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CFA Level II 2020 COPY (552) > Alternatives > Flashcards

Alternatives Flashcards

1
Q

Non-residential Properties

A

i. Residential with the intent to produce income

ii. Commercial properties
1) Office (dependent on job growth)
2) Industrial(Dependent on consumer spending)

iii. Multi-family(if only used for income)

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2
Q

Real Estate Values

A

a. Market value - what the average investor is willing to pay
b. Investment value - value to a particular investor
c. Value in use - value for part of a business
d. Assessed value - value by a taxing authority

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3
Q

Valuation: Cost Approach

A

Purpose: what it would take to construct a comparable building

Value = Market value of land + building value

Building Value =
Replacement cost for building
- Curable
- Incurable [(age / life) * replacement cost
- Obsolescence

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4
Q

Valuation: Income Approach

A

Purpose: value based on first year NOI

Direct capitalization Method Value:

(AKA going-in cap rate)= NOI1 / cap rate

Note: If tenant pays all expenses: rent1 / ARY

If there is a temporary impairment need to use stabilized ROI

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5
Q

Gross income multiplier

A

Gross income multiplier = sales price / gross income

value = gross income * gross multiplier

Note: This ignores vacancy rates and operating expenses

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6
Q

Discounted Cash Flow Method

A

Discount rate = cap rate + growth rate

TV: Use GGM

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7
Q

Term and reversion lease approach

A

Step one: calculate PV of current lease

Step two: Calculate TV of the new terms

Step three: Calculate PV of the TV

Step four: add step one and three

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8
Q

Rent Layer method

A

Step 1: calculate the value of contract rent (rent / current discount rate)

Step 2: calculate value of incremental rent [(New rent - old rent)/new discount rate)]

Step 3: Calculate PV of incremental rent

Step 4: add step one and three

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9
Q

Real Estate Indices

A

Appraisal-based indices

used to measure market movements (lags, less volatile, lower correlation)

Transaction-Based Indices

Repeat-Sales (sales of the same property)

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10
Q

Real Estate Ratios

A

Debt Service Coverage Ratio (DSCR): first year NOI / debt service

Loan-to-value (LTV): loan value / appraisal value

Equity dividend rate = first year cash flow / equity

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11
Q

Types of publicly trades real estate securities

A

Equity REITS: actively managed tax-advantaged trusts (Has no corporate income tax)

REOCs: no tax advantages

Residential or commercial MBS

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12
Q

How the Economy affects REITS

A

REIT Type Affects Most

Hotel Job Creation

Office Job Creation

Residential Population Growth/Jobs

Shopping/Retail Retail Sales

Storage Population Growth

Healthcare Population Growth

Industrial Retail Sales

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13
Q

Overall Net Asset Value Per Share

A

REIT assets - liabilities

a. Cap rate = NOI / value (This is based on recent transactions)
b. Value = NOI / cap rate

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14
Q

Funds from Operations (FFO)

A

Account net earnings

+ Depreciation

+ Deferred tax expense

  • Gains from Sales of property and debt restructuring

+ Losses from sales of properties and debt restructuring

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15
Q

Adjusted Funds From Operations (AFFO)

A

FFO

  • Non-cash (straight-line) rent adjustments
  • Recurring maintenance-type capital expenditures and leasing commissions
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16
Q

Net Asset Value per Share Accounting

A

Start with Estimated NOI

/ Cap rate

= Estimated value of operating real estate

+ Cash and accounts receivable

  • Debt and other liabilities

= Net asset value

/ Shares outstanding

17
Q

Price-to-FFO valuation Price-to-AFFO valuation

A
  1. Price-to-FFO valuation

FFO / shares THEN * multiple

  1. Price-to-AFFO valuation

AFFO/ shares THEN * multiple

18
Q

Different Types of Private Equity Valuations

A
  1. Discounted cash flow (not typically used for VC due to unknown cash flows)
  2. Relative value (price multiples) - not used a lot for VC due to lack of comparables
  3. Real option analysis
  4. Replacement cost
  5. Venture capital method (debt is usually low and equity is high)
19
Q

Venture Capital Method: Pre, Post, and Ownership

A

a. Post-money = PRE + INV: Exit value / (1 + r)^t
b. Pre-money = POST - INV
c. Ownership = INV/POST

Example:

Intial investment $4M, value of firm in 7 years = $25M, discount rate = 25%

  1. Calculate PV: FV = 25M, N = 7, I =25 CPT PV = 5,242,886

Ownership = INV/POST, $4M / 5,242,886 = 76.29%

20
Q

Exit routes

A

a. IPO - highest exit value but costly. Timing is key
b. Secondary Market Sale
c. Management Buy out
d. Liquidation

21
Q

Distribution waterfall

A

Purpose: how the carried interest is paid to the GP

a. Deal-by-deal method; just paid the % of carried interest on the profits
b. Total return
i. Portfolio value exceeds committed capital
ii. Portfolio value exceeds invested capital (plus 20%)
c. Clawback: GPs must pay back if losses occur

22
Q

Private Equity Quantitative Measures

A

a. PIC (Paid-in capital); amount utilized by the GP
b. DPI (distributed to paid-in capital); LPs realized return for which they received distributions
i. Cumulative distributions/paid-in capital
c. RVPI (residual value to paid-in capital); LPs unrealized return (what has not been distributed)
i. NAV/paid-in capital
d. TVPI (total value to paid-in capital);
i. sum of DPI and RVPI

23
Q

Adjusting the Discount Rate for Failure

A

r* = (1 + r / 1 - q) - 1

24
Q

Commodity Market Participants

A

a. Hedgers - take an offsetting position
i. Producers; natural long position
ii. Consumers; natural short position
b. Speculators; risk takers and provide liquidity
c. Arbitrageurs

25
Q

Storability/Renewability

A

a. Storability: high means does not degrade over time and costs are low
b. Renewability: produced without limit;
i. wheat is renewable, minerals/crude oil is not

26
Q

Convenience Yield

A

Purpose: The benefit from holding a commodity in stock vs just owning a futures contract

i. Short supply = higher convenience yield, lower futures price
ii. High supply = low convenience yield, higher futures price

27
Q

Theory of storage Types

A

Inverse relationship between inventory and yield

  1. Nonstorable commodities (like oil and livestock) are usually in backwardation
    i. This means positive roll return
  2. Storable commodities (like gold) are almost always in contango
    i. This means negative roll return
28
Q

Accessing commoditites

A
  1. Direct purchase (but have storage and maintenance)
  2. Commodity stocks
  3. Mutual Funds
  4. Futures (but must roll contracts)
  5. Structured Products
29
Q

Backwardation and Contago

A

Backwardation (Producers dominate)

Current spot price > future spot price

Contango (Buyers dominate)

Current spot price < future spot price

Normal Backwardation: Expected spot price > future spot price

Normal Contango: Expected spot price < future price

30
Q

Total Return of Commodities

A

Total return = spot return + roll return + collateral return + rebalancing return

31
Q

Spot return of Commitities

A

Spot return: change in spot price. Driven by supply and demand

32
Q

Roll Return of Commoditites

A

Roll return: income generated as futures contracts close and get replaced over time

Contango = negative return

Backwardation = positive return

33
Q

Collateral and Rebalancing Return of Commoditites

A

Collateral Return: interest received on a cash investment

Rebalancing return: diversification return

34
Q

Excess and total return indices

A
  1. Excess return index reflects an uncollateralized futures investment

Excess return = spot return + roll return

  1. Total return index is a fully cash-collateralized commodity investment (gets interest from t-bills)

Total return = spot return + roll return + collateral return

35
Q

Insurance Perspective

A

Desire by producers to hedge price risk

Leads to normal backwardation

36
Q

Hedging Pressure Hypothesis

A

Desire by producers to hedge price risk AND consumers to hedge their short positions

Leads to normal contango

37
Q

Theory of Storage for Returns

A

Considers impact of inventory

Price changes occur based on convenience yield and storage costs

38
Q

Ways to Calculate the Cap Rate

A

Cap rate = discount rate - growth rate

OR

NOI1 / value

OR

NOI1 / comparable sales price

39
Q

Venture Capital Method: Shares required

A

Step one: Shares * Ownership % / 1 - Ownership %

This is total shares required

Step two: INV / total shares required

CFA Level II 2020 COPY (552) (13 decks)

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