Funds From Operations versus net income: Examining the dividend-relevance of REIT performance measures


Authors: Ben-Shahar, Danny; Sulganik, Eyal; Tsang, Desmond


This study compares Funds From Operations (FFO) and net income by examining how well these two performance measures explain the dividend policy of Real Estate Investment Trusts (REITs) beyond operating cash flows. The findings reveal that while the non-cash component that is common to both FFO and net income is significantly associated with the level of dividends distributed by REITs, the additional non-cash component in net income but not in FFO has no association with dividends. The findings also show that the non-cash component in net income becomes significantly associated with dividends only when measurement errors in depreciation are low (i.e., reporting quality in depreciation is high). By suggesting that the inclusion of depreciation distorts the dividend-relevance of REIT net income, this paper provides further support to the dominance of FFO over net income for financial reporting in the REIT industry.

Journal of Real Estate Research, 2011