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Net Operating Income (NOI): Formula, Definition and Examples

Breaking down the all-important measure of profits for analyzing real estate investments.

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Net operating income (NOI) is the most important profit measure in real estate.  It strives to isolate to core operating profits of real estate assets, so as to avoid muddying the waters with non operating items such as corporate overhead and major non cash items like depreciation.

Net operating income definition and formula:

Net operating income = Rental and ancillary income - direct real estate expenses.

More important than what expenses factor into NOI are the expenses that don't impact NOI.  Namely, NOI captures profitability before any depreciation, interest, taxes, corporate level SG&A expenses, capital expenditures, or financing payments

Net operating income (NOI) example

Most real estate companies including REITs as well as real estate private equity firms - will own multiple real estate properties so identifying NOI is critical for isolating property-level profitability.

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Below is a net operating income example from the Prologis 2019 10-K- one of the world's largest REITs.

Net operating income is Non-GAAP

Interpreting net operating income (NOI)

From the Prologis 10-K , you can see that it is a non-gaap measure of profits so it does not appear on the income statement, but instead is presented in a separate table and is reconciled to GAAP metrics "operating income" and "earnings before income taxes."

Not surprisingly, the Net Operating Income is greater than GAAP Operating Income because it excludes general & administrative costs, D&A.

NOI vs EBITDA

NOI is similar to a common and nearly universally used measure of operating profitability EBITDA but with even more add backs to really focus on pure operating income generated by the properties.

 

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