Real Estate Investments, Valuation and Financing

Course Outline

Day 1 - Topics
Real Estate Sector Overview
The goal of this section is to provide a thorough understanding of how the sector is structured, access points and the ability to critique performance.

• Types of commercial real estate – core asset classes and alternative such as hotels, self-storage, student accommodation and land
• Performance characteristics - Long term performance; liquidity; risk adjusted returns and correlation to other asset classes
• Entry points into the sector (direct, unit trust, synthetically etc.) and sector ownership
• Accounting considerations: - finance versus operating lease accounting treatment: forthcoming changes and implications for sale and leasebacks
• Corporate ownership - should a company own property or rent and how to approach an assessment?
• The listed sector – Real Estate Investment Trusts (REITs) as a tax efficient wrapper; entry criteria, relevance, NAV discounts and premia considerations, comparison of different REIT Landscapes
• Real estate cashflows - the core component parts of a real estate cash flow: rental cash flow, leasing dynamics, service charges, letting and renewal fees, agents fees

How to Value Real Estate
The goal of this section is to understand the methodology for valuing real estate assets and investment opportunities as well as gaining an appreciation of the relevant nomenclature.

• Yield based valuation methodology – initial, reversionary and equivalent yields
• Private equity valuation approach - targeted Internal Rate of Return (IRR) methodology
• Harmonising surveyor, investment banking and private equity valuation approaches
• Hotel valuation: worked example of hotel portfolio analysis
• Land valuation: worked example of development appraisal / residual calculation
• Operating company / Property company interaction and how to realise value from the separation

Day 2 - Topics
How to Finance Real Estate
The objective of this section is to appreciate the distinct parts of the debt capital stack and give an appreciation of the key issues to consider from a borrower and lender perspective.

• Understanding the capital stack – junior, senior and mezzanine finance
• Loan performance metrics from a banking perspective
• Events of default (EoD) - what are they and implications including enforcement
• Secured versus unsecured lending - understanding lender perspectives and economics
• Introduction to securitisation and CMBS and its return to the markets
• Non-performing loans – basic principals and private equity approach to valuing
• Global debt funds – capital flows and understanding why they are prevalent

Private Equity Investment (including investment appraisal exercise)
The goal of this session is to understand the structure, legal framework, performance measurement and remuneration mechanisms of private equity funds.

• Components of total return – capital growth, rental growth, income, asset management
• Concept, methodology and measurement of Internal Rate of Return (IRR) and Net Present Value (NPV) calculations
• Acquisition appraisal utilising an IRR based approach
• Equity and sponsor remuneration - equity waterfalls, hurdle rates (single and tiered), carried interest (“carry”) and how to calculate it
• Catch-up - understanding, implementing and contrasting UK and US styles
• Cash drag and capital recycling
• How to prepare for investment committee

This session will include a worked example of how to assess a potential acquisition for a fund including cash flow modelling, capital financing considerations, sensitivity analysis for acquisition, leverage (gearing), banking covenants, and calculation of the equity payout to equity providers and sponsors.
Wrap-up: Review, conclusions & insights