Alternative Investments

Question 1

Real Estate Valuation Approaches

Answer 1

1) Income Approach
2) Cost Approach
3) Sales Comparison Approach

Question 2

Net Operating Income (NOI)

Answer 2

A measure of income after deducting expenses but before deducting financing costs and taxes.

NOI = income - vacancy - operating expenses

Question 3

Cap Rate

Answer 3

Cap Rate = Discount Rate - Growth Rate

Cap Rate = NOI/Value

Cap Rate = NOI/Sale Price

Question 4

Stabilized NOI

Answer 4

The NOI that is used if it is currently not getting full market rents because of renovations for example. It is the NOI that the building would get once renovations are complete.

Question 5

Curable

Answer 5

When fixing a problem on a property, it will add value that is at least as great as the cost of the cure. Ie: fixing a roof will add at least as much value as the cost of fixing.

Question 6

Debt Service Coverage Ratio (DSCR)

Answer 6

The ratio of the first-year NOI to the loan payment. Includes both interest and principal.

DSCR = NOI/Debt service

Question 7

Mortgage REITS

Answer 7

REITs that invest the bulk (75% or more) of their assets in interest bearing mortgages, mortgage securities, or short-term loans secured by real estate.

Question 8

Hybrid REITs

Answer 8

REITs that own and operate income-producing real estate, as do equity REITs, but invest in mortgages as well.

Question 9

UPREITs

Answer 9

The REIT has a controlling interest in and serves as the general partner of a partnership and may own properties at both the REIT level and the partnership level.

Question 10

DOWNREITs

Answer 10

The REIT owns more than one partnership and may own properties at both the REIT level and the partnership level.

Question 11

Book Value Per Share

Answer 11

Based on accounting values

Question 12

Net Asset Value Per Share

Answer 12

Based in market values

NAV = (NOI/Cap Rate) - Liabilities

Question 13

Funds From Operations (FFO)

Answer 13

Accounting net earnings - depreciation - deferred tax charges (the deferred portion of race expense) - gains or losses from sales of property and debt restructuring

Question 14

Adjusted Funds from Operations (AFFO)

Answer 14

Also known as funds available for distribution (FAD) or cash available for distribution (CAD), is a refinement if FFO that is designed to be a more accurate measure of current economic income.

AFFO = FFO - non cash rent - maintenance capex - leasing costs

Question 15

Non Cash Rent

Answer 15

An amount equal to the difference between the average contractual rent over a lease term (the straight-line rent) and the cash rent actually paid during a period.

Question 16

Private Equity Gross IRR

Answer 16

Relates to cash flows between the private equity fund and and it’s portfolio companies and is often considered a good measure of the investment team’s track record in creating value.

Question 17

Private Equity Net IRR

Answer 17

Related to cash flows between the private equity fund and the LPs, and so captured the returns enjoyed by investors.

Question 18

Return Components on an LBO

Answer 18

The return on preference shares, the increase in price multiples on exit, and the reduction in debt claims.

Question 19

Earn-Outs

Answer 19

Typically used in venture capital investments where the acquisition price paid for portfolio companies by private equity firms is tied to the companies’ future performance.

Question 20

Dilution in a Private Equity Transaction

Answer 20

The implicit cost of reduced investor value when firms take on additional financing or when stock options are granted (and exercised) by management.

Question 21

Back-Fill Bias

Answer 21

When a new hedge fund is added to an index and the fund’s historical performance is added to the index’s historical performance. The problem is that only funds that survived will have their performance added to the index, resulting in an upward bias.

Question 22

Distribution Waterfall

Answer 22

Identifies the profit allocation between LPs and GPs and specifies when GPs can receive carried interest.

Question 23

Ratchet

Answer 23

Refers to the equity allocation between shareholders and management. Enables management to increase its equity allocation depending on the company’s performance and the return achieved by the private equity firm.

Question 24

Clawback Provision

Answer 24

Requires the general partner in a private equity transaction to repay part of previously distributed profits if the fund subsequently underperforms.

Question 25

Hedonic Price Index

Answer 25

Relies on transaction data and the regression model explains the variation in transaction prices based on differences between individual properties sold.