Alternative Investments Flashcards
Real Estate Valuation Approaches
1) Income Approach
2) Cost Approach
3) Sales Comparison Approach
Net Operating Income (NOI)
A measure of income after deducting expenses but before deducting financing costs and taxes.
NOI = income - vacancy - operating expenses
Cap Rate
Cap Rate = Discount Rate - Growth Rate
Cap Rate = NOI/Value
Cap Rate = NOI/Sale Price
Stabilized NOI
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.
Curable
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.
Debt Service Coverage Ratio (DSCR)
The ratio of the first-year NOI to the loan payment. Includes both interest and principal.
DSCR = NOI/Debt service
Mortgage REITS
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.
Hybrid REITs
REITs that own and operate income-producing real estate, as do equity REITs, but invest in mortgages as well.
UPREITs
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.
DOWNREITs
The REIT owns more than one partnership and may own properties at both the REIT level and the partnership level.
Book Value Per Share
Based on accounting values
Net Asset Value Per Share
Based in market values
NAV = (NOI/Cap Rate) - Liabilities
Funds From Operations (FFO)
Accounting net earnings - depreciation - deferred tax charges (the deferred portion of race expense) - gains or losses from sales of property and debt restructuring
Adjusted Funds from Operations (AFFO)
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
Non Cash Rent
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.
Private Equity Gross IRR
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.
Private Equity Net IRR
Related to cash flows between the private equity fund and the LPs, and so captured the returns enjoyed by investors.
Return Components on an LBO
The return on preference shares, the increase in price multiples on exit, and the reduction in debt claims.
Earn-Outs
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.
Dilution in a Private Equity Transaction
The implicit cost of reduced investor value when firms take on additional financing or when stock options are granted (and exercised) by management.
Back-Fill Bias
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.
Distribution Waterfall
Identifies the profit allocation between LPs and GPs and specifies when GPs can receive carried interest.
Ratchet
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.
Clawback Provision
Requires the general partner in a private equity transaction to repay part of previously distributed profits if the fund subsequently underperforms.
