WSP RE Return Metrics and Multiples Flashcards

1
Q

Yield on Cost (Development Yield) Formula

A

NOI / Total Project Cost

NOI - Proforma Annual Stabilised

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2
Q

What is the Yield on Cost and Cap Rate difference

A

Cap Rate uses FMV while YoC uses Total Development Cost

YoC is essentially a forward looking cap rate

YoC carries more uncertainty since NOI must be stabilised and development work has not yet started

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3
Q

What is the development spread

A

Difference between YoC (Going In Cap Rate) and market cap rate (going-out cap rate)

Development Spread (%) = Yield on Cost (YoC) – Market Cap Rate

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4
Q

What is Yield on Cost method

A

YoC Metric is a “back-of-the-envelope” method to determine the trade off for a potential property development investment

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5
Q

What is a Good Development Spread?

A

While there is no set industry benchmark for what constitutes a “good” development spread, per se, most real estate developers target a development spread of around 1.5% to 2.5%.

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6
Q

What is the development yield

A

Stabilised Annual NOI / Total Development Cost

Essentially the potential ROI on a development project

Total Development Cost includes the cost of acquisition and development

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7
Q

What is a Good Development Yield?

A

contingent on the investment type and amount of development occuring

Higher development yield is more attractive generally

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8
Q

What is the difference between Development Yield and Cap Rate

A

The cap rate is the ratio between the annual NOI and the fair market value (FMV) of the property, whereas the development yield is the ratio between the stabilized NOI and total development cost.

development yield concept can be thought of as the “forward-looking” cap rate

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9
Q

What is Loss to Lease

A

difference between a unit’s market rental rate and the actual rent stated on the signed lease agreement.

Loss is nominal rather than monetary

Loss to Lease (LTL) = (Market Rental Rate ÷ Actual Rental Rate) – 1

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10
Q

Loss to Lease (LTL) vs. Gain to Lease (GTL): What is the Difference?

A

inverse of the “loss to lease” is termed the “gain to lease”

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11
Q

What is Equity Multiple?

A

Equity Multiple = Total Cash Distributions ÷ Equity Contribution

Total Cash Distributions (“Inflows”) → The cash retrieved from an investment over the holding period.

Equity Contribution (“Outflow”) → The total equity investment contributed by the investor on the original date of purchase.

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12
Q

Equity Multiple vs. IRR: What is the Difference?

A

Equity Muiltiple neglects the time value of money whereas the IRR does to makje the NPV of a projects cash flow to be 0

High IRR + Low Equity Multiple → A property investment could yield a high IRR, but a sub-par equity multiple if the timing and cash proceeds were received earlier, i.e. the earlier receipt of cash distributions can distort the IRR metric.

Low IRR + High Equity Multiple → Conversely, a property investment could have a high equity multiple, but a lower IRR if the cash flows are spread across a longer time span.

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13
Q

What is a good Equity Multiple

A
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14
Q

Equity Multiple vs. Cash on Cash Return: What is the Difference?

A

Cash on Cash Return – The cash on cash return is the ratio between the annual pre-tax cash flow the investor earns on property investment and the** invested equity in the coinciding period**, expressed as a percentage.

Equity Multiple – The equity multiple measures the total return on the investment and is calculated by dividing the total cash received by the total equity invested i.e. the cash received per dollar invested.

The cash-on-cash return offers a “snapshot” of the annualized return relative to the cash investment, with consideration toward only the cash income generated by the property.

On the other hand, the equity multiple is the ratio between the total return – from the initial purchase date to the exit date – relative to the equity invested.

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15
Q

What is Net Rental Yield

A

Net Rental Yield (%) = (Annual Rental Income – Operating Expenses) ÷ Property Value

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16
Q

Gross Rental Yield vs. Net Rental Yield: What is the Difference?

A

Gross Rental Yield → without consideration toward operating expenses such as property management fees, repairs or vacancies.

Net Rental Yield → accounting for the property expenses incurred as part of running the day-to-day operations.

17
Q

What is the implication of a higher rental yield

A

Generally speaking, a higher rental yield implies more profits and a better return on investment (ROI) in the property – all else being equal.

a rental yield between 5% to 8% is a decent starting point

18
Q

Common OpEx that the net rental yield factors

A

Property Management Fees
Maintenance Costs (Repair, Renovation, etc.)
Building Inspection Fees
Property Taxes
Property Insurance

19
Q

What is Levered IRR?

A
20
Q

Difference between Levered and Unlevered IRR

A
21
Q

Why does the levered IRR exceed the unlevered IRR in all cases

A

Debt financing means the equity contribution is lower thus a higher IRR

thus the return is lower for nearly any given investment

22
Q

What does the magnitude of the spread between levered and unlevered IRR signify

A

The greater the spread between the levered IRR and unlevered IRR, the more reliant the anticipated investment returns are on leverage.

Drawback to leverage is the potential downside risk created by placing a debt burden on the property.

23
Q

investment returns in cre come from which 2 sources

A

Cash Flow Growth → The growth in cash flow (or income) generated by a property stems from improvements in operating efficiency, in which more value is extracted from tenants (e.g. increase in rent prices). Further, there should be an expansion in the margin profile of the investment property, such as its NOI margin, from these initiatives to reduce costs.

Capital Appreciation → The capital appreciation concept refers to the value of an investment property increasing relative to the original purchase cost. Similar to achieving multiple expansion in LBOs, where the exit multiple is higher than the purchase multiple, the sale price at exit exceeds the acquisition price on the date of initial purchase.

24
Q

unlevered and levered cash flow formula

A

Unlevered Cash Flow (UCF) = Net Operating Income (NOI) – Capital Reserves – Capex – Tenant Improvements – Leasing Commissions

Levered Cash Flow (LCF) = Unlevered Cash Flow – Debt Service

25
Q

should you use leverage as a primariy investment strategy

A

If sufficiently meeting the minimum target return is contingent on the substantial use of leverage, the investment opportunity may be considered as riskier and might not be worth pursuing.

Simply put, using debt as a primary strategy to create value by itself is far riskier relative to plans to facilitate growth in net operating income (NOI) and capital appreciation from identifying favorable market trends or implementing improvements to properties.

26
Q

What is an Equity Dividend Rate

A

Equity Dividend Rate (EDR) = Before-Tax Cash Flow (BTCF) ÷ Initial Equity Contribution

annual cash yield received by an investor on a stabilized real estate property investment, after deducting financing costs.

Before-Tax Cash Flow (BTCF) → The pre-tax income of the property investment at stabilization. levered cash flow metric since the annual debt service, which includes principal amortization and interest, is accounted for.

Initial Equity Contribution → The equity investment on the date of the original property acquisition

27
Q

What is Real Estate Investment Payback Period?

A

Conceptually, the real estate payback period measures the recovery time in which the investment property remains unprofitable (and thus operates at a loss).

Investment Payback Period = Property Value ÷ Annual Return

Property Value → The property value, or total cost, is the total spend while completing the property investment, including the direct property-level expenses incurred across the holding period.

28
Q

What is a Good Payback Period in Real Estate Investing?

A
29
Q

What is GRM (Gross Rent Multiplier)

A

Gross Rent Multiplier (GRM) = Fair Market Value (FMV) ÷ Annual Gross Income

30
Q

What is Gross Income Multiplier?

A

Gross Income Multiplier (GIM) = Property Sale Price ÷ Effective Gross Income (EGI)

Property Sale Price → The stated selling price of the property that is currently on the market for sale.
Effective Gross Income (EGI) → The total income generated by the property across one year, prior to subtracting operating expenses.

31
Q

Gross Rent Multiplier (GRM) vs. Gross Income Multiplier (GIM)

A

Gross Income Multiplier (GIM) → In contrast, the gross income multiplier (GIM) is more inclusive since all forms of income generated by the property are factored into the metric rather than just rental income. Hence, the gross income multiplier is more frequently used in commercial properties with multiple streams of income.

32
Q

Net Income Multiplier (NIM)

A

Net Income Multiplier (NIM) = Property Purchase Price ÷ Net Operating Income (NOI)