NOI vs. EBITDA

NOI vs. EBITDA: Overview of Metrics

Net Operating Income (NOI) Definition

NOI is a real estate metric that stands for “net operating income” and measures the profitability of an income-generating real asset.

Since NOI allows an investor to gauge the profitability of a real asset and eliminate the effects of corporate-level expenses, this metric is often considered the most important profitability measure in real estate.

NOI eliminates the effects of these corporate-level expenses by isolating the core operating profits of the real asset in question, namely by excluding non-operating items such as depreciation, interest, taxes, corporate-level SG&A expenses, CapEx, and financing payments.

NOI can be calculated using the following formula.

NOI Formula

• NOI = Rental and Ancillary Income – Direct Real Estate Expenses

EBITDA Definition

EBITDA measures a company’s profitability before the effects of certain accounting or financial decisions.

Since it is a non-GAAP measure of profitability, companies are not required to report EBITDA on their financial statements.

However, investors will almost always use a company’s GAAP measures to determine EBITDA given the metric’s usefulness in assessing profitability.

When comparing companies, investors will often use EBITDA as the metric of comparison as opposed to net income given that EBITDA eliminates the effects of certain non-operating items that may be the result of accounting decisions or financing provisions.

EBITDA is found by taking a company’s earnings before interest and taxes, also known as operating income, and then adding back depreciation and amortization.

EBITDA Formula

• EBITDA = Operating Income + Depreciation + Amortization
• EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

NOI vs. EBITDA: Differences

While both NOI and EBITDA are two commonly used measures of profitability that exclude the effects of certain non-operating expenses, there are some key differences between the two.

The major difference is the use case of each metric.

• NOI: Given the property-specific nature of NOI, it is usually used to measure the profitability of a property, whether it be commercial or residential.
• EBITDA: On the other hand, EBITDA is used to measure the profitability of a company as a whole.

Another difference between the two relates to what is excluded when calculating each measure.

With NOI, more line items are excluded to capture property-level profitability, such as SG&A.

For real estate properties, NOI accounts for the lost revenue caused by tenant vacancies while EBITDA does not.

To conclude, NOI and EBITDA are two universally used measures of operating profitability, but NOI is intended for real estate properties and thus has more add-backs to isolate the pure operating income generated by the properties themselves.