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What is Net Operating Income (NOI)?
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 Formula (NOI)
The formula to calculate net operating income (NOI) is as follows.
The NOI is the difference between 1) the rental and ancillary income and 2) the direct real estate expenses.
However, more important than what expenses factor into NOI are the expenses that do NOT impact NOI.
Namely, NOI captures profitability before any depreciation, interest, taxes, corporate level SG&A expenses, capital expenditures, or financing payments
Most real estate companies including real estate investment trusts (REITs) as well as real estate private equity firms (REPE) – will own multiple real estate properties so identifying NOI is critical for isolating property-level profitability.
How to Calculate NOI: REIT Example (Prologis)
Below is an example of NOI from the 2019 10-K of Prologis, one of the world’s largest REITs.
NOI in Real Estate Investing: Non-GAAP Profit Metric
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.”
Net Operating Income (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.
