o-maturity, available for sale, or marketable securities.Since all these properties are currently classified as property, plant, and equipment, the issue of depreciation becomes important. If these properties were classified as inventory, then all maintenance and repairs would expensed as incurred, and no depreciation would be recognized. However, as property, plant, and equipment, maintenance and repairs would be capitalized and depreciation would be recognized over the life of the asset. This has a dramatic effect on the balance sheet, and the bottom line. Another issue is the fair representation of the financial situation of the company. If these assets are depreciated, then it implies that their value is going down over time. This is not case with these properties, the market value fluctuates and many times goes up rather than down. Therefore, a lot of value is lost from the balance sheet and investors cannot make an informed decision about where to invest. To combat all of these issues, a number referred to as funds from operations, or FFO, has been derived to better value REITs. FFO is calculated by starting with net income and adding back the appropriate depreciation and amortization figures. It would not be correct to add back depreciation and amortization that is not applicable to the specific assets in question. Next the effect of non-recurring items is added back, this does not include extraordinary items, accounting changes, or discontinued operations. These calculations constitute FFO. Although, many trusts report both FFO and net income, it is commonly FFO that that is used in EPS calculation. This is advantageous for the REIT because FFO is higher than net income. Therefore, EPS is higher, and in turn more attractive to investors. Those within the industry believe that these figures are a much better indicator of company performance than traditional EPS. Like EPS, P/E ratios are also calculated using FFO....
