Alternative -dup Flashcards
Mortgages
Direct investments such as sole ownership, partnerships, and commingled funds
Mortgage-backed securities
Shares of REITs and REOCs
Characteristics of real estate
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
Cost Approach to Valuation
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.
Income Approach - direct capitalization method
cap rate = discount rate − growth rate
value = V0=NOI / cap rate
cap rate = NOI / comparable sales price
NOI = income - vacancy & collection losses & operation expenses
Income Approach - discounted cash flow method
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)
Income Approach - direct capitalization method
gross income multiplier,
value = gross income × gross income multiplier
gross income multiplier = sales price / gross income
office Characteristics
job grows
industrial Characteristics
economy,
import/export
retail Characteristics
consumer spending
overall economy
job growth
savings rate
multi-family Characteristics
population growth
age demographic
DSCR
first year NOI / debt services
LTV
loan amount / appraised value
equity dividend rate
first year cash flow / equity
Advantages/Disadvantages of Investing in Publicly Traded Real Estate Securities
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.
Due Diligence Considerations of REITs
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.
layer method
term rent/ term rent cap rate
Appraisal based indices
NCREIF property index (NPI)
return = [NOI - cap exp + (change in market value)]
/beg. market value
max loan amount
min( implied by LTV, DSCR)
cash-on-cash return / equity dividend rate
[1st year cf = nio - debt]
/equity
NAVPVs -REIT valuation
(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
property value
= NIO / cap rate
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).
FFO accounting net earnings \+ depreciation charges (expenses) − gains (losses) from sales of property = funds from operations (FFO)
Price-to-FFO approach:
funds from operations (FFO) ÷ shares outstanding = FFO / share × sector average P/FFO multiple = NAV / share
Adjusted funds from operations: AFFO
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)
Price-to-AFFO approach:
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
P/E firms add value
- ability to re-engineer the firm and operate more efficiently
- ability to obtain debt financing on more advantageous terms
- Superior alignment of interests b/w management and private equity ownership
Tag-along, drag-along clauses
acquisition offer extended to all shareholders when an acquirer acquires control of the company
priority in claims
PE firms receive their distributions before other owners, often in preferred dividends
Earn-outs
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
valuation issue for buyout
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
valuation issue for VC
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
exist routes for PE firm
IPO
Secondary market sales
MBO
liquidation
=investment cost + earnings growth + increase in price multiple + reduction in debt
PIC
% of committed or absolute amount of capital utilized by the GP to date
DPI
cumulative distribution / PIC
realized return
RVPI
residual value to paid-in capital
measures the LP’s unrealized return
=NAV after distribution / PIC
TVPI
total value to paid-in capital
measures LP’s realized and unrealized return
=DPI + RVPI
NPV method f=
net investment / pv of entire firm value at exist
IRR method f=
fv(inv)/exist value
ratchet
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.
Net IRR = CF between
fund & LP
Gross IRR= CF b/w
fund & PM
J-curve
trendline that shows as initial loss immediately followed by a dramatic gain
mgmt fee=
%fee * PIC
carried interest
% * (nav before distribution - committed capital)
NAV before distribution
nav after distribution(T-1) + called down capital -mgmt fees + operating result
NAV after distribution
NAV before distribution - carried interest - distribution
post value
pv(exist value)
=exist value / (1+r)^n
pre value
post- inv
shares vc =
shares founders (f/[1-f])
price =
investment/ shares vc
share dilution f1=
f1(1-f2)
adj. dilution ratio
(1+r)/(1-q) -1
q= prob of failure
contago
spot < futures prices
negative calendar spread
spot -future < 0
backwardation
spot > futures prices
positive yld/calendar spread
spot -future > 0
insurance theory
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.
basis =
spot -future
hedging pressure hypothesis
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.
theory of storage
spot and futures prices are related through storage costs and convenience yield.
futures price = spot + storage cost - concienience yld
total return (long futures)
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
