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2020 CFA LEVEL II > Alternative -dup > Flashcards

Alternative -dup Flashcards

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CFA flashcards
1
Q

Mortgages

A

Direct investments such as sole ownership, partnerships, and commingled funds

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2
Q

Mortgage-backed securities

A

Shares of REITs and REOCs

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3
Q

Characteristics of real estate

A 
Heterogenty
High value
active management
high transition cost
desirability
cost & availability of debt capital
lack of liquidity
pros
capital increase
current income rent
inflation hedging
diversification
tax benefit
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4
Q

Cost Approach to Valuation

A

useful for new, unused or comparable transactions are not available.

Estimate the market value of the land.
+Estimate the building’s replacement cost.
-Deduct depreciation including physical deterioration, functional obsolescence, locational obsolescence, and economic obsolescence.

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5
Q

Income Approach - direct capitalization method

A

cap rate = discount rate − growth rate

value = V0=NOI / cap rate

cap rate = NOI / comparable sales price

NOI = income - vacancy & collection losses & operation expenses

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6
Q

Income Approach - discounted cash flow method

A

value is based on the present value of the property’s future cash flows using an appropriate discount rate.

value of a REIT share = PV(dividends for years 1 through n) + PV(terminal value at the end of year n)

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7
Q

Income Approach - direct capitalization method

gross income multiplier,

A

value = gross income × gross income multiplier

gross income multiplier = sales price / gross income

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8
Q

office Characteristics

A

job grows

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9
Q

industrial Characteristics

A

economy,

import/export

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10
Q

retail Characteristics

A

consumer spending
overall economy
job growth
savings rate

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11
Q

multi-family Characteristics

A

population growth

age demographic

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12
Q

DSCR

A

first year NOI / debt services

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13
Q

LTV

A

loan amount / appraised value

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14
Q

equity dividend rate

A

first year cash flow / equity

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15
Q

Advantages/Disadvantages of Investing in Publicly Traded Real Estate Securities

A 
superior liquidity
lower minimum investment,
access to premium properties
active professional management
protections afforded to publicly traded securities
greater diversification potential.

Advantages of investing in REITs (but not REOCs)
exemption from corporate taxation,
predictable earnings
higher yield.

Disadvantages of investing in publicly traded real estate securities
lower tax efficiency compared to direct ownership
lack of control
costs of a publicly traded corporate structure
volatility associated with market pricing
limited potential for income growth
forced equity issuance
structural conflicts of interests.

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16
Q

Due Diligence Considerations of REITs

A 
Remaining lease terms.
Inflation protection.
In-place rents versus market rents.
Costs to re-lease space.
Tenant concentration in the portfolio.
Tenants' financial health.
New competition.
Balance sheet analysis.
Quality of management.
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17
Q

layer method

A

term rent/ term rent cap rate

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18
Q

Appraisal based indices

A

NCREIF property index (NPI)
return = [NOI - cap exp + (change in market value)]
/beg. market value

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19
Q

max loan amount

A

min( implied by LTV, DSCR)

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20
Q

cash-on-cash return / equity dividend rate

A

[1st year cf = nio - debt]

/equity

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21
Q

NAVPVs -REIT valuation

A

(asset - liabilities) / shares
using market value instead of book value

NOI - noncash rent = cash NOI
\+full year adj for acquisition
\+next futures years NIO based on growth rate noi(1+g)^x
=EST NOI
/CAP RATE = Market rate of real estate
\+cash * equilvanet
\+land held for future development
\+AR + prepaid other assets
=gross asset
-debt
-other liabilities
=Net asset value
/shares outstanding
=NAVPs
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22
Q

property value

A

= NIO / cap rate

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23
Q

Relative value: REITs and REOCs can be valued using market-based approaches by applying a multiple to a property’s funds from operations (FFO)
or adjusted funds from operations (AFFO).

A 
FFO 
accounting net earnings
\+	depreciation charges (expenses)
−	gains (losses) from sales of property
=	funds from operations (FFO)
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24
Q

Price-to-FFO approach:

A 
funds from operations (FFO)
÷	shares outstanding
=	FFO / share
×	sector average P/FFO multiple
=	NAV / share
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25
Q

Adjusted funds from operations: AFFO

A

Most useful representation of current economic income (cash available for distribution, relied on est)

FFO (funds from operations) −	non-cash (straight-line) rent adjustment −	recurring maintenance-type capital expenditures and leasing commissions =	AFFO (adjusted funds from operations)
26
Q

Price-to-AFFO approach:

A 
funds from operations (FFO)
−	non-cash rents
−	recurring maintenance-type capital expenditures
=	AFFO
÷	shares outstanding
=	AFFO / share
×	property subsector average P/AFFO multiple
=	NAV / share
27
Q

P/E firms add value

A
  1. ability to re-engineer the firm and operate more efficiently
  2. ability to obtain debt financing on more advantageous terms
  3. Superior alignment of interests b/w management and private equity ownership
28
Q

Tag-along, drag-along clauses

A

acquisition offer extended to all shareholders when an acquirer acquires control of the company

29
Q

priority in claims

A

PE firms receive their distributions before other owners, often in preferred dividends

30
Q

Earn-outs

A

used predominantly in VC investments and tie the acquisition price paid by the private equity firm to the portfolio company’s future performance over a specific period

31
Q

valuation issue for buyout

A

use DCF
Use relative value approach
use of debt high
key drivers or equity return, increase in multiple upon exist, and reduction in the debt

32
Q

valuation issue for VC

A

uncertain cash flow, less use of DCF
difficult to use relative value approach
low use of debt as equity if dominant form of financing
key driver of equity return use pre-money valuation, investment, and subsequent dilution

33
Q

exist routes for PE firm

A

IPO
Secondary market sales
MBO
liquidation

=investment cost + earnings growth + increase in price multiple + reduction in debt

34
Q

PIC

A

% of committed or absolute amount of capital utilized by the GP to date

35
Q

DPI

A

cumulative distribution / PIC

realized return

36
Q

RVPI

residual value to paid-in capital

A

measures the LP’s unrealized return

=NAV after distribution / PIC

37
Q

TVPI

total value to paid-in capital

A

measures LP’s realized and unrealized return

=DPI + RVPI

38
Q

NPV method f=

A

net investment / pv of entire firm value at exist

39
Q

IRR method f=

A

fv(inv)/exist value

40
Q

ratchet

A

allocation of equity b/w stockholders and mgmt of the portfolio company and allows mgmt to increase their allocation depending on company performance.

A ratchet clause is a mechanism that determines the allocation of equity between shareholders and the management team of the private equity controlled company.

41
Q

Net IRR = CF between

A

fund & LP

42
Q

Gross IRR= CF b/w

A

fund & PM

43
Q

J-curve

A

trendline that shows as initial loss immediately followed by a dramatic gain

44
Q

mgmt fee=

A

%fee * PIC

45
Q

carried interest

A

% * (nav before distribution - committed capital)

46
Q

NAV before distribution

A

nav after distribution(T-1) + called down capital -mgmt fees + operating result

47
Q

NAV after distribution

A

NAV before distribution - carried interest - distribution

48
Q

post value

A

pv(exist value)

=exist value / (1+r)^n

49
Q

pre value

A

post- inv

50
Q

shares vc =

A

shares founders (f/[1-f])

51
Q

price =

A

investment/ shares vc

52
Q

share dilution f1=

A

f1(1-f2)

53
Q

adj. dilution ratio

A

(1+r)/(1-q) -1

q= prob of failure

54
Q

contago

A

spot < futures prices
negative calendar spread

spot -future < 0

55
Q

backwardation

A

spot > futures prices
positive yld/calendar spread

spot -future > 0

56
Q

insurance theory

A

that futures returns compensate contract buyers for providing protection against price risk to futures contract sellers (i.e., the producers). This theory implies that backwardation is a normal condition.

57
Q

basis =

A

spot -future

58
Q

hedging pressure hypothesis

A

expands on insurance theory by including long hedgers as well as short hedgers. This theory suggests futures markets will be in backwardation when short hedgers dominate (i.e., too many hedgers are short) and in contango when long hedgers dominate.

59
Q

theory of storage

A

spot and futures prices are related through storage costs and convenience yield.

futures price = spot + storage cost - concienience yld

60
Q

total return (long futures)

A

collateral return =holding period yld on tbill
+price return = change in price/previous price
+roll return = price of expiring futures - price of new
/ price of expiring futures contract

2020 CFA LEVEL II (15 decks)

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