The Scoop on the NOI Number

In taking a closer look at the unique metrics used to measure up REITs, we've detailed FFO (funds from operations) and RevPAR. You'll see another one, net operating income, or NOI, no matter what kind of real estate investment trust you want to invest in.

From a mathematical perspective, the net operating income reported by REITs such as Weingarten Realty Investors (NYSE: WRI  ) , Glenborough Realty Trust (NYSE: GLB  ) , and BRE Properties (NYSE: BRE  ) represents the recurring and other property-related rental revenue received, less property operating expenses such as utilities, insurance, and real estate taxes, but before financing charges such as interest. A REIT's corporate overhead is also excluded, because NOI is an attempt at evaluating the profitability of a property before financing and overhead costs.

To get an idea of some of the line items that are commonly used in calculating NOI, we'll use a recent quarterly earnings release from General Growth Properties (NYSE: GGP  ) . For the sake of simplicity, I'll stick to the retail portion of General Growth's business.

Line item


Total property revenues


Real estate taxes


Repairs and maintenance




Other property operating costs


Provision for doubtful accounts


Retail - Net Operating Income


Source: General Growth Properties' 1Q 2006 earnings press release

Many REITs also provide a same-store sales NOI figure. If you're thinking this is a figure from the world of retailers such as Target (NYSE: TGT  ) and Limited (NYSE: LTD  ) , you're correct, and the idea behind it is similar. In the world of retail, same-store sales are used to reflect how sales at stores open for 13 months or more are performing compared with the previous period (some companies use more than 13 months). The idea behind same-store NOI is similar for REITs, and it gives us insight into a REIT's ability to generate growth from its existing properties as opposed to property acquisitions. The calculation is simply the growth in net operating income for properties that have been open for longer than one year.

Foolish tool
Like FFO, NOI also has its limitations. Understanding NOI is important to understanding the profitability and growth in profitability of a portfolio of properties, but it doesn't give you the full picture of a REIT's profitability or a number of other aspects of the business. NOI is, however, one of the important pieces for building a net asset value calculation for a property or a portfolio of properties such as a REIT. Because of this, it also offers a look into the profitability of a property, which makes NOI is a very useful tool for a REIT investor.

Learn more about REITs in the pages of Mathew Emmert'sMotley Fool Income Investor. Mathew's full Foolish list of top dividend-paying stocks is yours free with a 30-day guest pass.

At the time of publication, Nathan Parmeleehad no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.

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