Reading the Numbers · REITs

NOI describes property operations before several corporate and financing costs. A consistent set of properties helps reveal whether existing assets are improving.

Define the perimeter of NOI

Net operating income generally subtracts property operating expenses from property revenue. It usually excludes interest, corporate overhead, depreciation and capital expenditure. Definitions and adjustments vary, so use the issuer's reconciliation. NOI is neither cash available for dividends nor a substitute for the full income statement.

Separate existing properties from portfolio growth

Buying a building can increase total NOI even if every existing building performs worse. A same property or same store comparison attempts to hold the property set consistent. Inspect inclusion rules for acquisitions, developments and disposals. A change in the comparable set can affect the story.

Distinguish cash and accounting rent

Lease accounting can recognize rent differently from the cash collected in a period. Incentives, contractual increases and bad debt treatment matter. Compare cash measures with cash measures and accounting measures with accounting measures. Occupancy, rent collections and leasing costs help explain why the measures diverge.

Work through two bridges

Suppose comparable properties earned $20 million revenue and incurred $8 million operating costs, giving $12 million NOI. Next year revenue rises to $21 million and costs to $8.6 million. NOI becomes $12.4 million, an increase of about 3.33%. If a purchased property adds $2 million NOI, total NOI reaches $14.4 million. The 20% total increase is not the growth rate of the original assets.

Try it yourself

Revenue rises from $50 million to $52 million and property expenses from $20 million to $23 million. What happens to NOI?

Show the worked answer

NOI falls from $30 million to $29 million, a decline of about 3.33%. Revenue growth alone does not demonstrate improving property profitability.

Further reading

Educational material, not a recommendation to transact. All numerical examples are hypothetical and exclude costs unless stated. Actual terms, eligibility, tax treatment and broker procedures depend on the security and jurisdiction.

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