Alternatives Flashcards
Non-residential Properties
i. Residential with the intent to produce income
ii. Commercial properties
1) Office (dependent on job growth)
2) Industrial(Dependent on consumer spending)
iii. Multi-family(if only used for income)
Real Estate Values
a. Market value - what the average investor is willing to pay
b. Investment value - value to a particular investor
c. Value in use - value for part of a business
d. Assessed value - value by a taxing authority
Valuation: Cost Approach
Purpose: what it would take to construct a comparable building
Value = Market value of land + building value
Building Value =
Replacement cost for building
- Curable
- Incurable [(age / life) * replacement cost
- Obsolescence
Valuation: Income Approach
Purpose: value based on first year NOI
Direct capitalization Method Value:
(AKA going-in cap rate)= NOI1 / cap rate
Note: If tenant pays all expenses: rent1 / ARY
If there is a temporary impairment need to use stabilized ROI
Gross income multiplier
Gross income multiplier = sales price / gross income
value = gross income * gross multiplier
Note: This ignores vacancy rates and operating expenses
Discounted Cash Flow Method
Discount rate = cap rate + growth rate
TV: Use GGM
Term and reversion lease approach
Step one: calculate PV of current lease
Step two: Calculate TV of the new terms
Step three: Calculate PV of the TV
Step four: add step one and three
Rent Layer method
Step 1: calculate the value of contract rent (rent / current discount rate)
Step 2: calculate value of incremental rent [(New rent - old rent)/new discount rate)]
Step 3: Calculate PV of incremental rent
Step 4: add step one and three
Real Estate Indices
Appraisal-based indices
used to measure market movements (lags, less volatile, lower correlation)
Transaction-Based Indices
Repeat-Sales (sales of the same property)
Real Estate Ratios
Debt Service Coverage Ratio (DSCR): first year NOI / debt service
Loan-to-value (LTV): loan value / appraisal value
Equity dividend rate = first year cash flow / equity
Types of publicly trades real estate securities
Equity REITS: actively managed tax-advantaged trusts (Has no corporate income tax)
REOCs: no tax advantages
Residential or commercial MBS
How the Economy affects REITS
REIT Type Affects Most
Hotel Job Creation
Office Job Creation
Residential Population Growth/Jobs
Shopping/Retail Retail Sales
Storage Population Growth
Healthcare Population Growth
Industrial Retail Sales
Overall Net Asset Value Per Share
REIT assets - liabilities
a. Cap rate = NOI / value (This is based on recent transactions)
b. Value = NOI / cap rate
Funds from Operations (FFO)
Account net earnings
+ Depreciation
+ Deferred tax expense
- Gains from Sales of property and debt restructuring
+ Losses from sales of properties and debt restructuring
Adjusted Funds From Operations (AFFO)
FFO
- Non-cash (straight-line) rent adjustments
- Recurring maintenance-type capital expenditures and leasing commissions
Net Asset Value per Share Accounting
Start with Estimated NOI
/ Cap rate
= Estimated value of operating real estate
+ Cash and accounts receivable
- Debt and other liabilities
= Net asset value
/ Shares outstanding
Price-to-FFO valuation Price-to-AFFO valuation
- Price-to-FFO valuation
FFO / shares THEN * multiple
- Price-to-AFFO valuation
AFFO/ shares THEN * multiple
Different Types of Private Equity Valuations
- Discounted cash flow (not typically used for VC due to unknown cash flows)
- Relative value (price multiples) - not used a lot for VC due to lack of comparables
- Real option analysis
- Replacement cost
- Venture capital method (debt is usually low and equity is high)
Venture Capital Method: Pre, Post, and Ownership
a. Post-money = PRE + INV: Exit value / (1 + r)^t
b. Pre-money = POST - INV
c. Ownership = INV/POST
Example:
Intial investment $4M, value of firm in 7 years = $25M, discount rate = 25%
- Calculate PV: FV = 25M, N = 7, I =25 CPT PV = 5,242,886
Ownership = INV/POST, $4M / 5,242,886 = 76.29%
Exit routes
a. IPO - highest exit value but costly. Timing is key
b. Secondary Market Sale
c. Management Buy out
d. Liquidation
Distribution waterfall
Purpose: how the carried interest is paid to the GP
a. Deal-by-deal method; just paid the % of carried interest on the profits
b. Total return
i. Portfolio value exceeds committed capital
ii. Portfolio value exceeds invested capital (plus 20%)
c. Clawback: GPs must pay back if losses occur
Private Equity Quantitative Measures
a. PIC (Paid-in capital); amount utilized by the GP
b. DPI (distributed to paid-in capital); LPs realized return for which they received distributions
i. Cumulative distributions/paid-in capital
c. RVPI (residual value to paid-in capital); LPs unrealized return (what has not been distributed)
i. NAV/paid-in capital
d. TVPI (total value to paid-in capital);
i. sum of DPI and RVPI
Adjusting the Discount Rate for Failure
r* = (1 + r / 1 - q) - 1
Commodity Market Participants
a. Hedgers - take an offsetting position
i. Producers; natural long position
ii. Consumers; natural short position
b. Speculators; risk takers and provide liquidity
c. Arbitrageurs
Storability/Renewability
a. Storability: high means does not degrade over time and costs are low
b. Renewability: produced without limit;
i. wheat is renewable, minerals/crude oil is not
Convenience Yield
Purpose: The benefit from holding a commodity in stock vs just owning a futures contract
i. Short supply = higher convenience yield, lower futures price
ii. High supply = low convenience yield, higher futures price
Theory of storage Types
Inverse relationship between inventory and yield
- Nonstorable commodities (like oil and livestock) are usually in backwardation
i. This means positive roll return - Storable commodities (like gold) are almost always in contango
i. This means negative roll return
Accessing commoditites
- Direct purchase (but have storage and maintenance)
- Commodity stocks
- Mutual Funds
- Futures (but must roll contracts)
- Structured Products
Backwardation and Contago
Backwardation (Producers dominate)
Current spot price > future spot price
Contango (Buyers dominate)
Current spot price < future spot price
Normal Backwardation: Expected spot price > future spot price
Normal Contango: Expected spot price < future price
Total Return of Commodities
Total return = spot return + roll return + collateral return + rebalancing return
Spot return of Commitities
Spot return: change in spot price. Driven by supply and demand
Roll Return of Commoditites
Roll return: income generated as futures contracts close and get replaced over time
Contango = negative return
Backwardation = positive return
Collateral and Rebalancing Return of Commoditites
Collateral Return: interest received on a cash investment
Rebalancing return: diversification return
Excess and total return indices
- Excess return index reflects an uncollateralized futures investment
Excess return = spot return + roll return
- Total return index is a fully cash-collateralized commodity investment (gets interest from t-bills)
Total return = spot return + roll return + collateral return
Insurance Perspective
Desire by producers to hedge price risk
Leads to normal backwardation
Hedging Pressure Hypothesis
Desire by producers to hedge price risk AND consumers to hedge their short positions
Leads to normal contango
Theory of Storage for Returns
Considers impact of inventory
Price changes occur based on convenience yield and storage costs
Ways to Calculate the Cap Rate
Cap rate = discount rate - growth rate
OR
NOI1 / value
OR
NOI1 / comparable sales price
Venture Capital Method: Shares required
Step one: Shares * Ownership % / 1 - Ownership %
This is total shares required
Step two: INV / total shares required
