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Investing in REITs: Real Estate Investment Trusts, 4th Edition by Ralph L. Block

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The Significance of FFO and AFFO

Investors in common stock generally use net income as a key measure of profitability, but the custom in REIT world is to use FFO. The historical preference for FFO rather than net income relates to the concept of depreciation. The Securities and Exchange Commission (SEC), under federal securities laws, requires that all publicly traded companies file audited financial statements. On a financial statement, the term net income has a meaning clearly defined under generally accepted accounting principles (GAAP). Since most REITs are publicly traded companies, net income and net income per share can therefore always be found on a REIt's annual audited financial statements, and unaudited net income is reported quarterly. ...

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