Submission - Technical Competencies Flashcards
What is included in the investor update presentations?
Total investor contacted - Active, On-Hold & Declines
Investor status - Contact, Materials received, meeting, DD etc
Investor feedback
Potential and probability of investment
Geography of investors
What data sources were used for the debt tracker?
The sources for the debt tracker were the transactions that were made public, collated on real capital analytics and internal market knowledge from live and completed transactions
Give an example of when the debt tracker aided a transaction?
The debt tracker gave:
Number of transaction and volumes
A good indication of where pricing was for each asset class and the loan to values you could expect.
It identified the most active lenders and countries.
What is the purpose of the RICS Valuation Global Standards/Red Book?
mandatory rules
Best practice guidelines
promote and support high standards in valuation worldwide
RICS Valuation - Global Standards (‘Red Book Global Standards’) contains mandatory rules, best practice guidance and related commentary for all members undertaking asset valuations.
The Red Book is issued by RICS as part of our commitment to promote and support high standards in valuation delivery worldwide. The publication details mandatory practices for RICS members undertaking valuation services. It also offers a useful reference resource for valuation users and other stakeholders.
What are the exceptions to the Red Book?
- Internal Purposes
- Statutory Purposes - tax return
- Advice during negotiation and litigation
- Agency Purposes - anticipation of work
- Anticipation of giving evidence
What is a DCF? Does it differ between asset classes?
Discounted Cash Flow
The process is the same across asset classes and sectors.
The inputs may vary.
Principally estimating your cash flow, incl entry and exit.
Identifying a discount rate, usually the hurdle rate of the investor, and discounting the cash flow in each period.
The sum of the discounted cash flow is you NPV.
If this is a positive sum then the investment surpasses desired returns and should be acquired and vice versa.
The purchase price + the npv is the investment value (worth)
How does location, attribute, lease terms and covenant strength impact a valuation?
If you’re looking at Market Value for example.
You could have the same office building in Watford or central London. The central London office will command a higher market value to to the price people would be willing to pay for it. This could be because of the transport links, the proximity to other firms and clients, the ability to attract talent etc. Same applies to attributes.
Lease terms impact the value due to the valuation method - if there is a long term tenant in situ paying market rent then this building will be valued higher due to the certainty of the income stream. There will be no rent frees/voids in the near future to be taken into account. Same applies to covenant strength.
Walk me through the valuation you undertook in central London?
Fund valuation - so it was an on-going mandate where the building is valued quarterly.
Ensured competence
Check the notes on the previous valuation, to see if there were any upcoming issues. This highlighted that one tenant had not yet committed to renewing.
With this information in mind and the existing tenancy schedule I carried out an inspection with a colleague. The inspection confirmed the buildings situation.
The client confirmed that the tenant who had yet to renew had renewed their lease - consequently the yield was tightened on that tenant and the new lease terms inputted.
This was a reversionary valuation. The value rose by £250k.
How did you weight the comparables?
According to the RICS guidance on hierarchy of evidence. Categories A to C.
I collate all comparable in a schedule and then weight them accordingly.
A- Direct Comparables: Starting with recently transacted information of a similar property where facts are known towards asking prices in the market.
B- Market Data
C- Other sources
What is the hierarchy of evidence?
Categories A to C
A is direct comparable - so recent transactions of similar properties where all information is known to asking prices
B is Market info - yields, indexes etc.
C is other sources - other real estate and locations
What was the impact of the valuation on the fund?
The value of the building rose due to one of the tenants agreeing a lease renewal for 8 years with 8 months rent free and a 5 year break. The value rose by 5% or £250k
Why were rent frees and void periods extended during the coronavirus?
Voids and Rent Frees had been extended due to COVID - from 12 to 18 months rent frees and voids as high as 21.
Extended due to the uncertainty regarding future tenancies.
If there was less than a year on the tenancy then the severe scenario would be put in place.
These were referred to at the next quarter date.
Give an example of where these RFs and voids were pushed out and why?
City - Tenant lease was set to expire in 12 months and there was no tenant incoming.
Rent free was moved out to 18 and void 21 months as the comparable data had suggested
Value of that floor and building fell - After capitalizing the existing term the delay to the next lease being signed is now longer, the PV value of that income stream is now lower. The extension in the rent free means that the net effective rent will be lower and so the income stream is less.
What valuation method did you use for the city office?
Investment
When there is income, capitalized at a yield attained from comparable evidence
term and reversion - draw
Capitalise the term for the existing lease - capitalise the reversion and pv
How did you weight your comparables for the London valuation? What was your ERV and Yield?
According to the guidance note - comparable evidence in RE valuation 2019 aligned to 3 categories. Fortunately there was comparable evidence where all information was available and accurate internally that could be used in the local vicinity.
ERV = £50psf Yield = 4-5%
What are the sources of debt in the market and how do these differ due to investment criteria?
Senior Lenders
Insurers
Debt Funds
Investment Banks
All have different investment criteria and consequently risk profiles. Senior lenders to ensure they can pay interest on depositor and insurers of claims.
Debt funds and investment banks target higher returns for investors.
Why do people/firms use leverage?
To exacerbate returns - It also increases risk as it also exacerbates losses.
Generate the same profit with less initial equity injection. Increases your return on equity.
Whether it’s accretive is dependent on the price of debt.
What is LTV, ICR and DSCR?
Loan to Value
Interest Coverage Ratio - Just interest payments
Debt Service Coverage Ratio - Interest and principal repayments
What is a covenant? Why are these included?
Covenants are put in place by lenders in order to protect themselves. These financial stipulations give the borrower clear expectations for the loan contract and enable both parties to maintain the loan terms.
Ensures the solvency of the project - The borrower has enough income to sustain payments
Why is the covenant strength of the borrower important?
Ultimately the borrower financial strength is important for the lender. If the project doesn’t go to plan, does the borrower have strong financial status to ensure repayment. It can also determine the pricing of the loan.
Track record is also important.
How can you adjust for a weak borrower?
Lower LTV i.e. facility
Higher pricing - higher reward for increased risk
More restrictive covenants
Cash sweeps etc.
What would encourage a lender to fund a project?
Covenant strength - Credit report
Track Record
Prior relationship
Strong project fundamentals
What information did you require for the three retirement sites?
Debt requirements Asset descriptions and locations Development appraisals Demographics and market information track record timeline Development appraisal and specifications
What was included in the marketing materials for the retirement site?
IM and financial model
Exec Summary Finance Request Asset overiview Sector overview financials
What was the opportunity in the retirement sector?
Infancy compared with Aus, NZ and US - Undersupply
UK 65+ Population expected to grow by 20% by 2027 - Increasing demand
UK 65+ have £1.6 trillion Equity in their homes
Rising expectations for high quality, hotel style accommodation across UK markets - retirement living is viewed more as a lifestyle choice rather than a ‘last resort’
Why was the track record of the management team important to the retirement project?
Track record is important as it provides the lender comfort due to the fact this process has been completed successfully before.
An experienced team is a much more attractive investment prospect than someone with no experience or track record.
What is an ltc?
loan to cost - used for developments
Why was a 65% ltc selected for the retirement living portfolio? What were the macro factors?
From previous transactions and market knowledge, this was the sweet spot that would include the majority of lenders given the desired pricing. Senior and debt funds.
COVID. Increase in perceived risk meant that the loan amounts were reduced and pricing increased to mitigate the external risks.
What are restrictive covenants? What were the restrictive covenants in the retirement living deal?
Pre-sale targets
Sales per month
Sales re-pay loan etc.
What makes up the total cost of a loan when presenting the indicative terms to a client?
Loan Amount
Fees - Upfront, interest, non utilisation and exit
amortisation
What currency was used in the data centre deal?
Euros - the American Firm had a European investment arm in place
What are some of the sector specialties in data centres?
Tier IV Gold
Mechanical – Shield, heating and air handling
Electrical – 100% uptime
Security
MW is NIA
Tenants fit-out space so sticky
charged on a per KW / Month - depends on consumption = €160 for 50kw per month
What is Capex? How big was the Capex loan in the data centre deal?
Capital Expenditure. An asset management technique used to boost capacity or quality of an asset to increase rent achievable o.€80m - 60% LTC
What is a debt yield? What was the issue with the debt yield in the data centre deal?
Debt yield is the noi/total debt
i.e. how many periods of income would it take to repay the debt
Prior to the extension and income generated the income would be low compared to the debt quantum
What was the IRR and EM for the retail park in Birmingham?
Input dependent
- yields, rents, forecasts, tenants
23. 6% / 2.4x / 54m
Why were covenants important in the retail park deal? How did you assess their credit worthiness? What did you include?
Covenants were important due to the sector issues. The retail market was underperforming and a number of high profile retailers were going out of business.
The credit profiles gave the lenders comfort around their finances and their ability to meet rent payments. The majority of the information was from credit reports and financial statements from companies house. Profit, Assets etc.
Why were shopping parks more defensive compared to other sections of the market?
▪ Out of town retail parks provide a unique shopping environment to the mutual benefit of
the consumer and retailer. Accessible, convenient and stress-free for the consumer, they are
also flexible and cost effective for retailers, with low construction and relatively low
occupancy costs
▪ Shopping parks, although off a smaller base, experienced 5% less store closures than Retail
and Leisure Parks in the retail sector
Why can a debt fund be more reactive? Why are they able to provide less restrictive covenants?
Smaller more dynamic businesses that are often willing to take on more risk to enhance returns.
They are often more active in the opportunistic and value add spaces where they have to act quick to ensure completion.
They can be more flexible than senior lenders as there is often less regulation and procedures - this allows them to be flexible and take advantage of opportunities.
Why did COVID impact the sale of the shopping park?
The markets paused to understand the impact that the coronavirus was going to have - The buyer offered a discounted price to the seller for the benefit of completing - the seller wanted to reassess the impact on value.
What is a revolving credit facility/ hunting licence?
A loan where a pool of capital is made available to the borrower to be accessed as per their requirements. They are only charged on the capital drawn. Good for companies with unexpected outflows or expensive purchases. For operating purposes.
Features: Cash sweep, max amount, potential commitment, reuseability
In this case it was a pool of capital available for potential acquisitions
Why was the track record and potential pipeline important for the Opportunistic fund?
The fund needed to prove to the lenders that they had experience and had been successful following a similar strategy in the past.
Pipeline was important as the lenders, especially when there is not foresight of the assets they are lending against, want to know the likely assets they will be lending against.
Why did you go ahead with the mandate if you didn’t believe it would be achievable for the opportunistic fund?
It wasn’t that it wasn’t achievable, it was more setting the clients expectation.
They also wanted to create relationships with lenders moving forward.
We agree an engagement and carried this out. They were a impressive sponsor that had a bullet proof track record
Why are senior lenders able to offer lower prices?
Senior lenders and insurers for example require stable and long income to match their liabilities. Consequently they follow risk adverse funding structure. Usually low ltvs to mitigate risk. They also often impose tough covenants and restriction to ensure repayment and a lengthy process.
Why did the debt fund have higher LTPP and pricing in the opportunistic fund?
Risk profile.
Their investors want higher returns.
To do this they are often willing to increase the loan amount, increasing risk, to achieve their pricing requirements.
What were the restrictive covenants imposed by the senior lenders on the opportunistic fund? How did they hinder the model and timings?
They wanted to sign off acquisitions - due to the space the fund were operating in, often sales were completed quickly and off market.
The approval processes that the senior lender wanted to put in place would have hindered this.
What was the impact on the funds expected returns from accepting the debt fund metric in the opportunistic fund?
Cost of debt was coming close to the IRR - the point at which the debt no longer becomes accretive to returns
What is the difference between a development appraisal and a RLV? Where would each tool be used?
GDV - TDC - LV = Profit Viability of a development
GDV - TDC - Profit = RLV Price that should be paid for land to achieve a certain profit.
What does the RICS Financial Viability in Planning: conduct and reporting 2019 professional statement say?
14 Step Financial Viability assessment to establish profit and loss arising from development. Analyses outputs and inputs and matters of relevance. Gives judgement on profit.
- Impartiality and Objectivity statement
- Confirmation of instruction - absence of COIs
- No contingent fee statement
- Transparency of info
- Confirmation on whether RICS member working on the area already
- Justification of evidence
- Benchmark land value & supporting evidence
- FVA origination, review and negotiation
- Sensitivities
- Engagement of RICS members
- non-technical summary
- authors sign off
- Inputs supplies by others
- timeframe
Weakness of an RLV?
Lots of assumptions and very sensitive to changes in the profit requirement
What do you usually sensitize in a development appraisal?
yield
Rents/Values
Costs
Finance rate
What are some of the external factors that can impact a development appraisal?
Finance costs
Build Costs
Planning Costs
Contingencies
What use class does retirement living fall in?
C2 – Residential Institutions / C3 – Secure residential institutions
What is CIL and S106?
Community Infrastructure Levy
Charged by local authorities on a square metre basis - aligned to their charging schedules found online.
Charged on the increase in space from a redevelopment of buildings bigger than 100m2
Purpose is to allow the local authority to provide the required infrastructure to support development
Section 106 are flexible tariffs/requirements put on developments by the local authority - no compliance can mean no planning permission.
Three criteria:
1. In place to ensure the viability of the development
2. Directly related to development
3. fair and reasonable
e.g. Affordable housing or recreational facilities
What was the interest rate suggested on the senior living asset? Why?
5-6% - Due to the development risk taken on by the lender. There is currently no income generation. Price reflects the risk of the development
