WSP RE Return Metrics and Multiples Flashcards
Yield on Cost (Development Yield) Formula
NOI / Total Project Cost
NOI - Proforma Annual Stabilised
What is the Yield on Cost and Cap Rate difference
Cap Rate uses FMV while YoC uses Total Development Cost
YoC is essentially a forward looking cap rate
YoC carries more uncertainty since NOI must be stabilised and development work has not yet started
What is the development spread
Difference between YoC (Going In Cap Rate) and market cap rate (going-out cap rate)
Development Spread (%) = Yield on Cost (YoC) – Market Cap Rate
What is Yield on Cost method
YoC Metric is a “back-of-the-envelope” method to determine the trade off for a potential property development investment
What is a Good Development Spread?
While there is no set industry benchmark for what constitutes a “good” development spread, per se, most real estate developers target a development spread of around 1.5% to 2.5%.
What is the development yield
Stabilised Annual NOI / Total Development Cost
Essentially the potential ROI on a development project
Total Development Cost includes the cost of acquisition and development
What is a Good Development Yield?
contingent on the investment type and amount of development occuring
Higher development yield is more attractive generally
What is the difference between Development Yield and Cap Rate
The cap rate is the ratio between the annual NOI and the fair market value (FMV) of the property, whereas the development yield is the ratio between the stabilized NOI and total development cost.
development yield concept can be thought of as the “forward-looking” cap rate
What is Loss to Lease
difference between a unit’s market rental rate and the actual rent stated on the signed lease agreement.
Loss is nominal rather than monetary
Loss to Lease (LTL) = (Market Rental Rate ÷ Actual Rental Rate) – 1
Loss to Lease (LTL) vs. Gain to Lease (GTL): What is the Difference?
inverse of the “loss to lease” is termed the “gain to lease”
What is Equity Multiple?
Equity Multiple = Total Cash Distributions ÷ Equity Contribution
Total Cash Distributions (“Inflows”) → The cash retrieved from an investment over the holding period.
Equity Contribution (“Outflow”) → The total equity investment contributed by the investor on the original date of purchase.
Equity Multiple vs. IRR: What is the Difference?
Equity Muiltiple neglects the time value of money whereas the IRR does to makje the NPV of a projects cash flow to be 0
High IRR + Low Equity Multiple → A property investment could yield a high IRR, but a sub-par equity multiple if the timing and cash proceeds were received earlier, i.e. the earlier receipt of cash distributions can distort the IRR metric.
Low IRR + High Equity Multiple → Conversely, a property investment could have a high equity multiple, but a lower IRR if the cash flows are spread across a longer time span.
What is a good Equity Multiple
Equity Multiple vs. Cash on Cash Return: What is the Difference?
Cash on Cash Return – The cash on cash return is the ratio between the annual pre-tax cash flow the investor earns on property investment and the** invested equity in the coinciding period**, expressed as a percentage.
Equity Multiple – The equity multiple measures the total return on the investment and is calculated by dividing the total cash received by the total equity invested i.e. the cash received per dollar invested.
The cash-on-cash return offers a “snapshot” of the annualized return relative to the cash investment, with consideration toward only the cash income generated by the property.
On the other hand, the equity multiple is the ratio between the total return – from the initial purchase date to the exit date – relative to the equity invested.
What is Net Rental Yield
Net Rental Yield (%) = (Annual Rental Income – Operating Expenses) ÷ Property Value
Gross Rental Yield vs. Net Rental Yield: What is the Difference?
Gross Rental Yield → without consideration toward operating expenses such as property management fees, repairs or vacancies.
Net Rental Yield → accounting for the property expenses incurred as part of running the day-to-day operations.
What is the implication of a higher rental yield
Generally speaking, a higher rental yield implies more profits and a better return on investment (ROI) in the property – all else being equal.
a rental yield between 5% to 8% is a decent starting point
Common OpEx that the net rental yield factors
Property Management Fees
Maintenance Costs (Repair, Renovation, etc.)
Building Inspection Fees
Property Taxes
Property Insurance
What is Levered IRR?
Difference between Levered and Unlevered IRR
Why does the levered IRR exceed the unlevered IRR in all cases
Debt financing means the equity contribution is lower thus a higher IRR
thus the return is lower for nearly any given investment
What does the magnitude of the spread between levered and unlevered IRR signify
The greater the spread between the levered IRR and unlevered IRR, the more reliant the anticipated investment returns are on leverage.
Drawback to leverage is the potential downside risk created by placing a debt burden on the property.
investment returns in cre come from which 2 sources
Cash Flow Growth → The growth in cash flow (or income) generated by a property stems from improvements in operating efficiency, in which more value is extracted from tenants (e.g. increase in rent prices). Further, there should be an expansion in the margin profile of the investment property, such as its NOI margin, from these initiatives to reduce costs.
Capital Appreciation → The capital appreciation concept refers to the value of an investment property increasing relative to the original purchase cost. Similar to achieving multiple expansion in LBOs, where the exit multiple is higher than the purchase multiple, the sale price at exit exceeds the acquisition price on the date of initial purchase.
unlevered and levered cash flow formula
Unlevered Cash Flow (UCF) = Net Operating Income (NOI) – Capital Reserves – Capex – Tenant Improvements – Leasing Commissions
Levered Cash Flow (LCF) = Unlevered Cash Flow – Debt Service
