NOI Margin

How to Calculate NOI Margin?

The NOI margin measures the profitability of a property investment by comparing its net operating income (NOI) to the total revenue its generates over a specific time period.

The net operating income, or “NOI”, is a foundational metric in the real estate sector to determine the potential profitability of a property investment.

Like EBITDA, net operating income (NOI) is frequently used in practice because of the fact that the metric is unaffected by discretionary financing decisions or differences in tax policies based on the jurisdiction.

Since the net operating income (NOI) metric is calculated before interest expense, principal amortization, and taxes paid to the government, it is unlevered cash flow metric.

By standardizing the net operating income (NOI) metric – i.e. dividing NOI by revenue – the implied NOI margin can be utilized for purposes related to comparability, wherein the ratio is evaluated relative to the industry benchmark of comparable properties.

NOI Margin Formula

The formula to calculate the NOT margin divides a property’s net operating income (NOI) by its total revenue.

Where:

• Net Operating Income (NOI) → The net operating income (NOI) starts with the property’s revenue, namely rental income, followed by adjustments for other side sources of income and vacancy (or collection) losses. From there, the operating expenses incurred as part of managing the property (or portfolio of properties) must be subtracted, such as payroll, general & administrative costs, maintenance costs, utilities, property taxes and property insurance.
• Rental and Other Property Revenue → The total revenue amounts to the sum of the property’s rental income and other sources of revenue, including adjustments such as reimbursements and vacancy and credit losses.

The net operating income (NOI) is the profits generated by a property subtracted by its operating expenses across a specified period.

Net Operating Income (NOI) = Effective Gross Income (EGI) – Total Operating Expenses

• Effective Gross Income (EGI) → The effective gross income (EGI) represents a property’s total potential income, net of any adjustments related to vacancy and credit losses.
• Vacancy and Credit Losses → The incurred vacancy and credit losses is the rental income NOT collected from tenants, which is often caused by tenants refusing to fulfill their payment obligations per the lease agreement, either by choice or from facing financial difficulties where their cash on hand is not enough to meet the required payment obligations.

Thus, the net operating income (NOI) metric starts from the gross potential income (GPI) before subtracting any vacancy and credit losses (i.e. collection issues) to calculate the effective gross income (EGI).

From the effective gross income (EGI), any operating expenses related to property management, taxes, and insurance are subtracted to determine the annual net operating income (NOI).

Common Property Operating Expenses:

• Repairs and Maintenance
• Utilities
• Property Insurance
• Property Taxes
• Property Insurance

NOI Margin Calculator

We’ll now move on to a modeling exercise, which you can access by filling out the form below.

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1. REIT Operating Assumptions

Suppose we’re tasked with calculating the NOI margin of Aimco (NYSE: AIV), a publicly traded real estate investment trust (REIT).

In the latest reporting period, Q-1 of fiscal year 2023, Aimco announced the following financial results.

Quarterly Results (Q1-23)

• Development and Redevelopment Revenue = $2.2 million
• Operating Revenue = $36.7 million
• Other Revenue = $3.7 million

The sum of the revenue produced by the three segments is Aimco’s total quarterly revenue, which comes out to approximately $42.6 million.

• Total Rental and Property Revenue = $42.6 million

On the other hand, the property operating expenses in the corresponding period are as follows.

• Development and Redevelopment Expenses = $2.0 million
• Operating Expenses = $11.2 million
• Other Expenses = $1.2 million

^{REIT Quarterly Financial Results (Source: Q1-23 10-Q Filing)}

2. Net Operating Profit Calculation Example

In the next part of our exercise, we’ll calculate the net operating income (NOI) per segment.

There are three business segments per Aimco’s financial filings:

1. Development and Redevelopment
2. Operating
3. Other

By subtracting each segment’s revenue by the coinciding operating expenses, we can determine the net operating income (NOI) for each division of the REIT.

Operating Property Results (NOI)

• Development and Redevelopment Segment = $176k
• Operating Segment = $25.5 million
• Other Segment = $2.5 million

Notably, the second segment – the operating segment – contributes most of the revenue (and net operating income), whereas the first and third segment generate minimal profits in comparison.

The reason is the operating segment is the core part of the REITs business model and stabilized.

Note: The financials of Aimco used here deviate slightly from the figures recorded on the income statement prepared under GAAP reporting standards. For REITs, it is standard to rely more on non-GAAP metrics to analyze an investment.