In Praise of Cash Flow
Over the past few weeks I have looked through numerous public non-traded REIT 10-Ks and supplemental financial filings. All present Funds from Operations (FFO) and Modified (or Adjusted) Funds from Operations (MFFO). FFO used to be a fairly simple calculation: Net Operating Income plus depreciation and amortization, and less any cash from property sales. But over the years, this non-GAAP number appears to have become bastardized, and in my opinion, less reliable. Non-traded REIT sponsors used to shun this number, but with the rise of MFFO, they are embracing the figure as it has the impact of making distribution coverage look better. MFFO figures now include items from investing - acquisition fees - and from financing - interest hedging gains and losses - which may or may not be actual cash figures, and are not operational figures.
That is why I am spending more time looking at cash flow from operations, which is a GAAP number and that is adjusted for non-cash items like depreciation, and discounting MFFO figures. I review all three figures to the amount of total distributions (cash and reinvested) the non-traded REITs have paid during the year. The more the REIT covers from operating cash and FFO the better. Lack of operational cash flow coverage is a harbinger of potential future distribution cuts.