Welltower Superday Flashcards

What are the key metrics you use to analyze and value a property?
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A real estate investment trust (REIT) is a company that buys, sells, develops, and operates properties and/or real estate-related assets.

-Give average people the ability to invest in property without major capital.

-pay no corporate taxes if they distribute 90% of taxable income as dvds, earn 75% of their gross income from RE, have 75% of their total assets related to RE, and have more than 100 shareholders (no fewer than 5 investors can own over 50% of company)

-provides reliable, dividend income with stock price appreciation
-No corporate taxes on IS if they follow the criteria

-RE is most of their assets (on BS will have RE and Non-RE Assets)

-constantly acquiring, developing, and disposing of properties, so those are major Cash Flow Statement items

-Because of their high capital requirements and the need to issue dividends constantly, REITs are always low on cash and need to issue Debt and Equity all the time to continue operating
Look at Price/FFO (funds from operations) and Price/AFFO (adjusted funds from operations), which add back depreciation and subtract gains on property sales. NAV is important too.

Value properties by dividing Net Operating Income (Property's Gross Income - OpEx) by capitalization rate (based on market data).

Replacement valuation is more common because you can actually estimate the cost of building new properties and buying land.

DCF flows from specific properties.

FFO=Net Income to Common+RE-Related Depreciation & Amortization - Gain (Loss) on Sale of Depreciable Real Estate

AFFO=FFO-Maintenance CapEx - Gain (Loss) on Sale of Land + Other Non-Cash Charges

AFFO gets you closer to how much in cash earnings the REIT is generating on an ongoing basis with the factoring in of Maintenance CapEx to get buildings in working order
Property size is based on the size of the lot you acquire and what % the building can take up => Maximum Allowable Lot Coverage (which you can multiple by the lot size to get the total square meters or footage you can use for the building's footprint)

You can then determine total allowable sq. meters for the building using the Floor Area Ratio (FAR) and multiplying it by the lot square meters and you can then divide by the building footprint area to get number of floors.

ex. FAR is 10, lot is 10,000 square meters
-10x10,000=100,000 square meters across all floors
-if the building footprint was 5,000 for example (obtained using the method with the Maximum Allowable Lot Coverage), we could then divide 100,000/5,000 to get 20 floors
Offices/Retail/Industrial: $ per square foot

Apartments: $ per unit

Hotels: based on the Average Daily Rate (ADR), the total # of rooms, and the Occupancy Rate

**Can also earn other revenue sources from different things. (Ex. parking)

**Start with Potential Rental Income and net against Vacancy Allowance to get actual rental income
What are the most important property-level expenses, and how do you calculate them?Operating Expenses and Property Taxes (1) Property Taxes: determined by the local zoning regulations and calculate them based on the sq feet of the property (2) Operating Expenses: broken up into different categories (Ex. energy and utilities, repairs and maintenance, insurance, etc.). Can represent these as a per sq. feet in the building or for residential may link to the number of apartments or homes.office property's Income StatementRevenue -Operating Expenses -Property Taxes Net Operating Income +Interest Income / (Expense) +Depreciation/Amort.(if building is finished) Net IncomeWhy could there be a discrepancy in NOI for the same property between two analysts with the same financial information?Most likely Maintenance Capital Expenditures -Some people subtract saying it represents a true cash cost -Some people exclude it on the argument that CapEx should not be reflected in NOI *Could be something else and you have to understand how NOI was calculatedWhat's the difference between NOI and Stabilized NOI? When do you use each one of them?With development, buildings usually reach stabilization when Vacancy Rate, revenue and expenses are no longer changing aside from inflation. Need to look at this when you're modeling property development. When buying/selling buildings, better to use Stabilized NOI because it's the "steady-state" profit potentialDoes NOI accurately describe the cash flow that a property can generate?Better than Net Income since it excludes depreciation but it also excludes interest and possibly CapEx so it doesn't represent true cash flow. NOI usually more accurate for established properties where there's no debt and where CapEx is minimal.Construction TimelineConstruction Timeline: tells how many months it will take to plan the building, complete construction, and then get tenants to move in (1) Pre-Construction: acquire the land, hire architects, and plan the building (2) Construction: construct the building and any attached structures (3) Post-Construction: pay for furniture, fixtures & equipment (FF&E) and Tenant Improvements (TIs), market the property, and get tenants, and sell the building *Generally, the last two phases take more time than pre-construction*How do you estimate the Total Development Costs? What are the main categories?Land Acquisition Costs, Hard Costs (materials and constructing the building => pretty much anything that's not movable), Soft Costs (design, accounting, legal, permits), FF&E(movable, common area is you but tenant may be negotiated through TIs) , and Tenant Improvements (can be expressed as an absolute or per sq. ft) *TIs are custom to individual tenants*Total Development Costs and when they apply in the Construction TimelineLand Acquisition: Pre-Construction Hard Costs: Construction Soft Costs: All phases FF&E: Post-Construction TIs: Post-ConstructionWhat's the Loan-to-Cost (LTC) ratio, and how do you pick the proper values to use?Tells you how much Debt vs. Equity you're using the finance the development. Ex. Total Dev. Costs=$100 million and LTC is 80%, you would use $80m of Debt and $20m of Equity Look at comparable property developments and speak with banks and lenders to determine a right valueWhat are the different types of Debt vs. Equity?Developer Equity (GP): cash the developer itself puts down to finance the property in exchange for % ownership 3rd Party Investor Equity (LP): Cash from outside investors Mezzanine: riskier type of debt with higher interest rates than senior notes, in between Equity and senior notes in the capital structure Senior Notes: less risky type of Debt than mezzanine, with lower interest rates. May be secured by collateral (the building for ex.) **Could have different groups of equity or several tranches of senior notes)**Why might interest be capitalized for RE development loans?development loan: interest reserve to cover the interest payments and then the balance of the loan increases at the end because there's no cash flowWhy are there multiple different types of Equity in real estate development?Developer usually doesn't have enough cash to fund everything by himselfHow do you determine when to draw on Equity and Debt to fund the development?Always start by drawing on the developer equity first, until it's exhausted. Then 3rd Party Investor Equity. Then Mezzanine and finally Senior Notes. **Calculate the Total Development Costs fist and then use that to calculate the amount of funding required**Why do you draw on funds over each month / year in real estate development?You don't need all the funds at once. Buildings cost something to develop over time, so you can boost your returns by delaying the draws.How do you calculate the IRR by determining the net sale proceeds at the end?Get annual, stabilized NOI and then subtract Maintenance CapEx. Then assume a Cap Rate and determine a price. Subtract out Selling Fees and the repayment of outstanding debt to get net sales proceedsHow do you account for the arbitrary cap rate?sensitivity table to calculate how the IRR changes at difference purchase prices and selling pricesWhat is a Developer Promote and why might the 3rd party investors want to use them and give up some of their returns in the process?the developer may get more than their base amount of returns if the IRR hits a certain threshold. It's a motivating tool so that they work harder to make the development go well and achieve a higher IRR. Goal is to incentivize the developerHow would you calculate Developer Promotes and allocate investor returns?Here's a quick example: let's say that the Developer and 3rd Party Investor invested $20 million altogether and earn back $40 million in 5 years when the building is sold, which is around a 15% IRR. If they had only earned back $32 million, that would be around a 10% IRR. So if the Developer owns 10% and the 3rd Party Investor owns 90%, that $32 million would be divided and the Developer would get 10%, or $3.2 million, and the 3rd Party Investor would get 90%, or $28.8 million. Now there's $8 million left to allocate. Between 10% and 15% IRR, the Developer gets 15%, so they get 15% of that $8 million, or $1.2 million, and the 3rd Party Investor gets 85%, or $6.8 million. So the end result is that the Developer earns a 17% IRR rather than a 15% IRR, and the 3rd Party Investor still gets nearly a 15% IRR, lower by only around 0.2%. This whole structure is called the "waterfall" and it applies to any situation where the returns allocated to each Equity investor differ at different IRR levelsCould you use a DCF to value a property? Why not do that rather than using Cap Rates?You could, but most people use cap rates. DCF usually to cross-check results. To much reliance on future assumptions and it's hard to choose the Terminal Value. Also hard to choose the Discount Rate.Walk me through the Replacement Cost method.You would start by calculating the Asking Price per Square Foot for a property you're considering buying. For example, asking pricing is $100m and it's 100,000 sq. ft. so $1000/sq. ft. Then you can call a developer or someone else in the market to estimate how much it would cost to build it yourself (land acquisition, hard costs, soft costs, etc.) For example, they estimate you could build it yourself for $95m so $950/sq. ft. In this case, the asking price is above the replacement cost so you're buying the building at a premium. Not necessarily "bad" but need to compare to the market and see why.What are the advantages and disadvantages of the Replacement Cost method?Advantages: grounded in fundamental construction costs as opposed to prevailing Cap Rates in the market. Disadvantage: determining accurate values is very difficult. You could get a different answer from every person you ask to estimate. **As a result, used mainly as a sanity check rather than a strict valuation methodology**How do you calculate revenue for a hotel, and what is RevPAR?Based on the # of rooms, the Occupancy Rate, and the Average Daily Rate (ADR) Revenue= # of Rooms * Days in Year * Occupancy Rate * Average Daily Rate (ADR) RevPAR: "Revenue Per Available Room" RevPAR=Occupancy Rate*ADR -how much revenue each room actually results in each nightHow are RevPAR and RevPOR related?RevPOR: "Revenue Per Occupied Room" RevPAR=RevPOR*Occupancy RateAre RevPOR and RevPAR useful?Useful at a high level but exclude other sources of revenue (ex. Food&Beverage, Parking, etc.)Do you think a hotel would be valued at a higher or lower cap rate than an apartment complex?Generally, hotels will be valued at higher cap rates meaning they're less valuable since apartment and office complexes have more stable and predictable revenue from leases Also, hotels are more susceptible to economic downturns and client turnoverIf I'm modeling an apartment or other multi-family development, how is it different from what you might do for an office or retail complex?Typically, you base all calculations on Number of Units in the complex rather than sq. ft. Also may be differences in terms of cash collection because many apartment complexes require an upfront deposit from tenants, which gets returned at the end of the lease (security deposit)Single Net Lease (N) vs. Double Net Lease (NN) vs. Triple Net Lease (NNN)N: Rent +Property Taxes -lower rent, but you only include OpEx to compensate NN: Rent + Property Taxes + Insurance -even lower rent and OpEx is further reduced NNN: Rent + Property Taxes + Insurance + Maintenance -the lowest rent values, but you also have no OpEx and no Property Taxes. Net Rental Income=Net Operating IncomeWhich lease types are the most common for different properties?NNN is most common for office and retail complexes. Residential it's mostly just Gross Lease where the tenant basically only pays rent and maybe some utilitiesI'm looking at an acquisition of an office complex with NNN leases, but the press release only gives approximate rental income. How can I estimate NOI?Trick Question: for NNN, Net Rental Income=NOIWhat's different when you're analyzing healthcare properties such as hospitals?Look at things on a per-bed basis and think about revenue and expenses in terms of number of beds, patients, occupied beds, and so onWhy are JVs, Equity Interests, and Noncontrolling interests so common for REITs?property development and acquisitions are capital-intensive, but REITs have little cash on hand due to the Dvd requirement so they partner to ease burdenWhat are the advantages of AFFO over FFO? What are the disadvantages?AFFO is closer to the company's true cash flow because it reflects the impacts of Maintenance CapEx. Disadvantage is that AFFO tends to be inconsistent and not tracked consistently across REITs. Also, it does not truly represent recurring cash flow because it excludes CapEx related to acquisitions, development/redevelopment and dispositionsWhat happens to the property values in the commercial real estate market when interest rates rise?when interest rates rise, the capitalization rates most often follow suit. Moreover, if cap rates rise, property values tend to decline. Since rising interest rates mean the financing costs are higher, the pace of new supply can slow down while demand remains the same - so rent tends to increase as well.Why do higher interest rates cause RE purchase prices to decline?If interest rates increase, borrowing becomes more expensive, which directly impacts the return of real estate investors In a higher interest rate environment, investors must offset the higher costs of financing with a reduction to purchase prices - since a lower price increases returns. Therefore, as interest rates climb upward, cap rates are also expected to rise, place downward pressure on pricing.What's the relationship between cap rates and interest rates?Investors often view the interest rate paid on a 10-year Treasury note as "risk free," so when considering investments with greater risk they typically seek a return greater than the 10-year Treasury yield. Since capitalization (cap) rates are a measure of return on an asset, higher "risk-free" rates mean sellers will need to reduce their price expectations or increase cash flow, if that's an option, to entice buyers seeking competitive yields, which should also push cap rates up. https://www.jpmorgan.com/commercial-banking/insights/cap-rates-explainedWhat is net absorption rate?Measure of supply and demand in the CRE market. Attempts to capture the net change in demand relative to supply in the market. Net Absorption=Total Space Leased-Vacated Space-New SpaceWhat is the difference between positive and negative net absorption?Positive: more CRE was leased relative to the amount made available on the market. Suggests relative decline in the supply of commercial space available to the market. Negative: more commercial space has become vacant and placed on the market compared to the amount that was leased. Suggests the relative demand for CRE has declined in relation to total supplyWhat is a full service lease?Landlord is responsible for paying all of the operating expenses of the property, meaning the rental rate is all-inclusive of taxes, insurance, and utilities.What is a triple net lease?Tenant pays all expenses of the property including taxes, maintenance, and insurance in addition to rent and utilitiesWhat is a modified gross lease?Tenant pays base rent at the beginning of the lease and then takes on a portion of other expenses such as property taxes, insurance and utilitiesWhat are the three methods for valuing real estate assets?Cap Rate Comparables Replacement Cost MethodWalk me through a basic pro forma cash flow build for a real estate asset?Revenue: The calculation starts with revenue, which is primarily going to be rental income, but could include other sources of income and will most likely deduct vacancy and leasing incentives. Net Operating Income (NOI): Next, operating expenses are subtracted from revenue to arrive at the NOI. Unlevered Free Cash Flow: From NOI, capital expenditures related to the purchase and sale of properties are subtracted to arrive at the unlevered free cash flow metric. Levered Free Cash Flow: Finally, financing costs are subtracted from unlevered free cash flow to arrive at levered free cash flow.If you had two identical buildings in the same condition and right next to each other, what factors would you look at to determine which building is more valuable?Average Rent and Occupancy Rates Credit Risk NOI and Cap Rate **higher cash flow and less risk will be more valuable**What are the four main real estate investment strategies?Core: Of the four strategies, the least risky strategy (and thus, resulting in the lowest potential returns). The strategy typically involves targeting newer properties in locations with higher occupancy rates and tenants that are of higher creditworthiness. Core-Plus: The most common type of real estate investing strategy, which carries slightly more risk by involving minor leasing upside and small amounts of capital improvements. Value-Add Investments: A riskier strategy in which the risk can come from less creditworthy tenants, meaningful capital improvements, or a substantial lease-up (i.e. more "hands-on" changes). Opportunistic Investments: The riskiest strategy that targets the highest returns. The strategy consists of investments in new property development (or redevelopment).