Real Estate Career Guide
Table of Contents
Real Estate Market Overview
3
Real Estate 101
5
Industry Roles Overview
16
Roles & Responsibilities
22
The Job Search
37
The Interview
51
Appendix I: Sample Interview Questions
58
Appendix II: Career Management Statistics
70
Appendix III: Real Estate Glossary
78
Answers to Appendix I Questions
97
Wharton Real Estate Club 2014
Chapter 1:
MARKET OVERVIEW
Wharton Real Estate Club 2014
Real Estate Market Overview
U.S. Macroeconomic Trends
•The US continues sustained economic growth with
corporate profits decelerating but still at all-time highs
•The uncertainty surrounding US monetary
policy has resulted in bond yield volatility and is
Having an impact on the stability and pricing of debt
as yields rise
•Moodys/RCA is predicting a 10-year bond yield of 5%
by 2016 Europe continues to lag the US in its
recovery but has posted positive macro news in
recent quarters
Source: CBRE Global Vision Q3 2014
Real Estate Market Trends
•The apartment market is the only market where vacancy (at 6%) is below its long term average of 6.3%
•Commercial absorption continues to trend upward as the job and thus office market slow improve
•ULI projects office rents to grow by 4.2% a year through 2018
•Investors have started turning to secondary markets with low vacancy rates in the quest for higher yield
•The industrial sector is receiving increased attention as many large corporations move their manufacturing back to
the US and e-commerce grows the need for warehouse and logistical centers
•San Francisco and Houston are the markets likely to see most growth in 2014 per ULI industry surveys
Source: ULI Emerging Trends in real Estate 2014
Wharton Real Estate Club 2014
Chapter 2:
REAL ESTATE 101
Wharton Real Estate Club 2014
MAJOR PROPERTY TYPES
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Office
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Retail
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Residential structures comprised of discrete units that house distinct family groups
Types: garden, mid-rise, high-rise
Industrial
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Properties vary from large regional shopping centers containing 1+ million square feet to small
stores with single tenants
Types: regional mall, power center (big box), strip center, lifestyle center
Multifamily
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Buildings range from major multi-tenant buildings in CBD of large cities to single tenant
buildings, often built with specific tenant needs in mind
Types: central business district (CBD) or suburban; low-rise or high-rise; Class A, B or C
Special purpose buildings designed specifically for industrial use that would be difficult to
convert to another use, buildings used by wholesale distributors, and combinations of
warehouse or showroom and office facilities
Hotel
Residential
Wharton Real Estate Club 2014
Source: Professor Sinai Lecture 10/10
WHAT DRIVES REAL ESTATE VALUES
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Fundamentals (rents, expenses)
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Determined by demand (e.g. jobs, urban appeal)
Determined by supply (e.g. new construction)
NOI = Rents – Expenses (actually Total Operating Income less Total
Operating Expenses)
Asset pricing (interest rates, risk)
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How much will the market pay today for a stream of future real estate
income?
Determined by opportunity cost of capital
Determined by expected real estate income growth
Determined by anticipated real estate risk
“Cap rate”
Wharton Real Estate Club 2014
Source: Professor Sinai Lecture 10/10
VALUATION METHOD 1:
NOI / CAP RATE
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Applies a multiple to NOI (divide by the cap rate)
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Used to estimate the average market value of a property
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Property Value (V) = NOI / cap rate
Cap rate comes from surveys or transaction data (back out cap rate from market
averages (NOI/V) or observe NOI/V for other properties
NOI is first year of stabilized NOI
Example:
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Cap rate is like the required cash yield on a property
Akin to the inverse of a P/E ratio
Next year’s stabilized NOI = $500,000; Price paid for building = $5M
Cap rate = $500,000 / $5,000,000 = 10%
Cap rates vary over time, by property type, and by geography
Why are cap rates so low now?
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Plenty of capital allocated to buying, not so many properties for sale
Return of debt financing
Low Treasury rates = “what else is there to invest in?”
Composition of properties transacting – high quality
Wharton Real Estate Club 2014
Source: Professor Sinai Lecture 10/10
VALUATION METHOD 2:
DISCOUNTED CASH FLOW
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Discounted Cash Flow (“DCF”)
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Net Present Value (“NPV”)
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Estimate of future cash flows
Typical projection period of 5 10 years
Who needs pro formas and why?
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Determine the NPV of the investment by subtracting the payment price from the
sum of the present value of the property’s future incremental cash flows
What is a ‘pro forma’?
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A real estate asset is worth the expected value of all future cash flows generated
by that asset
The present value of the property is the sum of the present values of all expected
future cash flows
Lenders, investors, developers
How to build a pro forma
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Analyze the leases, Model the leases, Make assumptions, Reality checking
Wharton Real Estate Club 2014
Source: Professor Sinai Lecture 10/10
VALUATION METHOD 3:
REPLACEMENT VALUE
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Replacement Value
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Based on the cost of replacing/reconstructing property on a per square
foot basis
Estimate the replacement value of the property, less depreciation, and
then adding back the value of the land site
Note that land does not depreciate
In general, not used as a strict valuation method
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Sanity check and upper bound on valuation calculations
If you are buying a building for $500 per square foot and your estimate of
replacement cost is only $350, you will likely question the logic of paying
a steep premium
Wharton Real Estate Club 2014
Source: Professor Sinai Lecture 10/10
TYPES OF CAPITAL: DEBT
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Senior Loan: First in line for repayment
Junior Loan: Second in line for repayment
Mezzanine Debt
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“In between” debt and equity, in line behind debt, in front of equity holders
Helps a borrower who doesn’t have enough equity to meet senior debt holder’s
LTV requirements
Is a loan against equity stake in the project
Debt structuring converts whole loans into tradable bonds
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Benefits
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Liquidity
Access to broader capital markets
Examples
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Collateralized commercial mortgage backed securities (CMBS)
Collateralized debt obligations (CDOs)
Wharton Real Estate Club 2014
Source: Professor Sinai Lecture 10/10
TYPES OF CAPITAL: DEBT (CONTINUED)
Real Estate 101
What makes structured debt work
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Divorces bond credit quality from the credit quality of the underlying real estate
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Mitigates need for specialized real estate knowledge
Makes some bonds have a priority claim on cash flows from mortgages (or bonds) rather
than on the mortgages (or bonds) themselves
Bond credit quality can be higher than the credit quality of any given mortgage
Senior/Subordinated Structure
The Anatomy of CMBS -- $1 billion issuance
Class
Rating
Principal
Coupon
A1
AAA
150 mm
6.25%
A2
AAA
250 mm
6.35%
A3
AAA
300 mm
6.40%
A
AAA
700 mm
B
AA
50 mm
6.50%
25%
C
A
50 mm
6.60%
20%
D
BBB
80 mm
6.75%
12%
E
BB
60 mm
7.00%
6%
F
B
40 mm
7.00%
2%
G
Unrated
20 mm
7.00%
0%
IO
AAA
notional
0.90%
na
Wharton Real Estate Club 2014
Subordination
30%
Copyright 2012 Todd M. Sinai,
except if credited otherwise.
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43
Source: Professor Sinai Lecture 10/10
TYPES OF CAPITAL: EQUITY
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Sources:
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Institutions: Pension funds, endowments, etc.
Investors: Opportunity funds, family offices, etc.
Public: Real estate investment trusts (REITs)
Wharton Real Estate Club 2014
Source: Professor Sinai Lecture 10/10
REAL ESTATE INVESTMENT TRUSTS (REITS)
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Types:
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Equity: owner-operators of income-producing properties
Mortgage
Hybrid
REIT regulations
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REITs must be a “real estate” company:
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Must “flow through” income:
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No more than 30% of gross income may be derived from sales or exchanges of securities
or properties not held for a minimum (legislated) holding period
Must have broad ownership
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90%+ of GAAP taxable income must be distributed annually to shareholders
Must be a “buy and hold” company:
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75%+ of assets must be invested in real estate assets, cash, or government securities
75%+ of gross income must be derived from rents, mortgage interest, or gains from the
sale of real estate
5 or fewer entities may not own 50% or more of the outstanding shares
‘Look through’ provision for U.S. pension funds
In exchange, REITs do not pay taxes at the corporate level
Wharton Real Estate Club 2014
Source: Professor Sinai Lecture 10/10
Strategies & Risk/Reward Spectrum!
Expected Return
High
leverage
Distressed
Development
Value-Add
Built-to-Suit
Low
leverage
70-100% of
return driven
by capital
appreciation
(at back-end)
Public Equity
Core+
Core
Net Lease
Debt
70-100% of
return driven
by current
income/yield
Risk
Wharton Real Estate Club 2014
Chapter 3:
INDUSTRY ROLES OVERVIEW
Wharton Real Estate Club 2014
REAL ESTATE JOB MARKET OVERVIEW
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What types of companies do MBAs traditionally join, and what are the
roles within those companies?
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Real Estate jobs for MBAs typically fall into three
general categories
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Finance and Investments
! Investors
! Capital Markets
Operations
Development
See Appendix II for Career Management statistics and a breakdown
of roles and companies typical for recent Wharton MBAs
Wharton Real Estate Club 2014
REAL ESTATE JOB MARKET OVERVIEW
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What are the roles? What roles interest me?
Or more simply, ask yourself, do I want to be:
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buying land/building properties? (Development)
investing equity in builders and operators? (Private Equity)
lending money to those who build? (Lending)
buying and selling existing properties? (Investment Company, REIT)
helping buyer and seller connect? (Investment Sales Brokerage)
raising money for real estate companies to operate with? (I-Banking)
doing mergers and acquisitions of real estate companies? (I-Banking)
selling mortgages that are packaged as securities (CMBS)? (Fixed Income)
analyzing and trading stocks of public RE companies and CMBS? (Equities / Fixed
Income)
operating properties? (Asset Management)
renting out space in properties? (Leasing Brokerage)
advising corporations on their real estate holdings? (Corporate Advisory)
advising developers on their strategy? (Consulting)
Wharton Real Estate Club 2014
INDUSTRY PLAYERS/EMPLOYERS
PLAYERS
ROLE
EXAMPLES
Equity Owners
Investors who may have an active or passive role in a
property. Typically, opportunity funds (PE) are passive
investors while REITS are active
Opportunity funds – Blackstone
Equity REITS – Vornado
Institutions – pension funds and insurance companies
Corporations - Target, McDonalds
Private owners – You
Financiers
Provide debt to Investors. Often these companies will
securitize and sell the debt to the public
Commercial banks – Bank of America
Investment Banks – Merrill Lynch, Credit Suisse
(CMBS)
Institutions – pension funds, insurance companies
Mortgage REITS - Novastar Financial
Builders / Developers
Development and site selection, construction, sales
marketing and leasing, property management.
Company may hold or sell after development.
Tishman Speyer, Hines, Trammell Crow, REITS
Private owners
Asset Managers
Management of existing properties and portfolios,
either for assets owned by the company (like a REIT
that owns and manages its buildings), or 3rd party
asset management.
3rd Party – Pension fund advisors, ING Clarion,
RREEF, JP Morgan, Prudential.
Tenants
Small to large enterprises. They pay the rent!
Brokers
Leasing Brokers, Investment Sales. Facilitate
transactions involving commercial assets. In addition
they provide general real estate advisory services
CBRE, Cushman & Wakefield, DTZ Rockwood
Services
Architects, Lawyers, Appraisers, Property
Management, Advisory & Consulting, etc…
Property Managers – CBRE, Cushman & Wakefield
Consulting – PriceWaterhouse, Ernst & Young
Wharton Real Estate Club 2014
INDUSTRY PLAYERS
CORPORATE
ADVISORY
REAL ESTATE
INVESTMENT BANKS
OWNERS /
EQUITY INVESTORS
DEBT/ LENDERS
INVESTMENT SALES
BROKER
CONSULTANTS
ASSET
MANAGER
DEVELOPERS
OTHER BUILDINGS
PROPERTY
MANAGER
BUILDING STAFF
Wharton Real Estate Club 2014
BROKER / LEASING
“kicking the tires”
very close to the asset
(execute business plans)
“10,000 feet view”
very removed from the asset
(create business plans)
“Dividing Line”
Note: this is not correlated to risk/reward
Finance (“Capital Allocators”)
Property (“Operators”)
Owner Operators / REITs
Developers
Hedge Funds
Private Equity Funds
Development
Asset Acquisitions (from core to value add to opportunistic)
Entity (Corporate / LBO)
Zoning / Entitlement
Debt Investing
Architecture / Design
Distressed
Construction
Special Situations
Leasing & Marketing
Property Management
Asset / Portfolio Management
Debt Financing
Acquisitions
Company Type
Wharton Real Estate Club 201
Investment Style
Function
Chapter 4:
ROLES AND
RESPONSIBILITIES
Wharton Real Estate Club 2014
ROLES & RESPONSIBILITIES
INVESTMENT
•Acquistions
•Asset Management
•Market Research/Advisory
•Appraisal
CAPITAL MARKETS
DEVELOPMENT
•Investment/Commercial Banking
•Developer
•Equity and Debt Analysis
•Home Builder
•Community Developer
OPERATIONS
•Operations
•Property Management
•Tenant Consulting
•Leasing/ Full-Service Companies
Wharton Real Estate Club 2014
FUNCTION: INVESTMENT
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Equity / Debt Investments (Acquisitions)
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Analyze potential investments
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Pull together all relevant data (engineer’s reports, market research, creditworthiness of tenants, lease terms)
Model pro formas and returns analysis
Perform site visits to kick the tires
Work out the terms of the deal
Divest the investment
Asset Management
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Pick up where the acquisitions people left off
Monitor performance of asset
Perform budget-to-actual analysis
Interact with property management regarding tenancy, obsolescence and
marketing issues
Analyze potential re-positioning, capital improvement, and disposition of
assets
Wharton Real Estate Club 2014
FUNCTION: INVESTMENT
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Market Research
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Analyze potential investments
Collect data on sectors or geographic markets
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Synthesize data and produce reports on trends in different markets
Data forms a backbone for investment decision-makers
Investment Advisory
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Recommend allocation of client’s portfolio along a variety of variables
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Vacancy rates
Rent per square foot growth
Employment and other macro-economic statistics
Geography, Product type (residential, office, industrial)
Appraisal
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Use three separate approaches
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Cost method (replacement cost)
Sales-comparables method
Discounted cash flows (our favorite)
Produce report that concludes on the value of a property or properties
Wharton Real Estate Club 2014
FUNCTION: INVESTMENT
Pros
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Interesting, fast-paced work
Healthy pay and benefits
Relatively stable lifestyle
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Long hours
High pressure
Few openings for those with limited
experience
Companies
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Cons
Investments: Blackstone, Carlyle, DRA Advisors, Fortress, Lubert-Adler Partners
REITs: AvalonBay Communities, Hersha Hospitality Management, Simon Property
Group, Vornado Realty Trust
Strategies for recruiting
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The search is self-directed, so start early!
Network network network
Create positions/projects for yourself even at firms that don't traditionally hire
interns
Wharton Real Estate Club 2014
FUNCTION: INVESTMENT
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Real Estate Private Equity vs. Investment Funds
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Grey line between the two investment types
Real Estate PE funds generally expect higher returns, invest more
opportunistically and use higher leverage levels
Real Estate Investment Funds also invest private money in properties,
but generally expect a lower return and achieve this through core
investing and taking on less leverage
Wharton Real Estate Club 2014
FUNCTION: CAPITAL MARKETS
Investment / Commercial Banking:
! Perform work at a portfolio or corporate level, rather than
asset level
! Concerned with finance first, real estate second
! Advise real estate companies on optimal capital structure and
capital raising
! Match investors and those seeking capital
! Mergers & acquisitions
! Debt & equity underwriting
! Syndication, securitization
! Work for fee income
! Advise at corporate rather than asset level
! Ex. Goldman Sachs, Lehman Bros., Morgan Stanley,
Deutsche Bank, Credit Suisse, Wachovia, Bank of America
Wharton Real Estate Club 2014
FUNCTION: CAPITAL MARKETS
Equity / Debt Analysis:
! Typically work at a Wall Street bank
! Analyze publicly traded equity and debt
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Issue quarterly reports on earnings and company performance
Conclude on a rating, strong buy", "hold , etc.
Serve as an expert to investors on specific real estate companies
! REITs
! CMBS markets
! Real estate operating companies
Wharton Real Estate Club 2014
FUNCTION: CAPITAL MARKETS
Pros
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Excellent industry immersion
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High pay and benefits
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Gain knowledge and contacts quickly
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Fast Paced / shorter project time leads
to opportunity for greater breadth of
project exposure
Long hours
High pressure
Limited flexibility in shaping your role
Companies
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Cons
Goldman Sachs, Deutsche Bank, Morgan Stanley, Credit Suisse, Eastdil Secured,
Wells Fargo Securities, Lazard
Strategies for recruiting
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Identify early a handful of interesting companies to target
Some banks will recruit directly for real estate, others will require candidates to
undergo the general recruiting process before being placed in real estate
It is important to find out which banks have which strategies early on
Attend all formal recruiting events and be sure to emphasize your interest in real
estate! Speak to contacts within the real estate group to ensure they select you for
their matching process.
Wharton Real Estate Club 2014
FUNCTION: DEVELOPMENT
Developer:
! Originate project
! Acquisition, due diligence, entitlements
! Raise capital; often have little or no money in the deal
! Manage design, permitting, construction
! Perform initial sales or leasing
! Can also work as a project manager for a fee
Community Development:
! Some developers choose to develop in low-income areas
! Enterprise zones, TIFs, Empowerment districts
! Community lending requirement = opportunity
! Work with urban planners, city government
Wharton Real Estate Club 2014
FUNCTION: DEVELOPMENT
Pros
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More balanced lifestyle
Stability in the job
More flexibility to create ideal role
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Longer project horizons
Lower starting pay
Companies
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Cons
Hines, Tishman Speyer, Related Companies, Extell Development, JBG
Strategies for recruiting
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Few development companies recruit formally on-campus, and many do so on an
ad-hoc schedule
Create a list of target companies and scour your network for contacts at the
company
Reach out to contacts to set up informational interviews
Be well-versed for the Zell-Lurie Career Fair
If possible, spend time in your target city in the fall semester either to make
connections or stay connected if you are returning to your home city after school.
Wharton Real Estate Club 2014
FUNCTION: ASSET/PROPERTY MANAGEMENT
Portfolio managers work for investment and pension fund clients who have
large real estate holdings. They decide how to structure a client's real
estate portfolio to reach given return/risk goals, acquire the necessary
properties, hire managers, and measure portfolio results. Specifically….
Asset (Portfolio) Management:
! Prepares performance evaluations of asset including budget-to-actual and
hold-sell analysis
! Supervises property management regarding significant issues (leasing,
capital improvements, budgeting)
! Analyzes potential re-positioning, capital improvement, and disposition of
assets
Property Management:
! Responsible for day to day running of the business of a building
! Oversee cleaning, maintenance, repairs, leasing, budgeting, accounting, and
any tenant needs and amenities
Wharton Real Estate Club 2014
FUNCTION: ASSET/PROPERTY MANAGEMENT
Pros
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Closest to the Asset (PM)
Greatest source of return once asset has
been purchased
Cons
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Companies
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First line of defense (fielding complaints
from tenants)
Limited upside (although additional
compensation can be incentive-based,
most compensation comes from fees)
In an integrated firm, higher revenuegenerating departments have more
weight
Jones Lang LaSalle, CBRE, Cushman Wakefield, Tishman Speyer (Various)
Strategies for recruiting
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Argus coursework through the real estate club
Accounting coursework for asset/property management
Gaining familiarity with real estate operating statements
Off-campus networking (starting in the fall)
Wharton Real Estate Club 2014
FUNCTION: BROKERAGE AND LEASING
A junior person in this industry works on reports, marketing materials,
research, leasing and space use plans, and assists in structuring
leases and sales. Specifically…..
Tenant Representation / Consulting:
! Identifies client space needs (buy vs. sell, lease vs. own, etc.)
! Searches for optimal solution by negotiating with leasing agents
Leasing Agent:
! Tries to lease space to potential tenants
Broker:
! Facilitates the purchase or sale of assets
Hybrid / Full-Service Firm Opportunities:
! Many real estate firms combine several of these functions
! Synergies between investments, development, leasing and property
management, etc.
! Ex. - Jones Lang LaSalle, Tishman Speyer, CB Richard Ellis, Colliers,
Transwestern, Duke, etc.
Wharton Real Estate Club 2014
FUNCTION: BROKERAGE AND LEASING
Pros
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High deal volume builds broad
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experience quickly
In depth knowledge of the demand side
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of real estate
Expertise in a given market and/or asset
class
Commissions for commercial transactions
can be substantial
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Majority of compensation comes from
commissions
Sales environment
Companies
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Cons
Jones Lang LaSalle, Tishman Speyer, CB Richard Ellis, Colliers, Transwestern
Strategies for recruiting
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Argus coursework through the real estate club
Start developing expertise in an asset-class and/or market
Off-campus networking (starting in the fall)
Wharton Real Estate Club 2014
Chapter 5:
THE JOB SEARCH
Wharton Real Estate Club 2014
REAL ESTATE JOB SEARCH BEST PRACTICES
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The most successful Real Estate job searches include:
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Extensive research and education on the real estate industry
Networking to develop industry knowledge, relationships and job leads
Valuable information resources include:
Real Estate Club at Wharton
! Vast amount of resources on real estate (career treks, education,
professional mentorship)
Books such as Professor Linneman s Real Estate Investments: Risks
and Opportunities
Real Estate Newsletters such as www.globest.com, Real Estate Alert
Wharton classmates
Industry publications and research reports
Wharton Real Estate Club 2014
NETWORKING & INFORMATIONAL INTERVIEWS
So, how to I get to meet the players in Real Estate?
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Real Estate is a relationship driven business
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RE professionals network their entire career, not just in school
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Networking Best Practices:
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Have an agenda: 3-4 items you want to cover during your event/conversation
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Be interested in what they do
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Be yourself, but be interesting
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Practice your 30-second Elevator Pitch
Wharton Real Estate Club 2014
NETWORKING & INFORMATIONAL INTERVIEWS
How do I get an Informational Interview?
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Target individuals at the firms of interest and reach out to them via email
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Seek out Wharton Alumni, Alumni from your undergraduate school, or any sort of
connection that makes you special
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Express your interest in what they do and ask if you can speak with them for 10 minutes
to learn more about their perspectives on the real estate market and on how they got to
where they are today
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DO NOT send a resume in the initial contact
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Make it easy for them – provide them with some windows in which you are free in the
next several days, but make it clear that you are flexible to their schedule
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Schedule time to speak on the phone, or better yet, meet in person
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Avoid the hard sell – only once you have time scheduled, then send your resume to
provide some background on myself.
Wharton Real Estate Club 2014
NETWORKING & INFORMATIONAL INTERVIEWS
How do I get in front of those that can influence the hiring decision?
Before the call/meeting
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Research the firm, the group, and the individual on the web
(Google, Hoovers, Capital IQ, Factiva, Vault Employers Guide, Website)
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Make sure you have your story down pat
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If nothing else, have great, well thought out answers to Why do you want to work
in real estate? and What in particular attracts you to what we do?
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If requesting a meeting, write a brief but targeted email letting your contact know
when you will be in town, and 3-4 items you hope to discuss during the meeting.
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Discussing the possibility of a summer internship should not be listed as a
talking point in this initial correspondence
Wharton Real Estate Club 2014
NETWORKING & INFORMATIONAL INTERVIEWS
How do I get in front of those that can influence the hiring decision?
During the call/meeting
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Be courteous, show interest and subtly reveal that you have done your homework on
the company
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Ask the person about the company, their role and themselves
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People love to talk about themselves and their work – everybody likes to feel
special, and your interest validates their 70+hour weeks
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Unless you are asked directly if you are seeking employment, avoid this topic for the
first interaction
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Ask questions that will allow you to discern how you can be helpful to their business
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Ask if there are other people who they recommend speaking to
Wharton Real Estate Club 2014
NETWORKING & INFORMATIONAL INTERVIEWS
How do I get in front of the those that can influence the hiring decision?
After the call/meeting
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Send them a thank you email and/or a written thank you card within 24 hours of your
contact with them
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Represent yourself and the school well in this way – people remember these
things
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Say that you look forward to staying in touch, and that you will contact them to keep
them posted on your progress
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Do follow-up regularly, letting your contact know how his/her advice has helped you.
This keeps you fresh in the contact s mind
Wharton Real Estate Club 2014
RESUME HIGHLIGHTS
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Think of your resume as your own personal highlight reel
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Each bullet should convey why you are a superstar
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DO NOT use your resume as a brochure for your roles at your previous
jobs, rather:
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Take ownership of your roles and responsibilities
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Try to draw out the transferable skills that you ve developed and how they
can be applied to a real estate function
Believe it or not, you are qualified to work there!
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After all, you did get into Wharton
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Help the recruiter see what value you can bring to their firm
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Review past resume books, talk to 2nd years, read previous job
descriptions
Wharton Real Estate Club 2014
RESUME HIGHLIGHTS
Key themes/expertise to highlight on your resume:
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Research and Due Diligence
Financial Analysis
Building and presenting Investment Rationale
Project Management
Working with Debt or complex transactions
Team player (working with and leading teams)
Wearing many hats (e.g. working with different types of
people, taking on multiple roles at any given time)
Negotiating
Intellectual Curiosity
Entrepreneurial Spirit
Wharton Real Estate Club 2014
JOB SEARCH TAKEAWAYS
!
Identify organizations of interest and identify
contacts there
!
!
For large organizations, contact multiple people
!
!
Classmates, alumni and executive MBA students all
may be helpful
Need to reach decision makers and sometimes, that
requires contacting multiple people at an organization
Contact early and follow up
!
Hiring needs for many firms develop late. However, if you
contact the firms early and stay in touch, you may have an
advantage when openings occur
Wharton Real Estate Club 2014
JOB SEARCH TAKEAWAYS (CONTINUED)
!
Know what you want. Commitment is Key.
!
!
!
Educate yourself on the industry
!
!
!
!
Get involved in the Wharton Real Estate Club and attend
Zell-Lurie Center events
Read industry newsletters (MBACM subscribes)
Attend speaker series, treks and career fairs
Speak to as many people as possible
!
!
Real estate is a broad category with many different facets.
Think about what areas of real estate most interest you.
A focused job search can enable you to be more prepared and
knowledgeable.
Classmates and Alumni are valuable resources. Use them.
Practice interviewing
!
!
Schedule a mock interview with Career Management
Meet with classmates to interview each other
Wharton Real Estate Club 2014
The image cannot be displayed. Your computer
may not have enough memory to open the image,
or the image may have been corrupted. Restart
your computer, and then open the file again. If the
red x still appears, you may have to delete the
image and then insert it again.
JOB SEARCH RESOURCES
!
Where can I do industry research?
!
!
!
!
!
!
!
!
!
!
!
!
Read Vault and WetFeet Real Estate Industry and Employers guides
Read industry publications and research reports
!
GlobeSt., CPN, ACG, Real Estate Alert, Commercial Mortgage Alert, CBRE,
Jones Lang Lasalle
Read newspapers
!
Property reports in WSJ, NYTimes, New York Post on Wednesday
Read books
!
Real Estate Finance & Investments: Risks and Opportunities (Peter Linneman)
!
The Inside Track to Careers in Real Estate (Stan Ross)
Read Career Management and Real Estate Club website resources
!
Linneman Letter, Capital Markets updates, research, primers
Join professional associations (e.g. ULI, ICSC) and look through their websites
Talk with your peers at Wharton about summer and prior experience
Search SPIKE alumni listings, Zell-Lurie members list
Talk to Professors and your Mentor
Attend Zell-Lurie/Ballard lunches
Attend on-campus speakers/panels
Attend Treks and Zell-Lurie Career Fair
Wharton Real Estate Club 2014
JOB SEARCH RESOURCES (CONTINUED)
•
Where do I find job listings?
!
!
!
!
!
!
!
CareerPath
Real Estate Club emails
Wharton MBA Job Board
Individual company websites
Emails sent out by Zell / Lurie Center
Select Leaders Job Blast: http://www.selectleaders.com/
Young Real Estate Professionals of New York website http://www.yrepny.com/
Wharton Real Estate Club 2014
SUGGESTED JOB SEARCH TIMELINE
!
Over Winter Break:
!
!
!
!
!
During DIP Week:
!
!
!
Bone up on Education basics as you see fit
Put together a hit list of 5 to 10 companies
Write up sample introductory email to those companies
Write to them to set up introductory meetings
If you don t have interviews, try to schedule in-person informational meetings with
companies and individuals for during DIP week
Schedule these meetings at least two weeks in advance
Post-DIP Week:
!
!
!
Keep fighting!
Schedule more phone meetings and trips as necessary
Last year some of the top real estate firms posted summer jobs in March, April and
even May!
Wharton Real Estate Club 2014
Chapter 6:
THE INTERVIEW
Wharton Real Estate Club 2014
REAL ESTATE INTERVIEW PREP (Big Picture)!
!
Understand the hiring dynamics (need)"
!
The firm must have a need. Most don’t do long-range hiring."
─ Understand the dynamics of supply of MBA candidates and
lateral hires intersecting with hiring demand"
"
!
What do firms look for in a candidate? (fit)"
!
!
!
Relevant skills (direct or tangential experience + ability to learn)"
Cultural and philosophical fit (i.e. are you a good person + do you
share our views)"
"
"
""
Know what you want to do and play to your strengths"
!
!
!
!
Real estate has two different, broad buckets: finance and property"
Do you like to do deals (and love crunching numbers)? (Acquisitions)"
Or do you like to execute projects? (Development)"
On the “dividing line” you can do acquisitions at a development firm,
or you can do asset management at a private equity firm"
""
"
Wharton Real Estate Club 2014
REAL ESTATE INTERVIEW PREP (Fit)!
!
You want to demonstrate “passion” in three key areas:"
!
!
!
!
How do you demonstrate “passion”?"
!
!
!
Do your HW = a lot of opportunistic research (beyond the WSJ)"
─ News sources, public filings, books, blogs, gov’t, etc."
Understand details and historical context about the market, trends,
cycles, specific buildings, zoning, supply, deals, firms, people, etc."
How do you make someone interested in you?"
!
!
!
"
"
Why the real estate industry?"
Why development? (Or acquisitions, or brokerage, etc.)"
Why us? (And also very important, Why this city?)"
Have a view on the relevant market they care about and invest in"
Have a view on recent and relevant competitor’s deals"
Have a view on the company’s specific deals (and try to add value)"
Wharton Real Estate Club 2014
REAL ESTATE INTERVIEW PREP: KEY AREAS
!
What about Real Estate interests you?
!
!
!
How have you expressed that interest?
!
!
What have you done at Wharton or beforehand that illustrates this
interest?
How knowledgeable are you about Real Estate?
!
!
!
!
!
Why do you want to work in Real Estate?
What function within Real Estate are you interested in?
Development? PE? IB? Lending? Consulting? Why?
Views on the US real estate market
Understanding of different asset classes (hotel, commercial,
industrial, retail)
Familiarity with basic valuation methodologies (cap rates,
comparable sales, replacement value)
Favorite building, real estate market to invest in, etc.
Why this firm?
!
Research the firm, its properties, etc.
Wharton Real Estate Club 2014
INTERVIEWING BEST PRACTICES
!
How to convey you are right for the job
!
"Everything I needed to know I learned on Sesame Street":
! ABCs (About the industry, Basics of business, Cultural fit)
! 123s (Finance, Finance, Finance, and bit of budgeting thrown in)
! Plays well with others (teamwork, leadership, ethics,
communication, flexibility, etc)
!
Skills firms want to "see , not just hear about
! Analytical, entrepreneurial, leadership, finance, communication/
interpersonal, risk-taker, etc
!
Do some planning: Get across your 3 key points/skills, no matter what the
questions are. This is transferable during Z-L conversations as well…
Wharton Real Estate Club 2014
INTERVIEWING BEST PRACTICES
!
!
!
Make sure you know why Real Estate and be able to articulate it (it s
great if you can tie it into your past experience and what brought you
to Wharton)
Show a strong sense of intellectual curiosity – help them see that you
will continually strive to soak up Real Estate knowledge
If you have any experience in the following, make sure you convey it:
!
!
!
!
!
!
!
!
Due diligence/research
Financial analysis
Building and presenting investment rationale
Working with debt
Wearing many hats (e.g. working with different types
of people, taking on multiple roles at any given time)
Leading teams
Project management
Negotiating
Wharton Real Estate Club 2014
INTERVIEWING BEST PRACTICES
!
DO RESEARCH on the company with whom you are interviewing.
!
!
!
!
DO NOT waste their time by saying you want to get into a type of real
estate that they are not in
!
!
!
Have a different pitch for different types of Real Estate companies
Show that you ve done your homework
DO NOT give the impression that you will leave in a couple of years
!
!
If possible read bios of the senior management
Be able to talk to some recent deals done by the firm in an area that interests you
Shows you do your homework and that you are diligent and prepared
Real Estate is all about relationships and they take time to build
DO NOT get into a topic that is over your head
!
!
Know what you know and what you don t know, be honest about it
If you try to fake it, your efforts will be transparent and it is guaranteed to
ruin your interview
Wharton Real Estate Club 2014
Appendix I:
SAMPLE INTERVIEW
QUESTIONS
Wharton Real Estate Club 2014
BEHAVIORAL
!
What excites you about this industry / job?
!
What are three of your strengths?
!
Three weaknesses?
!
Tell me about a failure.
!
Tell me about a time you led a team and it failed.
!
Tell me about a time you had to manage your boss.
!
How would your peers describe you?
!
Tell me about a time you had to convince your team to pursue an alternative course of
action.
!
Tell me about a time others convinced you to change your mind.
Wharton Real Estate Club 2014
INTEREST & EXPERIENCE
!
Why real estate finance and not real estate development? (or the reverse of this)
!
Where do you see yourself in 5 years? 10 years? Are you really committed?
!
What other firms are you talking to? (important to know other firms' specialty)
!
What sector of real estate are you interested in? Why?
!
For people with any experience in real estate: What was your best project and why; what
was your worst project and why?
Wharton Real Estate Club 2014
MARKET KNOWLEDGE
!
What are the hot markets and how long do you think they will remain hot?
!
What are the risks of entering a new market?
!
What is your opinion as to the growth/consolidation of the REIT market?
!
What property sector do you find most promising? Least desirable?
!
If you had $100 Million dollars, where would you invest it? Why? If you were preparing a
memo for a real estate investment committee, what would you include?
!
Is the housing market overvalued now?
!
Do you think real estate investors are justified buying at lower cap rates?
Why or why not?
Wharton Real Estate Club 2014
REAL ESTATE FINANCE
!
What is CMBS? What is LTV? What is NOI? How do you compute NOI?
!
What are the 3 methods of appraising a property?
!
What is FFO? Why do REIT analysts use it?
!
What is a DSCR and how do the allowances vary by property type?
!
What kind of leverage can a well leased office building carry?
Would it all come from one lender? How would that leverage be priced in today's
markets (spreads)?
Wharton Real Estate Club 2014
REAL ESTATE DEVELOPMENT
!
What is FAR? Why is it important?
!
What is a triple net lease?
!
What is an expense stop? Why is it important to the landlord?
!
What is the impact on rents, stock and asset prices from a 10% increase in
population?
!
How would you decide how much to pay for land if you wanted to develop it?
!
What’s a good real estate market to invest in right now and why? Both inside and
outside of the U.S.
!
What are typical condo sale prices ($/sft) in New York?
Wharton Real Estate Club 2014
Guesstimating
!
How many floors are in this building?
!
What is the Net Rentable Area of this building?
!
How many light panels (fixtures) are in this building?
Financial Questions
!
How much debt can the building we're in support?
!
Requires candidate to estimate NRA, know market rent and opex to estimate NOI, know
cap rate and LTV
!
What's a better investment, buying a hotel in Vegas or an office property in
Manhattan?
!
You buy a building at 8% cap rate, 50% LTV, 6% interest. Assuming no taxes or
other leakage. What's the equity yield year one?
!
You invest $100 today and without any further inflows or outflows you sell for
$100 in 5 years. What's the IRR?
Wharton Real Estate Club 2014
Financial Questions
!
You invest $1 today, $1 end of year 1, $1 end of year 2, and get $3 end of year 3.
What's the IRR?
!
You invest $100 today and get $10 for 4 years (year end) and $110 end of year 5.
What's the IRR?
!
You invest $100 today and without further inflows or outflows what do you need
to sell for in year 3 to get a 10% IRR?
!
What's the relationship between IRR and NPV?
!
The project generates a 10% IRR. Sponsor contributes 5% of equity and coinvestor 95%. Sponsor receives 20% promote after a 15% IRR to the investor.
What's co-investor's IRR?
!
Your acquisition project generated a 15% IRR over 5 years. What's the multiple?
!
An acquisition project generated a 2.5x multiple over 5 years. What's the IRR?
Wharton Real Estate Club 2014
Financial Questions
!
What's the IRR if the multiple generated is 3.0x in 5 years?
!
You have an opportunity to buy an asset at an initial yield of 7%. You can obtain
65% LTV, 8% interest-only loan (without principal amortization). Assume 0% tax
rate, no cap rate compression, and no NOI change over a 5 year hold. Does this
deal make sense, why?
!
Helpful Reference for IRR and Multiple comparisons:
0%
5%
10%
15%
20%
25%
30%
35%
40%
1
2
3
1.00
1.05
1.10
1.15
1.20
1.25
1.30
1.35
1.40
1.00
1.10
1.21
1.32
1.44
1.56
1.69
1.82
1.96
1.00
1.16
1.33
1.52
1.73
1.95
2.20
2.46
2.74
Wharton Real Estate Club 2014
Years
4
1.00
1.22
1.46
1.75
2.07
2.44
2.86
3.32
3.84
5
6
7
1.00
1.28
1.61
2.01
2.49
3.05
3.71
4.48
5.38
1.00 1.00
1.34 1.41
1.77 1.95
2.31 2.66
2.99 3.58
3.81 4.77
4.83 6.27
6.05 8.17
7.53 10.54
IRR %
Multiple
IRR %
Multiple
1
2
3
4
5
6
7
1
100%
200%
300%
400%
500%
600%
2
41%
73%
100%
124%
145%
165%
3
26%
44%
59%
71%
82%
91%
Years
4
19%
32%
41%
50%
57%
63%
5
6
7
15%
25%
32%
38%
43%
48%
12%
20%
26%
31%
35%
38%
10%
17%
22%
26%
29%
32%
PRIVATE EQUITY / ACQUISITIONS
!
What is a cap rate? How would you choose a cap rate for a class A office building in NY?
!
How would you value an office building? Retail? Multifamily? Industrial? Hotel?
!
Two properties are across the street from each other in Midtown Manhattan. The
properties look exactly the same from the outside. Why might one be worth more than
another?
!
(Interviewer opens a large document to a wide angle picture of a commercial real estate
asset from the parking lot)... What do you see? Would you want to own this? Why/why
not? How would you value it? What concerns you?
!
Is an apartment building investment that yields a 23% expected IRR on equity more
attractive than an investment of an equal amount in a supermarket anchored strip
shopping center that provides a 18% expected IRR on equity?
Wharton Real Estate Club 2014
PRIVATE EQUITY / ACQUISITIONS (CONTINUED)
!
You have been asked to fly to Chicago (any city will do) for a due diligence trip and site
visit for a potential investment. What would you do before you leave to prepare? What
would you want to achieve while you are there?
!
In a JV Partnership, what does each party bring to the table? Do you understand the
basic equity and promote structure of a JV? If so, walk me through the rationale.
!
If you could invest in any real estate market where would it be and why?
!
What would you say your biggest weakness would be as an investor?
!
Would you rather buy or rent in this housing market? Why?
!
Why would you invest in core single-tenant office assets if you could just buy the
tenant's corporate bond?
Wharton Real Estate Club 2014
REAL ESTATE INVESTMENT BANKING
!
Would you rather have $100 in inventory or $100 in accounts receivable?
!
If you could invest in either a mortgage security or a corporate bond, which would you
choose?
Both have same coupon, same risk profile. You'd likely want the mortgage security
because payments are more frequent (monthly) than the corporate bond (bi-annually).
Always opt for more frequency.
Wharton Real Estate Club 2014
Appendix II:
CAREER MANAGEMENT
STATISTICS
Wharton Real Estate Club 2014
Full Time - Real Estate
FULL TIME RECRUITMENT
STATS
These graphs are generated from job offer data reported by students in CareerPath.
Full Time - Real Estate
Full-Time Job Acceptances
Classdata
of reported
2013 by students in CareerPath.
These graphs are generated from job offer
Median Starting Base Salary110,000
Class of 2013
2.0
110,000
3.0
2.0
1.0
1.0
90,000
80,000
70,000
60,000
0.0
0.0
105,000
100,000
100,000
Dollars (US$)
3.0
Percent of Class
Percent of Class
4.0
4.0
2008 2009 2010 50,000
2011 2012 2013
2008 2009 2010 2011 2012 2013
7.4%
11.1%
3.7%
3.7%
3.7%
22.2%
40.7%
80,000
70,000
60,000
50,000
Source of Full-Time Offers
Class of 2013
On-Campus Recruiting Services
7.4%
Not Specified
Career Fair
3.7%
Wharton Alumni Contact
3.7%
Alma Mater Alumni Contact
Other
3.7%
Wharton Research Center Contact
3
2
Timing of Full-Time 8Offers (OCRS)
Timing of Full-Time Offers (Non-OCRS)
Class of 2013
Wharton Real Estate Club
2014
Class
of 2013
4
Starting Base Salaries
25th Percentile - $105,000
Personal
Networking Connections
th Percentile
50
- $110,000
On-Campus Recruiting Services
th Percentile - $125,000
75
Not Specified
Timing of Full-Time Offers (Non-OCRS)
Class of 2013
ob Offers
Job Offers
4
2008 2009 2010 2011 2012 2013
Career Fair
Wharton Alumni Contact
Alma Mater Alumni Contact
Other
Wharton Research Center Contact
40.7%
Timing of Full-Time Offers (OCRS)
Class of 2013
100,000
110,000
102,500
105,000
100,000
90,000
7.4%Connections
11.1% Personal Networking
7.4%
22.2%
102,500
105,000
100,000
2008 2009 2010 2011 2012 2013
Source of Full-Time Offers
Class of 2013
105,000
100,000
110,000
Dollars (US$)
Full-Time Job Acceptances
5.0
Class of 2013
5.0
Median Starting Base Salary
Class of 2013
6
4
8
Internships - Real Estate
Internships - Real
These graphs are generated from job offer data reported by students in CareerPath.
6,000
5,000
Summer Internship Acceptances
2008 2009 2010 2011 2012 2013
Class of 2014
4,000
3,000
Internships - Real Estate
7,000
2.0
Dollars (US$)
6,000
0.0
Median Monthly Internship Salary
Class of 2014
18.2%
6,500
12.1%6,600
6.1%
6,000
5,675
5,500
24.2%
6.1% 5,000
5,000
33.3%
0.0
6.1%
4,000
24.2%
Other
2008 2009 2010 2011 2012 2013
6.1%
33.3%
Wharton Alumni Contact
12
6.1%
9
3
Wharton Job - On Campus
Recruiting
6
3
0
15
Other
Career Fair
2
15
Job Offers
9
6
3
12
9
6
1
3
0
0
Wharton Alumni Contact
Timing of Internship Offers (Non-OCRS)
Class of 2014
Timing of Internship Offers (OCRS)
Wharton Real Estate Club
12 2014
Class of 2014
Job Offers
6.1%
5
Personal Networking4Connections
Sept
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
0
Timing of Internship Offers (OCRS)
Class of 2014
Job Offers
24.2%
Career Fair
Job Offers
Job Offers
Other
Sept
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
1
12.1%
Wharton Job - On Campus Recruiting
Wharton Job - Job Posting
12.1%
Timing of Internship Offers (OCRS)
Class of 2014
2
18.2%
15
33.3%
3
5,000
Personal
Networking Connections
Class of 2014
Wharton Job - On Campus Recruiting
1
4
3,000
5,000
Source of Internship Offers
Class ofTiming
2014of Internship Offers (Non-OCRS)
Personal Networking
18.2% Connections
4
6.1%
3
6.1% 2
33.3%
5,500
6,000
4,000
Source of Internship Offer
Class of 2014
5,675
Wharton Alumni Contact
Wharton Job - Job Posting
5
24.2%
6,600
6,000
5,000
2008 2009 2010 2011 2012 2013
Timing
of Internship Offers (OCRS)
Source of Internship
Offers
Class of 2014
Class of 2014
12.1%
6,500
6,000
3,000
2008 2009 2010 2011 2012 2013
18.2%
4.0
Wharton Job - Job Posting
3,000
Career Fair
2008 2009
2010 2011 2012 2013
4,000
2.0
5
Dollars (US$)
4.0
Summer Internship Acceptances
Class of 2014
7,000
Sept
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Percent of Class
Source of Internship Offers
Class of 2014
These graphs are generated from job offer data reported by students in CareerPath.
4.0
7,000
6.0
Median Monthly 0.0
Internship Salary
2008 2009 2010 2011 2012 2013
2008 2009 2010 2011 2012 2013
Class of 2014
6.0
6.0
Summer Internship Acceptances
Class of 2014
These graphs are generated from job offer data reported by students in CareerPath.
2.0
2.0
0.0
7,000
Percent of Class
Percent of Class
4.0
Internships - STATS
Real Estate
RECRUITMENT
Dollars (US$)
SUMMER
6.0
Median Monthly Internship Salary
Class of 2014
6,500
6,600
6,000
5,675
5,500
5,000
Dollars (US$)
Summer Internship Acceptances
Class of 2014
These graphs are generated from job offer data repor
Timing of Internship Offers (Non-OCRS)
Class of 2014
RECRUITMENT STATS (CONTINUED)
Updated Careerpath Data:
Class of 2013
FULL-TIME
Number
Number
Accepted
Accepted (w/salary data)
% of
Accepted
Annual Salary
Range
25%
Annual
Salary
Median
Annual
Salary
75%
Annual
Salary
# with
Sign-on
Bonus
Median
Sign-on
Bonus
FUNCTION:
Real Estate
16
15
2.83
80,000 - 225,000
110,000
113,000
135,000
7
-
16
14
2.83
80,000 - 225,000
105,000
110,000
125,000
6
-
% of
Accepted
Monthly Salary
Range
25%
Monthly
Salary
Median
Monthly
Salary
75%
Monthly
Salary
# with
Sign-on
Bonus
INDUSTRY:
Real Estate
Class of 2014
SUMMER
INTERNSHIPS
Number
Number
Accepted
Accepted (w/salary data)
Median
Sign-on
Bonus
FUNCTION:
Real Estate
21
20
2.91
1,000 - 15,600
3,190
5,250
7,346
0
-
20
18
2.77
1,000 - 15,600
2,500
5,000
6,500
0
-
INDUSTRY:
Real Estate
Wharton Real Estate Club 2014
FULL TIME RECRUITMENT STATS (CONTINUED)
Wharton Real Estate Club 2014
FULL TIME RECRUITMENT STATS (CONTINUED)
Wharton Real Estate Club 2014
INTERNSHIP RECRUITMENT STATS
Wharton Real Estate Club 2014
INTERNSHIP RECRUITMENT STATS (CONTINUED)
Wharton Real Estate Club 2014
Appendix III:
REAL ESTATE GLOSSARY
Wharton Real Estate Club 2014
Adjusted Funds From Operations (AFFO):
AFFO is a superior measure of a REIT’s operating performance compared to the more
commonly used metric – FFO. The primary reason is that AFFO reflects the large and
real costs that landlords incur to maintain their properties over long holding periods.
These capital expenditure costs (“cap-ex”) are critical for investors to consider when looking
at REITs versus alternative investments in stocks and bonds, and when looking at
REIT valuations across different property types. Our calculation of AFFO is:
FFO
− Normalized Cap-ex Reserve
− Straight Line Rent
− Gains on Land Sales
− Minus merchant-building gains
− Extraordinary items such as gains/losses on debt pre-payments
= AFFO
See also Funds From Operations.
AFFO Yield:
A valuation metric that is typically used to compare REIT return potentials. A high AFFO
yield may indicate that a REIT is undervalued. But it may also serve as a caution flag regarding
the quality of a company’s real estate portfolio, balance sheet, or management
team. AFFO yield is the AFFO per share generated in a stated year as a percentage of the
current share price. It is also the inverse of an AFFO multiple (Price per Share / AFFO
per Share), a frequently used valuation approach.
See also Adjusted Funds From Operations.
Annualized Base Rent (ABR):
A term used commonly in the retail REIT and industrial sectors that measures the contractual
rent to be paid by a tenant over a 12-month period. It excludes property operating
expenses reimbursements, which are expenses that are borne by the tenant rather
than the landlord and passed through as incurred.
Blended Cap Rate:
Reflects the weighted average cap rate ascribed to a given REIT based on all real estate
segments in which a company participates. Generally, cap rates listed for REITs
blended cap rates.
See also Primary Cap Rate.
Bottom Up:
A valuation approach grounded in company-level research.
Wharton Real Estate Club 201
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Canada Mortgage and Housing Corporation (CMHC):
Owned by the Government of Canada, with the primary goals of providing insurance for
residential mortgage loans to Canadian home buyers, as well as for multifamily commercial
mortgage products.
Capital Expenditures (Cap-ex):
The costs associated with the long-term ownership of commercial real estate are typically
underestimated. Maintaining the competitive position of a property usually requires a
substantial capital reinvestment by the owner. Cap-ex includes maintenance and leasing
costs. Many of these expenditures are capitalized – not expensed – for accounting purposes.
Nevertheless, they have a sizeable impact on property level cash flows.
These costs can be normalized to reflect an expected average over the life of the building. It is often
quoted as a percentage of the current nominal Net Operating Income
(NOI) stream (i.e., NOI before cap-ex).
The approach for estimating cap-ex varies by sector:
• Apartment: Estimated on a per-unit basis.
• Industrial: Structural Reserve per square foot + Tenant Improvements + Leasing Commissions.
• Mall: Estimated based on property quality and type.
• Office: Structural Reserve per square foot + Tenant Improvements + Leasing Commissions.
• Strip Centers: Estimated based on property quality and type.
• Health Care: Varies by type:
! Senior Housing: Estimated on a per-unit basis.
! Medical Office Building: Estimated on a per-square-foot basis.
! Hospitals and Skilled Nursing Facilities: Estimated on a per-bed basis.
Cap Rate:
A metric industry participants use to gauge the yield of a transaction. Cap rates are typically
quoted on a forward one-year NOI basis. Four types of cap rates
(nominal, economic, implied, and market) can be used to describe transactions and market pricing.
See also Nominal Cap Rate.
See also Economic Cap Rate.
See also Implied Cap Rate.
See also Market Cap Rate.
Chattel Loan:
A loan on a mobile or manufactured home, not including the land on which it sits. Assets
used as collateral for a chattel mortgage must be movable or non permanent in nature.
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Community Center:
Sells general merchandise or convenience-oriented goods/services. Offers a wider range
of apparel and other soft goods than neighborhood centers. The center is usually configured
in a straight line, as a
strip, or may be laid out in an L or U shape, depending on the
site and design.
Construction in Progress (CIP):
Reflects the cumulative cost of in-process development projects incurred since inception.
CIP should include the cost of the land and other “soft costs” such as capitalized interest
and professional fees, although not all companies do so . In our Net Asset Value (NAV)
estimates, CIP may be shown at a value that is higher/lower than the amount shown on a
company’s balance sheet depending on our evaluation of the risk/reward of the project.
See also Value Creation.
Current Value of Net Income (CVNI):
The sum of common dividends paid by a company plus changes in NAV/Share over time.
CVNI is calculated similarly as total returns, but it is designed to measure theoretical NAV
growth if dividends are reinvested in the company (rather than investment growth).
Data Center:
A highly specialized facility designed to house racks of mission-critical computer servers
and the associated infrastructure required to power and cool them 24 hours a day. Data
centers can be classified as (not mutually exclusive):
•
•
•
•
Powered Base Building: A data center comprised of the building shell with access
to significant power and bandwidth. All electrical and mechanical improvements are
done at the tenant’s expense.
Turn-Key: Refers to a data center built out to include all mechanical and electrical
infrastructure at the landlords expense. Tenants are still responsible for installing
servers or racks.
Internet Gateway: A datacenter which serves as an internet traffic hub.
Co-location facility: A datacenter which typically houses servers used by smaller end users.
Development Yield:
Measures the NOI expected to be generated from a development property upon stabilization
as a percentage of development cost. Total development cost should include land and
cost of capital during the lease-up period.
Dividend Payout Ratio:
Measures the percentage of a REIT’s common dividend that is covered by recurring cash
flow. You can measure the dividend payout ratio after factoring in normalized capex
(i.e., based on AFFO). Dividend payout ratios that are based on FFO generally overstate
dividend paying capacity.
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Dividend Yield:
A valuation metric typically used to compare dividend return potential. Dividend yield is
the expected annual dividend per share as a percentage of the current share price. Dividend
yields are often accorded too much importance. A relatively low dividend yield may
appropriately signal that a stock is pricey. But more commonly, it indicates a REIT that
possesses a high-quality portfolio, a superior balance sheet, and/or an exceptional management
team. Likewise, a relatively high dividend yield sometimes signals that a stock is
cheap. But more often it serves as a sign that the REIT has cash flow, balance sheet, or
management issues.
Where Dividend Pace = Four times the most recently announced quarterly dividend.
Down-REIT:
A REIT structure where each asset is held by the REIT and its contributor separately. A
Down-REIT has the appearance of a REIT with several joint ventures. This structure is
uncommon.
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Earnings Yield:
A valuation metric used to compare the return potential of securities. All else equal, a
higher earnings yield indicates that a stock is undervalued. This metric is typically used
when analyzing non-real estate companies because depreciation can overly penalize real
estate companies. Earnings yield is the net income generated in a year as a percentage of
the current share price. The REIT marketplace is generally discusses FFO yields, but AFFO yields
can be observed as well.
Earnings yield is the inverse of the frequently cited P/E Ratio (Price / Earnings).
Economic Cap Rate:
When most commercial real estate investors use the term “cap rate”, they are referring to
what we call “nominal cap rates”. An “economic cap rate” is a superior measure of the
estimated cash flow yield investors receive because it takes cap-ex into consideration.
Economic cap rates provide a much better tool for comparing properties that have high
cap-ex (e.g., office) against those with low cap-ex (e.g., self-storage).
Where:
• Economic NOI = Nominal NOI − Normalized Cap-ex
• Property Value = Transaction Price
See also Economic Net Operating Income.
See also Nominal Net Operating Income.
See also Cap Rate.
See also Nominal Cap Rate.
See also Internal Rate of Return.
Economic Net Operating Income:
Forward 12-month estimated income from a property or portfolio after operating expenses
and cap-ex are deducted from cash rents. Economic NOI provides a better estimate of underlying
cash flow than nominal NOI.
Economic NOI
= Rents
− Operating Expenses
− Non-cash Rents
+/- NOI adjustments
+ 12-month Forward Growth Adjustment
− Cap-ex.
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Rent includes: Base rents, lease termination income, parking, and service revenue.
Operating expenses include: Real estate taxes, utilities, insurance, property management
fees, advertising, basic repairs, and maintenance.
Typical adjustments to NOI include:
− Adjustments for external growth to include a full-period effect of acquisitions, dispositions,
and development completions
− Normalized margins
− Seasonality adjustments
− Normalized lease-termination income
− Normalized straight-line rent income
− Large leases that have not yet commenced
See also Nominal Net Operating Income.
See also Cap-ex.
Embedded Net Operating Income Growth/(Loss):
The amount NOI by which would change if all leases were instantaneously marked to
market on an occupancy-neutral basis. The metric reflects the amount of “built up” rent
growth (or decline) that has yet to be captured by existing leases. Comparably low (high)
cap rate transactions can often be explained by high (negative) embedded NOI growth
(loss).
Floor Area Ratio (FAR):
The ratio of building area to ground area. A higher FAR reflects a higher density. Land
values, zoning, and entitlements are often quoted in these terms.
Franchise Value:
Franchise Value represents the value management can add to a company above and beyond that
which is captured in an NAV. Historical premiums to NAV, total returns, and NAV growth (Current
Value Net Income, a.k.a., CVNI) are used to estimate a company’s Franchise Value going forward.
However, historical values will not capture recent changes in management, investment focus, or the
development pipeline.
Franchise Value is also often referred to as “Platform” value.
See also Warranted Premium/(Discount) to NAV.
Funds From Operations (FFO):
FFO is an earnings metric crafted by the REIT industry. FFO starts with net income and
then adds back depreciation expense under the logic that commercial real estate appreciates
over time – it does not depreciate – and REIT earnings would be unduly penalized
relative to other industries due to the heavy depreciation expense incurred by real estate
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owners. The reality is that commercial real estate owners must constantly reinvest capital
in their properties to maintain their competitive position. FFO fails to acknowledge this
important issue. Consequently, Adjusted Funds from Operations (AFFO), which makes
an explicit adjustment for cap-ex, is a superior performance measure. Companies often
use FFO definitions that deviate from the NAREIT definition.
FFO
= Net Income
− Preferred Share Dividends
+ Depreciation
− Gains or Loss from Sales of Property
FFO is frequently quoted on a per-share basis.
Grocery Anchored Shopping Center:
Typically serves residents within a 3-mile radius. The strength of the grocery store anchor
is usually a key determinant of the rents an owner can charge other tenants. Grocery
stores generally pay low rents, so grocery anchored shopping center owners make most of
their profits from the smaller “mom and pop” tenants – e.g., dry cleaners, nail salons,
sandwich shops. Grocery anchored shopping centers have earned a reputation for being
“recession resistant” since consumers have to buy food even during tough times. However,
during the ’08-’09 recession, such centers proved to be less durable as consumers
started doing more grocery shopping at discount retailers such as Wal-Mart, Costco, and
Target. The Strip Center Database classifies a grocery-anchored center with up to one big
box national tenant and a number of in-line shops.
Gross Leasable Area (GLA):
Represents the total floor area within a property. This area typically excludes common
space.
Within the Mall sector, the GLA is subdivided between Anchors and Shops because of
rent disparities.
Household Income (HHI):
Average household income. Strip center property owners frequently use three-mile HHI
to gauge a specific population’s wealth, while mall owners use a broader radius.
High Barrier Markets:
Markets where development is difficult and expensive due to regulation, high land costs,
and/or lack of available sites. Commercial real estate in high barrier markets generally
produces superior long-term NOI growth relative to low barrier markets, but with greater
short-term volatility.
Implied Cap Rate:
The cap rate at which the NAV per-share estimate equals the current share price. The measure is
used to describe the property yield embedded in a REIT’s current stock price. Implied cap rates are
useful for comparing valuations. All else equal, implied cap rates should be low when NOI growth
prospects are good or value-creation opportunities exist.
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Where:
• Implied NOI = Total Asset Value x Nominal Cap Rate
• Total Value of the REIT
= Liabilities
+ Preferred Stock
+ Shares x Share price
Note: This method assumes all assets earn the company’s cap rate which may not be accurate
for companies with large non-earning assets.
See also Cap Rate.
See also Nominal Cap Rate.
Implied Cost of Equity:
Calculated as the discount rate where the present value of expected dividends equals the
current share price.
See also Adjusted Funds From Operations.
Implied Weighted Average Cost of Capital (WACC):
The WACC for a company (or group of companies) based on an assumed cost of debt and
the implied cost of equity. The debt and equity cost components are weighted by the company’s
leverage ratio.
See also Implied Cost of Equity.
See also Weighted Average Cost of Capital.
See also Leverage.
Internal Rate of Return (IRR):
The discount rate that sets estimated discounted cash flows equal to the initial investment.
For properties, portfolios, markets, or REITs, analysis can base initial cash flows
on economic cap rates. Intermediate cash flows are based on the initial cash flow and
grown at the corresponding NOI growth rates. Terminal values are calculated by applying
a long-term growth rate, which is typically a negative spread to estimated inflation (i.e.,
long-term growth is less than inflation).
See also Economic Cap Rate.
Intrinsic Value:
The value of an asset. The intrinsic value of an asset will not always be the same as the
current market value. Identifying discrepancies between the intrinsic value and the market
value provides an arbitrage opportunity.
Note: Intrinsic value has a different definition for stock options
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(Intrinsic Value of an Option = Share Price - Strike Price).
Leverage:
A measure of a company’s use of debt.
When calculating a company’s use of leverage, analysts may cite “net leverage,”
which assumes existing cash reduces debt. This is designed to avoid penalizing a company
for drawing from a line of credit and holding the proceeds as cash on the balance sheet.
Note: In the leverage and net leverage calculations, total liabilities include preferred
equity.
Leverage Ratio:
Measures the amount of debt carried by a REIT relative to the market value of its assets.
This is akin to a loan-to-value (LTV) ratio commonly cited in the mortgage market. The
leverage ratio provides a snapshot of balance sheet strength. However, it is best used in
conjunction with a Debt-to-EBITDA ratio calculation, since some REITs that own substantial
amounts of non-earning assets (e.g., land and vacant buildings) may appear to
have reasonable balance sheet strength from a leverage standpoint, but may not be generated
sufficient cash flow to service their outstanding debt. See Leverage.
Lifestyle Center:
A retail property that is typically comprised of upscale national retailers combined with
significant dining and entertainment venues. Most lifestyle centers have an outdoor setting,
many of which attempt to replicate a “Main Street” type of feel. Lifestyle center development
boomed in the mid-‘00s. However, the subsequent recession, plus overbuilding
in many markets, caused significant financial distress for many newly minted lifestyle
centers.
Low Barrier Markets:
Markets where new development is a constant competitive threat to existing properties
due to abundant amounts of land and limited regulatory challenges. Commercial real
estate in low barrier markets generally produces lower long-term NOI growth relative to
high barrier markets, but rents also tend to be less volatile.
Macro:
Refers to a national or global topic.
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Market Cap Rate:
A term used primarily in the hotel and apartment sectors. It is similar to the
“economic cap rate” in that a deduction to NOI is made to reflect the cap-ex incurred by
owners to maintain their properties. A key difference is that the standardized cap-ex reserves
commonly used by market participants are far smaller than the cap-ex historically
incurred by public and private owners in both property types.
Where:
• Standardized Cap-ex Reserve =
o Apartment: $450 per Room
o Hotels: 4% of Revenues
• Property Value = Transaction Price
See also Nominal Net Operating Income.
See also Cap Rate.
See also Economic Cap Rate.
Market Revenue per Available Foot (M-RevPAF) Growth:
A measure of the health of a market (or sector) that combines two key operating metrics
(effective market rents and occupancy) into a single value. Although same-store NOI
growth is a more widely used performance benchmark, this metric is heavily influenced
by the length of leases in each sector and does not serve as a timely proxy for market-level
operating fundamentals.
Mark-to-Market Debt:
Reflects the difference between the outstanding principal and the current value of a fixedrate
bond based on prevailing interest rates. The mark-to-market value can be thought of
as interest savings (when the coupon is lower than market interest rates) or added interest
expense (when the coupon exceeds market interest rates).
Note: If the “Price” function returns a #Name error, the Analysis ToolPak & Analysis
ToolPak – VBA should be loaded in Excel via Tools Add-ins.
Net Asset Value (NAV):
Real estate differs from many other industries in that the market value of the assets
owned by a company can be estimated with reasonable precision. The reason is that numerous
sales transactions, involving similar assets, provide excellent “real time” pricing.
NAV estimates are the foundation for our NAV-based Pricing Model, which has proven to
be highly successful over time for making accurate investment recommendations. NAV is
the mark-to-market value of a company’s common equity calculated by applying an estimate
of private market values to the company’s real estate and other adjustments and deducting
all liabilities, including preferred equity. NAV is often presented on a per-share
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basis.
NAV
= Current Value of Real Estate Assets (valued on a pro rata basis using NOI and
estimate of a cap rate for the respective portfolio)
+ Development (valued at CIP + Estimated Value Creation)
+ Other Tangible Assets (marked-to-market where appropriate)
− Debt (marked-to-market based on current prevailing interest rates and spreads)
− Other Tangible Liabilities
− Preferred Equity (marked-to-market based on market pricing where available and
prevailing interest rates)
NAV per Share
= NAV Divided by Diluted Shares (including Operating Partnership units and inthemoney options)
See also Cap Rate.
See also Construction in Progress.
See also Value Creation.
See also Mark-to-Market Debt.
See also Operating Partnership Units.
Net Effective Rent:
A metric designed to measure the economics of a lease after taking into consideration applicable
operating costs, leasing commissions and tenant improvements. Changes in
market rents impact a landlord’s NOI and cash flow. Those fluctuations can be exacerbated
by concurrent changes in the re-leasing costs (i.e. tenant improvements and leasing
commissions) that landlords incur, particularly in the office and retail sectors. Net effective
rent is a more complete tool for measuring changes in overall lease economics. They
tend to fall further than rents, on a percentage basis, during market downturns, while the
opposite is true during market recoveries.
Net Effective Rent
= Annual Base Rent
− Operating expenses (if rent above is gross)
− Annual Leasing Commissions (averaged for each year of the lease)
− Tenant Improvements (averaged for each year of the lease)
Net Leasable Area (NLA):
A property’s leasable area. This measure typically excludes common areas and mechanical
space.
Net Leverage:
See Leverage.
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Net Operating Profit After Tax (NOPAT):
Intended to reflect a company’s unleveraged cash flow.
NOPAT is the preferred measure of unlevered earnings within the lodging
sector. The Hotel valuation model applies a multiple to the calculated NOPAT to arrive
at a value of the company’s operational assets.
NOPAT
= EBITDA
− Normalized Cap-ex
− Normalized Cash Taxes
− Option Expense
+ Operating Lease Payments
Net Rent:
Refers to rent that does not include property expenses that are paid by the tenants directly
rather than the landlord. In the case of “triple net” (NNN) leases, the tenant agrees
to pay all expenses associated with the property (e.g., real estate taxes, insurance, repairs
and maintenance). In most cases net rent should be roughly equal to NOI.
“New Normal:”
A phrase coined by PIMCO in early 2009 to describe an economic environment characterized
by slow economic and job growth, low inflation, and low returns.
Nominal Cap Rate:
When the term “cap rate” is used by most market participants, they are referring to what
we call “nominal cap rate”. Nominal cap rates represent the expected unleveraged firstyear
yield a property buyer expects to realize on its investment. Like bond yields, nominal
cap rates move inversely with property values – when values rise, cap rates fall, and vice
versa. A primary flaw to nominal cap rates is they overstate the true yield to be realized
by investors. The reason is that cap-ex – the substantial cost borne by commercial property
owners over long holding periods – is ignored. As a result, “economic cap rates” are a
better measure of investment yields.
A nominal cap rate is calculated as: Nominal Net Operating Income (NOI) / Property
Value.
Where:
• Nominal NOI
= Revenues
− Operating Expenses
− Non-Cash Rent
+ 12-Month Forward Growth Estimate
• Property Value = Transaction Price
See also Nominal NOI.
Nominal Cash Net Operating Income:
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See Nominal Net Operating Income.
Nominal Net Operating Income (NOI):
Forward 12-month estimated income from a property or portfolio after operating expenses
are deducted from revenue. Further deductions for straight line and other noncash
rents are made to calculate Nominal Cash NOI.
Nominal NOI
= Rents
− Operating Expenses
+ 12-month Forward Growth Adjustment
Nominal Cash NOI
= Rents
− Operating Expenses
− Non-cash Rents
+ 12-Month Forward Growth Adjustment
Rent includes: Base rents, lease termination income, parking, and service revenue.
Operating expenses include: Real estate taxes, utilities, insurance, property management
fees, advertising, and basic repairs and maintenance.
For the purposes of calculating operating real estate value in an NAV, NOI from the income
statement will be adjusted for:
− Internal growth expectations.
− Adjustments for external growth to adjust for full-period effects of acquisitions,
dispositions, and development completions.
− Abnormal margins.
− Seasonality.
− Abnormal lease-termination income.
− Abnormal non-cash rent income (e.g., Straight-line rents).
− Sizeable signed leases that have not yet commenced.
Observed Premium/(Discount) to Assets:
The premium (discount) ascribed to a company’s asset base that is implied by the current
share price compared to an initial assessment of asset value. Observed premiums/
discounts in the public market have historically been reliable predictors of future changes
in private-market prices.
Also referred to as Premium/Discount to Unlevered Asset Value (UAV).
Occupancy Cost Ratio (OCR):
A ratio which expresses a retailer’s total cost of occupancy (sum of minimum rents, percentage
rents, common area maintenance*, and real estate tax recovery) as a percentage
of tenant sales. Stabilized occupancy cost ratios range from 12-16% for most mall tenants.
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In general, higher productivity tenants can support higher occupancy cost ratios.
* Common area maintenance (CAM) are any expenses (e.g. janitorial services, air conditioning,
and lighting) passed to tenants for shared space (e.g., parking lots and hallways).
Operating Partnership (OP) Units:
Many REITs are structured as Umbrella Partnership REITs (or UP-REIT). This complex
corporate structure has a simple goal – allow owners of commercial real estate to effectively
sell properties to REITs without immediately triggering capital gains tax. The invention
of the UP-REIT structure in the early-‘90s was critical to spurring the Modern
REIT era because it established a highly tax-efficient way for private real estate companies
to convert to public ownership.
OP units represent an equity interest in the UP-REIT that is almost always exchangeable
for common shares on a 1:1 basis. Capital gains are triggered when OP units are converted
to common shares, so such exchanges are typically made only when the shares are
going to be sold immediately.
In most NAV valuations, total assets reflect the assets of the OP rather than just the
REIT’s share of the partnership. As such, OP units are included as part of the fully diluted
share count.
Power Center:
A shopping center that is comprised primarily of big-box retail tenants such as Best Buy,
Home Depot, Toys R Us, etc. A power center typically has a limited amount of space
dedicated to smaller tenants such as fast food restaurants. Cash flows for power center
owners tend to be pretty steady, since big-box retailers generally sign long-term leases (10
years is typical). However, bankruptcies of national retail chains such as Circuit City and
Linens N Things have proven to be problematic for power center owners. The Strip Center
Database classifies a power center as any center with three or more big box national
tenants (even if one is a grocer). Power centers generally include a number of small
shops.
Primary Cap Rate:
Represents the cap rate ascribed to the core real estate segment in companies that operate
in multiple real estate segments.
Private REITs:
Also called “public, non-traded REITs,” private REITs sell stock to investors and own/
operate commercial real estate portfolios. However, the shares of these companies are
not freely traded on a stock exchange, which greatly decreases liquidity for their owners.
Most private REITs are also burdened with egregious fee structures that serve as an anchor
on the total returns that investors can ultimately achieve. Private REIT shares are
typically sold to retail investors through commission-based financial planners and, despite
the structural shortcomings, the industry has been successful in raising billions of
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dollars of equity.
Prop 13:
In California, an amendment enacted in 1978 that limits the tax rate on real estate. The
proposition decreased property taxes by assessing property values at their 1975 value and
restricted annual increases of assessed value to an inflation factor, not to exceed 2% per
year. It also prohibited reassessment of a new base year except for: a) a change in ownership,
or b) completion of new construction.
Relative Pricing Model:
A pricing model that compares prices to gain a positive spread in total returns by buying
the cheap security while selling the expensive security.
Releasing Spreads:
Describes the spread between lease rates on expiring leases and the rates on new leases.
The metric measures rent growth from the time the lease was initially signed offset by
rent bumps that occurred during the course of the lease. Releasing spreads are often
measured on a cash and a GAAP basis. Cash releasing spreads reflect the last cash payment
of the expiring lease versus the first cash payment after the renewal. GAAP releasing
spreads will be impacted by non-cash adjustments to the ending lease payments and renewed
lease payments.
Revenue per Available Room (RevPAR):
A metric that combines occupancy and rental rates of hotel properties to measure operating
performance. The calculation is closely tied to the M-RevPAF concept used across sectors.
See M-RevPAF.
Strip Centers:
A generic term applied to retail properties that are not traditional malls or factory outlet
centers. The strip center properties owned by REITs generally fall into two broad categories
– 1) grocery anchored shopping centers and 2) power centers.
Top Down:
A valuation approach based on a macro thesis. The impacts of that thesis are subsequently
analyzed at the universe level, the sector level, and, finally, the company level.
Triple Net Rent (NNN):
See Net Rent.
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UP-REIT (Umbrella Partnership):
UP-REIT: The UP-REIT structure was created in the early ‘90s to facilitate the conversion
of private real estate companies to public vehicles on a tax-efficient basis. In an UPREIT,
a partnership owns the real estate assets. The partnership is owned jointly by a
REIT and other investors who usually contributed properties to the partnership in conjunction
with the IPO (these owners are known as “OP unitholders”). The OP units are
usually exchangeable for stock in the REIT on a 1:1 basis. Accepting OP units from the
UP-REIT in exchange for real estate allows owners to defer capital gains tax. That tax
gets triggered when OP units are ultimately converted to REIT common stock, which is
typically done only when the shares are to be liquidated immediately.
The use of OP units as acquisition currency provides UP-REITs with a competitive advantage
over “all cash” buyers in situations where the seller is looking to defer paying capital
gains tax. Most of the REITs in our coverage universe are structured as UP-REITs.
See also Operating Partnership (OP) Units.
See also Down-REIT.
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Value Creation:
The expected profit of a development project after adjusting for risk. Value creation is one
of two key components (CIP is the other) in valuing development in an NAV model.
Value Creation = The Present Value of Real Estate at Stabilization
(Est. Stabilized NOI / Est. Stabilized Cap Rate)
− Total Est. Construction Cost
− Profit Hurdle to Adjust for Risk.
The profit hurdle is a risk assessment based on time to completion, amount of pre-leasing
completed, and other risk factors (e.g., location, market conditions, etc.). Generally, the
shorter (longer) the time to stabilization, the lower (higher) the profit hurdle. Additionally,
as pre-leasing increases (decreases), the profit hurdle decreases (increases).
See also Construction in Progress.
Warranted Premium/(Discount) to Assets/Value:
The premium (discount) that should be ascribed to a company’s asset base due to factors
that are not captured in an NAV analysis.
Potential Components:
• Sector Average Premium (Discount) to Assets: One of the biggest factors in determining the
appropriate premium to assets for a company is the average premium of the sector.
• Franchise Value: Franchise value represents the value management can add to a company
above and beyond that which is captured in an NAV. Historical premiums to NAV, total returns,
and NAV growth (CVNI) are used to estimate a company’s franchise value going forward. Can
include a subjective element.
• Corporate Governance: Through a systematic review of REIT governance, including past
conduct, a discount can be applied.
• Share Liquidity: A measure of the total daily dollar value of shares traded
relative to peers.
• Overhead: Real estate NOI is an integral input in any NAV calculation, but
because this figure is above the G&A line on an income statement, G&A needs to be
handled separately. The overhead score is based on estimated annual G&A as a percentage
of total assets per the NAV relative to peers.
• Leverage: Leverage is often used to enhance equity holders’ returns by injecting
additional risk. The increase in risk should reduce the multiple an investor is
willing to pay for the stock.
Note: Although Premiums/(Discounts) are often discussed relative to NAV, this should be
done with caution because leverage can skew the results.
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Warranted Premium/(Discount) to NAV:
See Warranted Premium/(Discount) to Assets/Value.
Warranted Share Price:
Estimate of fair value for a company’s stock relative to its peers.
Assumes overall sector share pricing is fair.
See also Net Asset Value.
See also Warranted Premium / (Discount) to Assets.
Weighted Average Cost of Capital (WACC):
The implied cost for a company to raise capital to purchase an asset. WACC includes all
forms of capital, including equity, preferred equity, and debt holders. Unlike the WACC
calculations for companies in most industries, REITs do not benefit from an interest tax
shield, which should encourage companies to use less debt than companies in other industries.
See also Implied Weighted Average Cost of Capital.
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RE Club Recruiting Guide 2014
Questions / Answers for Technical Questions
Guesstimating
1) How many bricks do you think you need to build that building across the street?
o Just show how you think/process as 100% accurate answer isn’t the goal here
2) What do you think is the Net Rentable Area of this building?
3) How many light panels (fixtures) are in this building?
Financial Questions
1) How much debt can the building we're in support?
o Estimate NOI then use cap rate / LTV to get to loan size (and gut check against
DSCR)
o NOI: estimate # of floors and floorplate to get to GBA; use load factor get to NRA;
multiply by market net rent to get to NOI
o Loan Size: divide NOI by market cap rate to get to value and multiply by LTV
2) What's a better investment, buying a hotel in Vegas or an office property in
Manhattan?
o Open ended question…
o Basically, do you know what a cap rate is for both?
o And do you understand the risk/reward of each investment ?
3) You buy a building at 8% cap rate, 50% LTV, 6% interest. What's the equity yield
year one?
o Say upfront you assume no principal amortization, no taxes, no depreciation, and
no other leakages
o Plug $8m NOI at 8% cap rate = value is NOI / cap rate = $8m / 8% = $100m
o 50% Loan to Value (“LTV”) = $50m debt, $50m equity
o 6% interest on debt = 6% x $50m = $3m
o NOI less debt interest = $8m - $3m = $5m to equity
o Equity yield = $5m / $50m = 10%
! Even if you have principal amortization, it’d count towards equity yield
! If you must have taxes, assume “net tax rate” (adjusted for depreciation
shield) is 30%. $5M after debt before tax CF * 30% tax rate = $1.5m in
taxes. This leaves $3.5m to equity " $3.5m / $50m = 7% yield. (Or 10%
pre-tax equity yield * [1-30%] = 7% after tax yield).
4) You invest $100 today and without any further inflows or outflows you sell for
$100 in 5 years. What's the IRR?
o Trick question. Do not do NPV! Think of IRR as profits. First you return capital
(i.e. break even) then you start making profits. So IRR is the profit in excess of
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your return of capital. You made no profits, so IRR = 0%. If you discount $100 by
years at 0% then you get $100. Check in excel. You might intuitively you think
you “lost” money but IRR is just a gross return function, it has nothing to do with
inflation or time value of money. A $100 in 5 years is worth $100 today at 0%
discount rate.
You invest $1 today, $1 end of year 1, $1 end of year 2, and get $3 end of year 3.
What's the IRR?
o Again trick question. Do not do NPV! You invested a total of $3 and you got back
$3. You made no profits. IRR = 0.
You invest $3 and get $1 every year forever. What’s the IRR?
o “Return on capital” every year is $1/$3 = 33.3%. This is a perpetuity formula
(check that value today = $1/33.3% = $3).
You invest $100 today and get $10 for 4 years (year end) and $110 end of year 5.
What's the IRR?
o Again – what’s the “return on capital” in year 1? 10/100 = 10%
o …year 2 = 10/100 = 10%
o …year 3 = 10/100 = 10%
o …year 4 = 10/100 = 10%
o …year 5 = 10/100 = 10%
o Plus you get principal back in 5 years (which generates 0% IRR as per above)
o So you get exactly 10.000% IRR
o Basically, it’s a core deal where you make $50 in distributions from cashflow,
$100 from sale and generate net $50 in profits on $100, or 50% total return over
5 years. This is 10% per year.
o Note: if you do not get $10 ever year, but you compound, then your $100 turns
into $100*(1+10%)^5 = $161. But you still get a 10% IRR. Working backwards, if
you you’re told that you don’t get anything for 5 years and then get $150 end of
year 5 (it’s still a 50% total return, or a 1.5x multiple) but you know the IRR is
definitely less than 10% (it’s ~8.5% IRR).
You invest $100 today and without further inflows or outflows what do you need
to sell for in year 3 to get a 10% IRR?
o Basically asks if you can do the following compounding math:
o Balance end of year 1 = $100 x (1+10%) = $110
o …year 2 = $110 x (1+10%) = $121
o …year 3 = $121 x (1+10%) = $133
What's the relationship between IRR and NPV?
o Straight up corporate finance. IRR is the discount rate at which NPV equals zero.
o If someone asks you “What’s an IRR?” Say as above and add “it’s the internal
rate of return, or the discount rate at which NPV = 0.”
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10) The project generates a 10% IRR. Sponsor contributes 5% of equity and coinvestor 95%. Sponsor receives 20% promote after a 15% IRR to the investor.
What's co-investor's IRR?
o Trick question. Key things to watch out for are: (a) project generates only a 10%
return for all parties; (b) 15% IRR to investor is the “hurdle rate” (or “preferred
return”), and (c) it’s implied (or you clarify your assumption) that capital
contributions are pari passu (in proportion) and distributions up to the hurdle rate
are also pari passu.
o So, because you’re not making above the 15% hurdle rate, both sponsor (or
“general partner” or “GP”) and co-investor (or “limited partner” or “LP”) make the
same return of 10%.
o If the question was the same except “the project return is 15%” then the hurdle
rate is still not exceeded and both LP and GP still make 15% each.
11) Your acquisition project generated a 15% IRR over 5 years. What's the multiple?
o You need to know relationship between IRR and multiples and be comfortable
going back and forth between the two.
o For simplicity, assume that all cash is compounded towards back-end with no
current income.
o 15% IRR over 5 years is roughly a 2.0x multiple. 100 x (1+15%)^5 = $201.
12) An acquisition project generated a 2.5x multiple over 5 years. What's the IRR?
o 2.5x multiple is slightly over a 20% IRR
13) What's the IRR if the multiple generated is 3.0x in 5 years?
o ~25% IRR
o Try to remember these and you’ll be generally fine:
! 10% IRR over 5 years = 1.6x
! 15% IRR over 5 years = 2.0x
! 20% IRR over 5 years = 2.5x
! 25% IRR over 5 years = 3.0x
! 10% IRR over 3 years = 1.3x
! 15% IRR over 3 years = 1.5x
! 20% IRR over 3 years = 1.7x
! 25% IRR over 3 years = 2.0x
! 30% IRR over 2 years = 1.7x
! 20% IRR over 2 years = 1.4x
14) You have an opportunity to buy an asset at an initial yield of 7%. You can obtain
65% LTV, 8% interest-only loan (without principal amortization). Assume 0% tax
rate, no cap rate compression, and no NOI change over a 5 year hold. Does this
deal make sense, why?
o This is a trick question. Without doing any math you should see that the deal
makes 7% and debt costs you 8%. Your income won’t go up and you won’t get a
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boost to returns from back-end appreciation at sale, so your IRR will be the same
as the equity yield.
When debt costs > equity yield = this is called “negative leverage.” basically debt
is dilutive to your returns.
(Check: if you do the math, then you get roughly ($65m x 8% = $5.2m to debt
interest, leaving you with $7m less $5.2m interest = $1.8m to equity. Then $1.8m
/ $35m = 5.1% equity yield (assuming no tax). This deal doesn’t make any sense
if you make less on equity than on debt.
Now, if the question asked the same thing, but said that your “NOI will compress”
or that NOI will go up (so long as your IRR will be >8%) then you can say that this
deal might make sense.
The ideal “qualified” answer you give is: “No, it’s negative leverage because your
equity yield is less then debt interest. However, if my income increased and/or
cap rate compressed such that I can make more than 8% equity IRR, then this
deal might make sense because at least debt is no longer dilutive to my returns.”
15) Do you think a 60% IRR generated over 1 month hold is a good return?
o Open ended question. Makes you think about trade-off between IRR vs hold
period and multiple, portfolio churn, risk-reward, and amount of equity committed
vs absolute profits generated.
o A 60% return over one month is roughly 60% / 12 = 5% return per month. Since
you only held it for one month, you made 5% on your money. Is that a good
return? Probably not. That’s only a 1.05x multiple. Most investors want to
generate high IRRs but also absolute dollar profits, which is driven by multiples
(hopefully at least 1.3x). So if someone gave you $100m to invest and you return
$105m while they expected at least $130m (1.3x) or even $180m (1.8x) back,
then they won’t be too happy. It’s great you made an LP made a “60% annual
return,” but you only made a 5% total return and many times less in profits than
they expected and now the LP must redeploy that capital.
o At the extremes, a 1.05x multiple on $10b = $500m in profits. And if you took
almost no risk generating that $500m, then it’s arguable a very good riskadjusted return over one month.
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