Class 2: Alternative Investments Flashcards
three most popular alternative investments
RE (most popular)
Private equity (future)
Infrastructure (future)
alternative investments benefits
can make more money
low correlation to other tradition investments
–> better diversification
rewards usually outright the risks
–> better chance to find undervalued assets
—-> nearly impossible to do in the stock market
disadvantages of alternatives
lack of information and transparency
not very liquid
higher fees
no policing when putting it first in the market unlike stocks (less regulated)
different tax treatments
high due diligence costs
after buying, it is very difficult to judge how its worth (hard to give it appraisal)
–> hard to check performance at year end
use of derivatives
due diligence costs
doing research before making an investment
how to buy RE
direct (ownership of actual properties)
indirect (REITs)
pros of RE
more money has been made in RE than in any other industry
can use high leverage
–> magnifies returns when things go well
–> magnifies losses when things go wrong
direct control unlike stocks and bonds
Houses are not taxed in Canada
tax-deductible expenses (CCA shit)
diversification of total portfolio
what are shopping centers doing to remodify themselves since covid
they focus more on entertainment and vag on fashion
how can we diversify with RE
geographic
location
property type
seller has information advantage
requires hands on property management
cons of investing in RE
not very liquid
high unit cost and not divisible
high cost to acquire and to analyse
commissions are high
what does an asset need to be considered liquid
- can sell quickly
2. have to be able to sell at full value
true or false
is real estate a full time job
ye
how to value Real Estate
- comparable sales
- cost approach
- income approach
cost approach
a real estate valuation method that estimates the price a buyer should pay for a piece of property is equal the cost to build an equivalent piece of property
replacement cost to rebuild
comparable sales
recent sales of similar properties
income approach
a) Multiplier
b) net operating income / cap rate
c) NPV of cash flows
Multiplier income approach
disadvantage of this
gross income · multiplier = property value
we do not consider the condition or age of the property
–> influences the net income
why should we not use income taxes in RE?
because we use it in property valuation
how to find net operating income of real estate
potential rental income + other income = total potential income
- vacancy losses and other things that lowers rent = total operating income
- operating expenses
= net operating income
advantages of REITs
pay dividends
easy to buy
less of an initial investment
information is transparent
not a full time job
not taxed
-
what do REITs do to not taxed?
they have to pay out between to 90 and 95% of their earnings as dividends
how to valuate REITs
- Net Asset Value
- Price-to-funds from operation (P/FFO)
–> most common multiple method
- Price-to-adjusted FFO (P/AFFO)
4.
Net Asset Value to value REITs
NAV = (market value of assets - market value of liabilities) / (number of REIT shares outstanding)
FFO adjustments
why would REITs do this?
net earnings
+ depreciation expenses
+ deferred tax charges
- Gains (losses) from sales of property and debt restructuring
= FFO
FFO/shares outstanding * office multiple = price of share
depreciation is not a real cash flow
we should neutralize capital losses or take out any capital gains cause its a rate thing
Adjusted FFO (AFFO)
FFO
- Noncash (straight-line) rent adjustment
- recurring maintenance-type Capex and leasing commissions
= AFFO
AFFO/shares outstanding * office multiple = price of share
tenant inducements
the shit you do to incite tenants to reach
which method is more accurate to value REITs
discounted cash flow
–> nearly impossible to do
–> extremely time consuming
this is why we would choose net asset value method instead
Private Equity fund physiology
general partner has all liability
–> doesn’t care cause he has no money but has expertise so he don’t care
–> gets management fees and carried interest
limited parterre has limited liability
–> has the money but no expertise so he don’t care
private equity are gyuuu
carried interest
a bonus in the form of shares that the general partner receives if he does well
venture capital life
- formative stage
- later stage
- mezzanine stage
- formative stage of venture capital life
angel investing stage
seed stage
early stage
angel investing stage of the formative stage of venture capital life
business plans and market potential
seed stage of the formative stage of venture capital life
product development
market research
early stage of the formative stage of venture capital life
begin production and sales
- later stage of venture capital life
company expansion
- mezzanine stage of venture capital life
IPOs and shit
clawback
allow investors to reclaim fees paid earlier if the fund does not later return the initial investment and if a minimum return requires managers to have excessive fees
direct investment in commodities
cash purchase of commodities
long position in derivatives
indirect investment in commodities
investment in companies whose principal business is associated with commodities
mutual funds and ETFs
returns in commodities
lower returns and highermrisk than S&P 500 and bonds
wide variety in return characteristics with commodity type
low correlation with stocks, bonds, and RE
–> why people invest in it
how do commodities provide diversification
provides an inflation hedge against unexcited inflation with positive collation to inflation
contango
future prices > spot prices
backwardation
future prices < spot prices
insurance theory
longs rewarded for providing protection to producers
–> backwardation is something common and normal
stage theory
future prices relate to spot prices through storage costs and convenience yield
convenience yield
the monetary benefit from holding a physical commodity versus being a long holder of (theres more)
