Alternative Investment Flashcards
Debt
private - mortgage
public - mbs
Equity
private - direct investments such as sole ownership, partnerships, and commingled funds
public - shares or REITs and REOCs
reasons to invest in real estate
generate current income and capital appreciation
as inflation hedge
for diversification
tax benefits
cost approach (real estate valuation)
replacement cost - curable physical deterioration = replacement cost after curable physical deterioration - incurable physical deterioration (effective/economic life & replacement cost) - incurable functional obsolescence (change lower compare to new)/cap rate - location obsolescence - economic obsolescence \+ market value of land = est value by cost approach
income approach - direct capitalization method
cap rate = discount - growth rate
=NOI/Comparable sales price
value = NIOI / cap rate (going-in)
gross income multiplier - direct capitalization method
sales price/gross income
value = gross income * gross income multiplier
income approach -DCF
using terminal cap rate
appropriate for REIT & REOC
NIO
rental income + other income
- vacancy & collection loss
= effective gross income
- operating expense (not including int. exp and income tax)
layer method
term rent/ term rent cap rate
appraisal-based indices
NCREIF property index (NPI)
RETURN = (NIO - cap.exp + change in market value)
/ beg. market value
Transaction based indices
using repeat-sales index a hedonic ( required only one sale) index
Debt service coverage (DSCR)
first year nio/ debt service
loan to value
loan amount / appraisal value
max loan
min (implied by LTV, DSCR)
cash-on-cash return / equity dividend rate
1st year cash flow (noi-debt pmt) / equity
NAPVs
(asset - liabilities) / shares
NOI
before deduction of depr &g&a
=EBITDA + G&A
FFO
Accounting net earnings, excluding
1) depr on real estate
2) deferred tax charges
3) gains or losses from sales of property and debt restructuring
NAVPS of real estate using FFO
NOI - non-cash rent \+full year adj. for acquisition \+ growth NOI * (1+g)^n / cap rate \+cash & equivalent \+land held for future development \+a/r \+prepaid assets -debt -liability
=net asset value / shares outstanding
FFO/shares outstanding * price/ffo multiple
FFO
most used, adjusts reported earnings and is popular measure of continued operating income of a REIT or REOC
account net earnings
+ depr
-gains from sales of property
+ loss from sales of property
AFFO
most useful /better than FFO in representation of current economic income
cash available for distribution
relies on est
=FFO
- non-cash rent adj
-re-occurring maintenance type capital expenditure
=AFFO
AFFO/SHARES * PRICE/AFFO MULTIPLE
P/E firm add value from
- ability to re-engineer the portfolio company and operate it more efficiently
- ability to obtain DEBT financing on more advantages terms
- superior alignment of interest b/w mgmt and private equity ownership
P/E firms align interest with portfolio managers by
- compensation
- tag-along-drag-along clause
- board representation
- non-compete clause
- priority in claims (dividends and liquidation)
- required approvals
- earns-outs (venture capital): mechanism linking the acquisition price paid by the p/e firm to the company’s future financial performance over a predetermined time horizon
real option analysis
applicable for immature companies with flexibility in their futures strategies
Exist value
investment cost
+ earnings growth
+ increase in price multiple
+ reduction in debt
post-money valutaion
PRE + INV
ownership proportion of VC
INV/POST
NPV method
f = INV/POST POST = EXIST/(1+R)^n
IRR Method
f= fv(inv)/exist value
shares vc = share founders (f)/(1-f)
price=INV/shares vc
shares vc2 = (shares vc1 + shares founder) f2/(1-f2)
r*
(1+r) / (1-q) -1
limited partnership
provide funding, no active role in mgmt
general partner
limited partnership is liable for all firms debts and has unlimited liability, portfolio managers
ratchet
allocation of equity b/w stockholders and mgmt of the portfolio company
mgmt to increase their allocation depending on company performance
PIC
PIC / committed capital
DPI
REALIZED return
=cumulative distribution / PIC
DPI = £345 (Total distributions)/£280 (Total call downs) = 1.23×.
RVPI
unrealized return and is the value of the LP’s holding in the fund dividend by the cumulative invested capital
= NAV after distribution / PIC
TVPI
RVPI +DPI, net of mgmt & carried int
mgmt fee
PIC * %fee
carried int
%(nav before distribution/gross NAV - committed capital)
NAV before distribution
NAV after distribution
+capital called-down
-mgmt
+operating result
NAV after distribuion
NAV before distribution
- carried interest
- distribution
contago
futures prices > near term futures prices
backwardation
s > near futures price
positive calendar spread, basis spread
insurance theory (backwardation is normal)
the desire of commodity producers to reduce their price risk drives commodity futures returns
future prices will be LESS than current spot prices to provide a return to those buying futures from producers
basis
spot - future yld
calendar spread
future - near
Hedging pressure hypothesis (long + short)
when producers hedging behavior dominate, the mkt will be in backwardation
when user dominates, market will be in contango
theory of storage
futures price = spot + storage cost - conveniencet yld
total return (futures)
collateral return T-Bill
+ price return
+ roll return (price of expiring/price of new)-1
advantages of publicly traded real estate securities
superior liquidity
lower minimum investment active professional mgmt
protections afforded to public traded securities
greater diversification potential
disadvantages of publicly traded real estate securities
lower tax efficiency compared to direct ownership
lack of control
costs of a publicly traded corp. structure
volatility associated with market pricing
limited potential for income growth
forces equity issuance
structural conflicts of interest
Due Diligence consideration
remaning lease terms inflation protection in-place rents vs. market rents costs to re-lease space tenant concentration in the portfolio tenant's financial health new competition b/s analysis quality of mgmt
shopping/retail value determinant
- retail sales growth
2. job creation
office/hotel
- job creation
2. supply vs. demand
residential
- population growth
2. job creation
health care
- population growth
2. supply & demand
industrial
- retail sales growth
2. population growth
storage
- population growth
2. job creation
clawback provision
requires the GP to return capital to LPs in excess of the agreed profit split between the LPs and GPs. This provision ensures that when a private equity firm exits a highly profitable investment early in the life of the fund but subsequent exits are less profitable, the GP pays back capital contributions, fees, and expenses to LPs to ensure that the profit split is in line with the terms outlined in the fund’s prospectus.
Carried interest
represents the GP’s share of profits generated by the fund.
co-investment provision
favorable for LP investors. With this provision, LPs generally have a first right of co-investing along with the GP. This can be advantageous for the LPs because fees and profit share are likely to be lower (or zero) on co-invested capital.
