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
