FV adjustment on Investment Property    +12,804
- Gain on disposal of IP                   −9,278
+ FV adjustment on derivatives             +4,127
─────────────────────────────────────────
FFO                                        44,053

Alstria’s analyst-adjusted FFO for 2010: €44.1m, vs reported Net Income of €36.4m. The difference (€7.6m, or 21%) matters enormously when you’re projecting future years, comparing Alstria to peers, or computing a P/FFO multiple.

Why analysts adjust differently from management

You’ll notice management often publishes its own “adjusted FFO” or “EPRA Earnings” calculation in the annual report. That number won’t always match what an analyst computes. Why?

Companies have an incentive to report higher numbers, sometimes by under-counting non-cash items. They might leave certain non-cash income IN their adjusted figure (e.g., a one-time insurance recovery), or strip out certain non-recurring expenses they consider “exceptional” but which really do recur.

Analysts have an incentive to be conservative. They want a number that reliably forecasts forward — so they’re more aggressive about stripping out one-offs and non-cash items.

In Alstria’s case, management’s reported “EPRA Earnings” comes out lower than our analyst-adjusted FFO — Alstria is conservatively-accounted, which is unusual. Most companies skew the other direction. Either way, the right move is always do your own calculation. Don’t trust the published “adjusted” line without auditing it.

FFO per Share

Once you have FFO, the metric most analysts use to compare REITs is FFO per Share:

FFO per Share = FFO / Average Shares Outstanding

Note: average shares outstanding, not year-end shares. If a REIT raised equity mid-year, the new shares were only outstanding for part of the year — using year-end shares would understate FFO per Share by allocating full-year FFO to a higher share count.

This matters because investors evaluate REIT investments and capital actions on accretion/dilution to FFO per Share:

• An acquisition is accretive if it raises FFO per Share (i.e., the deal generates more incremental FFO than it dilutes via the equity issuance to fund it).
• An acquisition is dilutive if FFO per Share goes down — meaning the cost of capital exceeded the asset’s earning power.

Junior analysts who can compute accretion/dilution from a deal’s term sheet are immediately more useful than those who can’t.

When FFO is wrong (or at least, insufficient)

FFO is the standard, but it’s not perfect. Three caveats:

1. FFO doesn’t account for capital expenditure. A building generates cash from rent, but it also requires maintenance capex (roof replacements, HVAC upgrades, leasing costs to retain tenants). FFO ignores all of this. A REIT with high recurring capex needs has lower true cash-distribution capacity than its FFO suggests. The fix: AFFO (Adjusted FFO), which subtracts recurring capex from FFO.

2. FFO doesn’t differentiate same-store growth from external growth. A REIT that doubles its FFO by issuing equity and acquiring buildings is not the same as a REIT that doubles FFO from organic rent growth on its existing portfolio. Sophisticated analysts decompose FFO growth into “same-store NOI growth,” “acquisitions,” and “developments.”

3. FFO doesn’t capture leverage. Two REITs with identical FFO can have wildly different risk profiles depending on debt levels. Use FFO alongside leverage metrics (Net Debt / EBITDA, Loan-to-Value, Debt Service Coverage Ratio).

Putting it together

For a junior analyst on a REIT-coverage desk, the workflow is:

1. Read the published P&L and identify the non-cash and non-recurring items (training: takes a few weeks)
2. Compute your own adjusted FFO by stripping them out (training: takes one afternoon if you’ve seen the framework)
3. Compute FFO per Share using average shares
4. Compare to peers’ FFO per Share to assess relative valuation (P/FFO multiple)
5. Project FFO forward using assumptions about rent growth, occupancy, acquisitions, dispositions, and capital structure changes
6. Evaluate corporate actions by their accretion/dilution to FFO per Share

Steps 1–3 are mechanical once you’ve internalized the framework. Steps 4–6 are where real analyst skill develops — and where most generic financial modeling courses leave you to figure it out on your own.

Learn the full framework

Calculating FFO from a published P&L is the foundation of REIT analysis. Building a complete projection model — line by line, from a real annual report, all the way through to forecasted FFO per Share five years out — is what we teach in our complete REIT Modeling course.

The course is built around Alstria specifically. You’ll work through every adjustment, every projection assumption, every Excel mechanic on the same case study used in this post. By the end, you’ll have a fully-built, fully-linked Excel model that produces forecasted FFO and FFO per Share you can defend to a senior.