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Net Operating Income (NOI)

Guide to Understanding Net Operating Income (NOI)

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Net Operating Income Formula (NOI)

The formula to calculate net operating income (NOI) is as follows.

Net Operating Income = Rental and Ancillary Income – Direct Real Estate Expenses

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.

REIT Net Operating Income (ROI)

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.”

NOI Non-GAAP Metric (Real Estate)

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.

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