NOI, Capex, and What a Cap Rate Hides

Key takeaways

• NOI is a definition, not a measurement: Camden Property Trust’s FY2025 reconciliation runs from $394.9m of net income to $1,006.8m of NOI by adding back $611.0m of depreciation, $138.2m of interest, $79.3m of G&A, and $37.5m of property management expense, and removing a $260.9m gain on sale.
• Property expenses took 36.0% of Camden’s 2025 property revenue ($566.7m of $1,573.5m), and real estate taxes alone were $196.8m, or 12.5% of revenue and 34.7% of every operating dollar, the largest single line and the one an owner controls least.
• Recurring capex is real and sits outside NOI entirely: Camden deducted $108.2m of recurring capitalized expenditures from $757.2m of Core FFO to reach Core AFFO, which is 14.3% of the cash and larger than the $72.2m repairs-and-maintenance line NOI does capture.
• Credit is the unwritten term in a cap rate: 32.2% of Realty Income’s annualized base rent came from investment-grade clients at year-end 2025, and its 2025 re-leases recaptured 103.9% of prior rent, a portfolio result across 1,015 re-leases that a one-building owner cannot lean on.

NOI is a definition, and definitions are negotiable

Net operating income is property revenue minus property operating expenses. It deliberately stops before financing, before depreciation, before corporate overhead, before tax, and before gains on sale, because it is meant to describe the building rather than the owner. That is exactly why two honest people can compute two different NOIs from the same rent roll.

Camden Property Trust publishes the full bridge, and it is worth reading as an anatomy lesson. Its FY2025 10-K reconciles $394.9 million of net income up to $1,006.8 million of NOI by adding back $611.0 million of depreciation and amortization, $138.2 million of interest expense, $79.3 million of general and administrative expense, $37.5 million of property management expense, $12.9 million of land-development impairment and $4.0 million of income tax, and by removing a $260.9 million gain on the sale of operating properties along with fee, interest, and deferred-compensation income. Every add-back is a genuine cost somebody pays. NOI simply is not the line where they appear.

The property management line is the one that catches buyers. Camden pulls $37.5 million of it out of NOI, which is correct under its own definition. A seller with a self-managed building does the same thing by default: there is no management fee, because the owner did the work for free. A buyer who intends to hire a manager at, say, 4% of collections has to put that cost back before comparing anything. At a 6.5% cap rate, every dollar of NOI is worth $15.38 of price, so a management adjustment on a $400,000 rent roll moves the defensible purchase price by roughly a quarter of a million dollars.

So the first discipline is not arithmetic, it is definition control. Before you accept an NOI, establish in writing whether it deducts management, whether it uses collections or scheduled rent, whether it includes a vacancy allowance, and whether any capital item was classified as a repair to keep it inside NOI or as a capital expenditure to keep it out. Those four questions decide more of the price than the cap rate you argue about afterwards.

Building it line by line

Once the definition is fixed, NOI is an addition and a subtraction, and the subtraction has more structure than most rent rolls admit.

Camden’s 2025 numbers give a clean reference for stabilised multifamily at scale: property revenues of $1,573.5 million, property expenses of $566.7 million, NOI of $1,006.8 million. That is a 64.0% NOI margin and a 36.0% operating expense ratio. The expenses break down as real estate taxes $196.8m, salaries and benefits for on-site employees $106.9m, utilities $110.8m, repairs and maintenance $72.2m, and other property expenses $80.1m. Real estate taxes are the largest single line, at 12.5% of property revenue and 34.7% of every operating dollar, and they are the line an owner has the least ability to manage. You do not budget a tax bill down; you appeal an assessment, and you lose most appeals.

The second thing to read is the direction of travel. Camden’s same-store pool of 54,625 apartment homes grew revenue 0.8% to $1,453.2 million while expenses grew 1.7% to $516.7 million, so same-store NOI grew 0.3% to $936.5 million. That is negative operating leverage: costs rising at roughly twice the rate of revenue. One year of it is noise. Two consecutive years of it means NOI goes backwards while the rent roll still looks healthy, and a buyer who capitalised the first year has already overpaid.

Per home, dividing each same-store line by the 54,625 homes, that pool ran about $26,604 of revenue, $9,460 of expenses, and $17,144 of NOI per apartment home per year. Revenue per home exceeds base rent because it includes fees and reimbursements; Camden separately reports average monthly rental rates per home by market, ranging from $1,569 in Austin to $2,883 in Los Angeles/Orange County.

Finally, be careful which occupancy you are using. Camden’s average physical occupancy by market in 2025 ran from 93.9% in Nashville to 96.8% in the Washington, D.C. metro. But its own footnote states that the average monthly rental rate per home incorporates vacant units and resident concessions calculated on a straight-line basis over the life of the lease. Physical occupancy and economic occupancy are different numbers. A building at 96% physical occupancy that is giving two months free on a twelve-month lease is collecting about 83% of face rent on those units, and roughly 80% of gross potential rent overall. The rent roll shows the face number. The bank statement shows the other one.

Capex is real, and NOI does not know about it

NOI includes repairs. It excludes replacement. A repair keeps this year running; a replacement buys the next fifteen. The second one is missing from every cap rate ever quoted, and it does not stop being owed because it was left out of a spreadsheet.

Camden separates the two cleanly enough to measure the gap. Repairs and maintenance of $72.2 million sits inside property expenses, and therefore inside NOI. Recurring capitalized expenditures of $108.2 million sit outside it entirely. Camden deducts them from Core FFO of $757.2 million to reach Core adjusted FFO of $649.1 million. That is 14.3% of the cash the business ultimately produces, and it is 50% larger than the repairs line that NOI does capture. Across its 175 properties and 59,921 apartment homes, that works out to roughly $1,805 per home per year: a derived figure, dividing the disclosed total by the disclosed home count, on a professionally managed portfolio with scale purchasing.

Illustrative only. Twenty-four units at $1,500 a month is $432,000 of gross potential rent. Take 5% for vacancy and concessions and effective gross income is $410,400. Apply Camden’s 2025 operating expense ratio of 36.0% and expenses are $147,744, leaving NOI of $262,656. At a 6.5% cap rate the property prices at about $4.04 million.

Now reserve for capital replacement at Camden’s derived rate, rounded to $1,800 per unit: $43,200 a year. NOI after reserve is $219,456, and the yield on the same $4.04 million price is 5.43%. The cap rate did not move. The actual return fell by 107 basis points, more than a full percentage point, and nothing changed except honesty about the roof.

The common objection is that the building will not need $43,200 this year. Usually true, and irrelevant. Capex is lumpy in timing and smooth in obligation: a roof at year seven, HVAC compressors across years three to twelve, a parking lot resurface, and a turn cost every time a unit changes hands. The reserve exists so that the year the roof arrives is a budgeting event rather than a refinancing event. The risk of skipping it is not that the money is lost. It is that the money is spent, later, at a worse moment, on a property whose NOI you have already used to justify a mortgage payment.

Tenant credit is the discount rate nobody writes down

Two buildings with identical NOI are not identical assets. If one is leased to a national grocer for eight more years and the other to a two-year-old gym on a short term, the cash flows differ in exactly the way that matters, which is probability, and the cap rate has no field for it.

Realty Income’s FY2025 10-K shows what a credit-graded rent roll looks like at scale: 15,511 properties, approximately 355.0 million square feet, 1,761 clients across 92 industries, 98.9% occupancy at year-end (98.7% a year earlier), and a weighted average remaining lease term of about 8.8 years. It reports that 32.2% of total portfolio annualized base rent came from investment-grade clients, their subsidiaries, or affiliates. Its top 20 clients represented 35.8% of annualized base rent, with 11 of those 20 carrying investment-grade ratings or being subsidiaries or affiliates of investment-grade companies. By industry, grocery was 11.0% of annualized base rent, convenience stores 9.6%, home improvement 6.4%, dollar stores 6.1%, and quick-service restaurants 4.8%.

The more instructive disclosure is what happens when leases end. In 2025 Realty Income had 1,317 lease expirations, including leases rejected in bankruptcy. It re-leased 963 to the same client and 52 to a new client, sold 334 vacant properties, and finished the year with 173 properties available for lease, down from 205. The new annualized base rent on those re-leased units was $301.99 million against $290.61 million of prior rent, a 103.9% rent recapture rate.

Read that number carefully, because it is the one most often borrowed out of context. 103.9% is a portfolio outcome across 1,015 re-leases. The same distribution that averages above 100% contains individual re-leases well below it, and 334 of the 2025 resolutions were not re-leases at all. They were sales of empty buildings, which is what a re-lease looks like when it does not happen. A single-property owner has a sample size of one, so the tail is the entire outcome rather than a rounding adjustment.

What to underwrite instead of a credit rating you will not have: the tenant’s own financial statements or, failing that, the health of the specific location; how mission-critical the site is to their operations; the lease structure and who actually pays taxes, insurance, and structural maintenance; and the honest cost and time to backfill the space if they leave. That last number, months of vacancy plus tenant improvement allowance plus leasing commission, is the real credit spread, and it belongs in the model before the price is agreed, not after the tenant gives notice.

What a cap rate hides

A cap rate is one year of NOI divided by a price. That is the entire construction. It contains no capital expenditure, no financing, no lease term, no tenant credit, no expense trend, and no definition of NOI you did not verify yourself.

Each of those omissions has already been priced in this briefing. Capex: the twenty-four-unit example above goes from a 6.5% cap rate to a 5.43% yield the moment a reserve is honest. Definition: Camden’s own reconciliation shows $37.5 million of property management expense sitting outside NOI, which is the same adjustment a self-managed seller silently makes. Trend: same-store expenses rising 1.7% against revenue rising 0.8% means next year’s NOI is not this year’s NOI. Term and credit: 8.8 years of weighted average lease term to graded tenants is a different asset from a month-to-month rent roll, at any cap rate.

Illustrative only, and worth doing as a habit. Deal A is the twenty-four-unit building at a 6.5% cap, or 5.43% after reserve. Twenty-four leases reprice every year, so inflation passes through annually; so does every expense increase, and the owner carries turns, roofs, and payroll. Deal B is a single-tenant retail building at the same 6.5% cap, triple-net, eight years remaining, with the tenant paying taxes, insurance, and maintenance. There is no meaningful capex reserve during the term, so that 6.5% is much closer to a real 6.5%. But the entire NOI rests on one signature, the rent steps are fixed in the lease no matter what inflation does, and at year eight the building is worth whatever the next tenant will pay for a purpose-built box. Same number, opposite risk shapes, and the cap rate says nothing about the difference.

The practical discipline is to stop quoting one number. Quote three: the cap rate as presented, the cap rate after your own reserve and management adjustments, and the debt-service coverage at the rate you can actually borrow at today. The first is the seller’s number, the second is the asset’s number, and the third is the one that decides whether you still own it in five years.

Rebuilding a seller’s NOI

The work is mechanical, takes an afternoon, and is the highest-return afternoon in the whole transaction.

Start on the revenue side with collections, not gross potential rent and not the rent roll. Twelve months of bank deposits, reconciled to the rent roll, will show you concessions, chronic late payers, and the units that are occupied by someone who has not paid since spring. Then strip out anything non-recurring: a lease-break fee, an insurance settlement, a one-time utility reimbursement.

On the expense side, rebuild every line from a source document rather than the seller’s schedule. Property taxes from the county record, and re-run them at the assessment your purchase price will trigger, because in many jurisdictions a sale resets the basis, which means the seller’s tax line expires at closing. Camden’s real estate taxes were $196.8 million in 2025, the largest single line in its property expenses at 34.7% of the total; on a smaller building, a reassessment can move NOI by more than every operational improvement you had planned. Insurance from a current binding quote in your name, not the seller’s renewal. Utilities from twelve months of actual bills. Payroll at what it costs to hire, not what a relative was paid. Management at a market fee whether or not you intend to self-manage.

Then subtract a per-unit capital reserve before you compute any yield at all. Camden’s disclosed recurring capex works out to roughly $1,805 per apartment home per year, which is a defensible starting point for stabilised multifamily and a floor for anything older or deferred. Only now do you have a number worth dividing into a price.

Finally, price the property twice: once at the seller’s NOI and cap rate, once at yours. The gap between the two is your negotiating range, and it is usually larger than the price reduction you would have asked for by instinct. Two honest cautions. Ratios drawn from a large REIT describe a professionally managed portfolio with scale purchasing and are a reference frame rather than a benchmark for a single building. And this is general education, not investment, tax, or legal advice: the numbers that decide your deal are the ones on your county’s assessment roll, your insurer’s quote, and your lender’s term sheet.

Put it to work

Rebuild the seller’s NOI yourself. Start from actual collections, not gross potential rent, and add back nothing. Break expenses into taxes, insurance, utilities, payroll, and repairs, then check each against the county record or the last twelve bills. Subtract a per-unit capex reserve before computing any yield. Then price the property twice: once at the seller’s cap rate, once at yours.

Sources & references

Linked entries open the named source directly. Entries without a link say exactly what kind of reference they are — and how to check them yourself.

• Camden Property Trust — Form 10-K for fiscal year 2025 (net income to NOI reconciliation, property revenue and expense detail, same-store results, recurring capitalized expenditures, portfolio occupancy and rental rates)
• Realty Income Corporation — Form 10-K for fiscal year 2025 (portfolio size, investment-grade share of annualized base rent, client and industry concentration, lease expirations, re-leasing activity and rent recapture rate)
• Your county assessor and tax collector records — Property tax is typically the largest single operating expense line, and in many jurisdictions a sale triggers reassessment. The assessed value, millage rate, and reassessment rules are public records at the county level — verify them there rather than accepting the seller’s historical tax expense.