Net Operating Income for property investments

CFA Level II Alternative Investments
#1

Just finished book 4 :slight_smile: and started book 5 this morning and valuation of property investments. Relevant is After Tax cash flow (ATCF) which I consider the equivalent of FCFE in Equity valuation as it deducts mortgage repayments. So far so good but one thing I do not understand: Starting point of ATFC calculation is Net operating Income (NOI) which in Equity Valuation is EBIT and therefore includes depretiation so WHY don’t the add back depretiation when they calculate ATCF? Is it because NOI (in property investment) doesn’t include depretiation like it would in Equity valuation? Or am I missing something more important… or is my understanding of NOI in euity valuation incorrect and NOI is simply EBITDA? Thanks!

#2

NOI is the equivalent of EBITDA.

#3

Thanks Chad. I don’t think there was a proper definition of NOI anywhere in CFA books (instead they make quite clear what’s included in EBITDA, EBIT…) and wikipedia suggested it would include Depretiation. Is NOI simply a term used in property investment or is this commom in equity valuation as well?

Bute even then: if NOI was indeed identical to EBITDA then why wouldn’t you add (depretiation X Tax=depretiation tax shield) and deduct only tax based on EBITDA minus CAPEX minus NWC change (probably 0 for property investment) minus Mortgage repayments (principal&Interest) to get FCFE which conceptually should be same as ATCF on page 20 CFA book 5) This would be consistent with DFCF valuation in equity analysis???

Thanks for your help anyway! cheers,Dirk

#4

Was there something about the disount rate being afer tax rate?

#5

I guess NOI really doesn’t include depreciation, because look at figure 8 on page 20 - they substract Depreciation from NOI.

as for NOI definition, i don’t know if it is a real difinition, but in level 1 book 6, p 206 the last line of example tells bout depreciation and NOI.