AlTs Flashcards
Name and describe the 3 ways to value direct property?
Cost Approach = Cost of Land - Cost of development = Value
Direct Capitalisation Apporach = Pretty much the Gordon growth model. Finding the Cash flows divided by the capitalisation rate
Discount cash flow = Just a DDM.
What is the difference between gross and net rent
Gross rent = Landlord pays expenses
Net rent is tenant pays expenses
How to calculate NOI and what does NOI mean
Net operating income.
It is calculated as
Potetnial total rental income + other income - Vacancies - Operating expenses
What is NOT included in NOI
Income taxes
What are 3 pros and 3 cons of property investment
Pro - Diversification, Inflation hedge, income and price appreciation
Con - Costly, may need leverage, lead times in construction, Lack of liquidity
Why/when would someone use the cost approach to value a proprty, and what is the cost approach?
cost approach is value - cost to build
You would use it for new properties, unusual properties
Is the capitalistion approach an income approach
Yes. same with the DCF
What is the gross income multiple?
It is a multiple, kinda a redo of the direct capitalisation approach, that can be used to value property. It is the Sales value of the property / GROSS income.
You can multiply your expected gross income by the comparable gross income to get propertty value. It does not take costs into considerion
What is the cap rate?
The cap rate is the discount factor - growth rate. DO NOT SUBTRACT IT A SECOND TIME
What is the formula to find the cap rate from the direct cap formula?
Cash flows / Sales price
What is the cap rate formula
Cash flow / CAP = Value
Which is more risky, stocks or private equity real estate
Private equity real estate portfolios are less risky than stock portfolios and have lower expected returns. Private equity real estate has bond-like characteristics because of the stream of lease payments and, at the same time, has stock-like characteristics because of the dependency on the strength of the overall economy when leases are renewed.
Does private equity real estate have tax exemptions
Yes
How to calculate the growth rate with the going in cap rate
Discount rate - going in cap rate
How to calculate direct capitalisation value?
It is the going in cap rate under the first noi
What are the key differences between DCF and DC
DCF is more complex, and DCF relies on comparable transactions
What sort of depreciation do you subtract from the cost value>
Functional, economic, location etc.
Using the sales comparison method, are undesirable qualities in comparable properties added or subtracted from its value
Added (yes added)
How is the return of an index calculated?
NOI - Capex + Change in value / Begininng market value of property
Which is more volatile, appraisal indexes or transaction indexes and why
Appraisal indexes are smoothed, transaction indexes actually show market vol
Name the 3 ratios important for public property valuation
Debt to service coverage = NOI / Interest+Principal Higher is better
Loan to value = Loan value / Value of property, Lower is better
Equity Dividend Rate = Cash return / equity, higher is better
Name 3 types of publically traded real estate
REOC
REIT
MBS
What the hec is an REOC
Real Estate investment companies. Pretty much a incorporated developer.
Does a reit have tax benefits
Yes
How to calcuate NAV of reit
Market value of Assets (NOI/r) - Liabilities.
This does not always match what is in the market
Important: Fund From Operation. formula. and alternative/better formula
FFO = Net income + NCC + Defferred Taxes - Gains + Losses. This is the real economic cash the firm is generating. It is a better NOI
FFO - Non cash rent = Adjusted FFO. This is a better representation of cash on hand
Non cash rent = Cash recieved - cash you should’ve received. The formula should be showing kind of like your normalised earnings
Formula for non cash rent (for FFO)
Rent recieved - Cash supposed to recieve for period
What are some key characteristics of reits
Distros, tax efficiency, decreased vol
Which is more diverse, reoc or reit
REIT- can invest in multiple jurisdictions
Which is more operationally flexible , reoc or reit
Reoc
Affo formula
Ffo- non cash rent - maintenance
What is the key consideration to re investing
Leverage exposure
Nav formula
Noi/ r + cash - debt
Key differences between REITS and REOCs
Tax structure and how they generate income/returns. Reocs generate income from sales/development of properties, and have no special tax exemptions.
What are the three considerations of the LBO model?
Cash flow of target
Total amount of financing the pe firm needs
Total cost of that financing
What is the post-money valuation formula?
Pre money valuation + investment
or
present value of the exit value
How to calculate equity stake of PE fund using post money valuation?
Investment / Post money valuation
What is a key difference between VC firms and LBO firms?
LBO firms use nearly all debt, VC firms use equity
When would you use a DCF to value a firm. Would a VC firm use it, or LBO firm
Operating history, predictable cash flows. LBO firm only
When would you use a Real Option model, and who would use it?
Immature companies only, it is for Venture Capital Firms
What are the three considerations of the LBO model?
Cash flow of target
Total amount of financing the pe firm needs
Total cost of that financing
What is the post-money valuation formula?
Pre money valuation + investment
How to calculate equity stake of PE fund using post money valuation?
Investment / Post money valuation
Formula for fraction of shares owned by PE company
Investment / Post money value
For a VC firm’s valuation, how do we calculate what we subtract from the post investment Value to account for risk?
It is the possibilitiy or probability of failture to the power of how many years that is happening. E.g, risk of failture = 80%^4 then multiple that by the TERMINAL value. Subtract that answer from the terminal value to get the new one.
Or just change the discount rate
What is a tag along, drag along provision?
Ensures management of company are included in any acquisition offer
Which type of firm (LBO or VC) can a MBO not take place? And what is a MBO
Management buyout. VC firm management do not have access to the capital needed for a MBO
Which quant measures in Private Equity do you want high?
DPI and RVPI (realised and unrealised return)
Is an income approach applicable for VC companies?
NO
Formula for fraction of shares owned by PE company
Investment / Post money value
For a VC firm’s valuation, how do we calculate what we subtract from the post investment Value?
It is the possibilitiy or probability of failture to the power of how many years that is happening. E.g, risk of failture = 80%^4 then multiple that by the TERMINAL value to get the extra bit you subtract from the post invesemnt value.
Which is harder to value risk, LBO or VC?
VC
Which type of firm (LBO or VC) can a MBO not take place? And what is a MBO
Management buyout. VC firm management do not have access to the capital needed for a MBO
Which quant measures in Private Equity do you want high?
DPI and RVPI (realised and unrealised return)
Is an income approach applicable for VC companies?
NO
Index return formula for RE index?
NOI - Capex + Positive Values Change / Previous period Value
What are the 3 components of total return of a commodity contract
Spot return plus roll return plus collateral return
When spot prices are higher than future prices, the market is in….
Backwardation
When spot prices are lower than future prices the market is in…..
Contango
What is collateral return?
Return of the exchange rate (eg) during the life of a contract
What is the name of the spread between future and spot prices
Calendar spread or basis
If the need to hedge your commodity is high in the market , what happens to future prices?
Heighten
What is the formula for future price taking storage into consideration
Future = spot + storage - convenience yield
If your asset is abundant in the market, the convenience yield is….
Low
Will farmers sell at a lower price to lock in prices ?
Heck yes
What are the 3 commodity future theories, and what do they mean
Hedging Pressure Theory = speculators want to lock in a price today
Insurance theory = Farmers/hedgers want to lock in a price today
Storage theory = Cost of storage and benefit of convenience yield stipulate future price
If the storage cost is high, is the market in backwardation or contango
Contango
If the convenience yield goes up heaps, is it more likley the market is in backwardation or contango
Backwardation
Explain backwardation and contango
Backwardation is the spot price is higher than the future price, contango is the spot price is lower
If there were a heap of hedgers in the market, would the market be in backwardation or contango
Backwardation. More hedgers = more farmers wanting to lock in future price. More future contracts in supply = lower price. Lower f relative to s = backwardation
Explain what convenience yield is
Convenience yield is the non-monetary benefit of holding an asset. Like, since i hold some cool commodity, like a baseball card, holding it has some sort of value to me, so that would decrease the future price, as the other party does not get to enjoy that.
Do speculators provide liquidity or not?
Yes they do mate
Formula for roll return
Change in future - Change in spot OR Future near - Future far / Future near
If there is an abundance of hedgers in the market, the future price will be….
Low, therefore the market will be in backwardation
Formula for roll return
Change in future - Change in spot OR Future near - Future far / Future near
Which is the most expensive route of exit strategy in PE
IPO`
If the market is in backwardation, will the roll return be positive or negative
Positive
Risk free * initial capital required is what?
The collateral yield
What must you do when rolling forward a contract, what do you need to buy?
Long term contracts, and sell short term contracts
Explain heteroskadacity simply
Heteroskadacity is that the variance is correlated with the independent variable
