Alternative Investments Flashcards
AFFO
adjusted funds from operation
AFFO = net Income +
depreciation and amort. +
(gains)/losses from sales of depreciable real estate -
non cash rent adjustment -
recurring maintenance capital expenditures -
leasing commissions
Theory of storage
Futures price = spot price + direct storage costs - convenience yield
Total Return
Price Return + Roll Return + Collateral Return
Price Return
(Current price - previous price) / previous price
Roll Return
(Near-term futures price - farther-term futures price) / near-term futures price * percent being rolled
Collateral Return
Annualized return * fraction of the year being held
when calendar spread is negative that market is in
contango
when calendar spread is positive that market is in
backwardation
Insurance theory of futures returns
producers of a commodity would prefer to accept a discount on the futures price if it meant a guaranteed price
implies markets are in backwardation
Hedging pressure hypothesis
a market in contango results when excess demand for price insurance outweighs the sellers
hedging activity of futures buyers exceeds that of sellers
Under theory of storage, when is convenience yield high
When the scarcity of resource is high
Three different approaches to value real estate
1) Cost approach
2) Income approach
3) Sales comparison approach
What is cost approach of valuation and when is it useful
1) estimate market value of the land +
2) estimate the buildings replacement cost -
3) depreciation, including function/locational/economic obsolescence
Most useful when subject property is relatively new, or for unusual properties where comparable transactions are limited
Valuation methods under income approach of valuation
1) Direct capitalization method
2) Discounted cash flow method
Net operating income from real estate property
amount of income remaining after subtracting vacancy and collection losses, as well as operating expenses such as insurance, property taxes, utilities, maintenance, and repairs from gross income
before financing costs and income taxes
value of real estate property using cap rate
NOI (1) / cap rate
cap rate
1) discount rate - growth rate
2) NOI (1) / comparable sales price)
gross income multiplier
sales price / gross income
all risks yield (ARY)
when tenants are required to pay all expenses, a cap rate is applied to rent instead of NOI
rent / comparable sales price
DSCR
debt service coverage ratio
first year NOI / debt services
LTV
loan to value ratio
loan amount / appraised valuee
equity dividend rate
first year cash flow / equity
used when debt is used to finance real estate, equity dividend rate used to measure the cash return on the amount of cash invested
Net asset value per share for REIT
market value assets - market value liabilities
market value assets are found by capitalizing NOI
Funds from operations
accounting net earnings +
depreciation charges (expenses) +
deferred tax charges (deferred tax expenses) -
gains (losses) from sale of property and debt restructuring
AFFO vs. FFO as measure of economic income
AFFO is better because it considers the capital expenditures that are required to sustain the property’s economic income, but FFO is more used because AFFO relies more on estimates that are considered more subjective
Sources of Value creation from Private equity
1) Ability to re-engineer the firm and operate it more efficiently
2) Ability to obtain debt financing on more advantageous terms
3) Superior alignment of interests between management and private equity ownership
Control mechanisms used by private equity
1) Compensation
2) Tag-along, drag-along clauses
3) Board reps
4) Noncompete clauses
5) Priority in claims
6) required approvals
7) earn out
Exit routes for private equity firms
1) IPO
2) Secondary market sales
3) Management buyout
4) Liquidation
PIC
paid in capital: the percent of committed or absolute amount of capital utilized by the GP to date
DPI
distributed to paid-in-capital: cumulative distributions paid to LPs divided by cumulative invested capital
“cash on cash return”
RVPI
residual value to paid in capital: LP’s unrealized return and the value of the LP’s holdings in the fund divided by the cumulative invested capital
TVPI
total value to paid in capital: measures the LP’s realized and unrealized return, the sum of DPI and RVPI
