Toward a more informative measure of operating performance in the REIT industry: Net income vs. funds from operations

This paper examines the value relevance and information content of alternative measures of operating performance in the Real Estate Investment Trust industry. The National Association of Real Estate Investment Trusts has suggested that net income is a misleading measure of operating performance for REITs. Accordingly, the industry has promoted Funds From Operations as a supplemental measure of operating performance. The industry's proposals are tested by comparing the association of NI and FFO with REIT stock returns. In addition, the specific components of NI that differ from FFO are examined to assess their value-relevance. The results suggest that FFO is more closely associated with stock returns than NI. These results generally support the industry's claim that GAAP-based depreciation expense does not provide value-relevant information. However, the fact that gains/losses from the sale of investments are associated with returns indicates that FFO excludes value-relevant accounting data.