Capitalization or cap rates, workout number two. Calculate Alexandria's net operating income on its real estate holdings used for rentals. We have a snippet of a real income statement from a REIT and the first thing that we're gonna do is we're going to calculate the net operating income based off of this income statement. We're given a couple of pieces of information. The first is that the tenant recoveries refer to building services paid for by the tenants, such as common area charges, taxes, insurance, et cetera. And secondly, that other income refers to management services provided by the REIT for other buildings. So in terms of calculating the net operating income we want to include the rental revenues and the tenant recoveries, but we're going to exclude the other income as that does not directly relate to the buildings and the rental income. The net operating income for 2018 is $1,010,718,000.

The tenant recoveries are $304,063.

Now, the rental operations expenses are $381,120 and I'm actually gonna put those as a negative so that I can separate them from the revenues. Now, we are going to exclude the general and administrative expenses because they apply to the REIT as a whole. We are going to exclude the general and administrative expenses because they apply to the greater REIT structure as a whole. We will exclude the interest because net operating income is an un-levered earnings metric. We will exclude depreciation and amortization because they're non-cash. We will exclude the impairment of real estate because it is non-cash. We will exclude the loss on early extinguishment of debt because it is related to the financing and is also non-cash. So the net operating income for the rental properties is $933,661. Alexandria assumes that its blended cap rate on all of its buildings is 6.5%. The NOI is expected to grow by 5% next year. How would you estimate the value of the buildings that generate the net operating income? So the first thing that we have to do is we have to grow the NOI by 5% and that will give us our net operating income for the next year. We then have to take that number and divide it by our cap rate and that will give us the value of the real estate assets that generate the net operating income.