Alternative Investments Flashcards
Three approaches to value real estate
- Cost Approach
- Sales Comparison Approach
- Income Approach - Direct Capitalization and DCF
Discounted Cash Flows for valuing real estate – value is based on the PV of the property’s future Cash Flows using the appropriate discount
Rental Income if fully occupied \+ Other Income == Potential Gross Income - Vacancy and Collection Loss == Effective Gross Income - Operating Expense ==Net Operating Income
Direct Capitalization Rate
Cap Rate = NOI / Value
Cap Rate = discount rate - growth rate
—->
Value = NOI / Cap Rate
Gross Income Multiplier
Sales Price / Gross Income
Term and reversion approach, for total property value
Total property value = PV of term rent + PV of reversion to estimated rental value
Layer Approach, for total property value
Total property value = PV of term rent + PV of incremental rent
Debt Service Coverage Ratio (DSCR)
DSCR = 1st year of NOI / debt service
Loan-to-Value (LTV)
LTV = Loan Amount / Appraisal Value
Equity Dividend Rate
= 1st year CF /equity
Net Asset Value Per Share is the most common measuure for the fundamental value of REITs
Estimated cash NOI / Assumed Cap Rate ==Estimated value of operating real estate \+ Cash & A/R - Debt & other liabilities == Net Asset Value / Total Shares Outstanding == Net Asset Value Per Share
Funds from Operations
Accounting Net Income
+ Depreciation Expense
+ Deferred Tax Expenses
- Gains from sales of property and debt restructuring
+ Loss from sales of property and debt restructuring
= Funds from Operations
Adjusted Funds from Operations (AKA Cash for Distribution)
Funds from Operations
- Non Cash rent adjustment
- Recurring maintenance cap ex & leasing comissions
== Adjusted FFO
Exit Value (for Venture Capital)
Investment Cost \+ earnings growth \+ increase in price multiple \+ reduction in debt == Exit Value
Net Asset Value before Distributions
NAV after PY distributions \+ capital called down - Management Fees \+ Operating Results == NAV before distributions
Net Asset value after distributions
NAV before Distributions
- Carried interests
- Distributions
== NAV after distributions
Post-Money Value
The PV of the estimated exit value
Pre-Money Value
PRE = POST - INV
Calculation for the fraction of VC ownership
First, f = INV/POST where POST = exit value / (1+r)^n OR f = FV(INV) / exit value
Then,
SharesVC = SharesFounders * f/(1-f)
With a price of,
price = INV / SharesVC
For a second round of VC financing`
POST1 = PRE2 / (1+r)^n
SharesVC2 = (SharesVC1+ SharesFounders) * (f/(1-f))
PriceV2 = INV2 / SharesVC2
To adjust the discount rate (that if it may fail) for VC,…
r* = (1+r)/(1-q) -1
where,
q = the probability of VC failure
Basis
= spot market price - futures price @ date in the future
Calendar spread
=future price of a distant maturity - future price of a nearer maturity
Contango
Futures’ price is higher at dates further in the future, where the calendar spread and the basis < 0
Backwardation
Futures prices are lower father in the future,
where the calendar spread and basis >0
Commodity Futures Price
= spot price + storage cost - convenience yield
Price return / spot yield
= (current price - previous price) / previous price
Roll return = when contract expires, and a new position must be restablished
Roll Return = (price of expiring futures contract - price of new futures contract) / price of expiring futures contract
