Archives
October 2020
Categories |
Back to Blog
Real estate private equity firms are looking to hire the top talent. One way they decide who is best is to challenge your technical skills. Although other factors determine whether you get hired, such as interpersonal skills, market knowledge, and such, technical skills are certainly a major factor in hiring decisions. So, what are the top four technical skills that you should master when interviewing for a real estate private equity job?
Asset-Level Modeling You absolutely need to understand how to build a real estate private equity model for a single property. If you have never built a full Excel model from scratch, you should immediately go to study Leveraged Breakdowns’ asset-level video courses. In fact, you should be able to build a model given really any arbitrary set of assumptions. If you can’t do this yet, I insist you visit our website and work through all of our free and premium content. Technical Interview QuestionsThere is a finite set of technical interview questions that real estate private equity firms like to ask repeatedly. Through our experience mentoring applicants to pretty much every major REPE fund, Leveraged Breakdowns has consolidated these common REPE interview questions into an extensive, yet concise document for your rapid review. For example, you should be able to answer the following questions without missing a beat:
Corporate-Level Modeling You should understand how to build a public company NAV from source filings. This means you understand the meaning of GAV, how to figure out debt, estimate transaction costs, and calculate a fully-diluted share count among a few other things. If these are foreign concepts to you, check out the Leveraged Breakdowns series on public REIT valuation. If you’re interviewing for a fund large enough to acquire public companies, you should learn how to build an M&A-focused real estate private equity model. Real Estate Operating BasicsDo you know what a rent roll is? Do you know how to calculate a cap rate? Do you understand the difference between gross potential rent and net effective rent? Real estate private equity firms all share one common trait: they’re investing in real assets with a common language. Whether you’re at a major fund or a local shop, you will need to understand the property fundamentals inside-and-out. ConclusionLanding a job in real estate private equity can be tough, especially as a complete outsider. That’s why Leveraged Breakdowns has committed itself to helping as many people as possible understand this exclusive industry. We give you the tools and knowledge you need to excel in the competitive interview process for REPE jobs.
0 Comments
read more
Back to Blog
Introduction
When you buy a property, you need to go through a lot of standard third-party diligence reports. There are plenty of websites that go into great detail on the contents of these reports. What I’m going to try to do is give you the points most relevant when discussing real estate private equity for beginners. That is, how do I actually interface with such reports during my day-to-day job? It’s good to wrap your head around the general concepts for these reports, but no need to get stuck in the weeds. If they come up during a real estate private equity interview, the questions will likely be generic in nature. It will impress your interviewer if you know anything at all about these, given it’s a bit of a niche subject. This post in particular will focus on the property condition report. Other posts will focus on the environmental site assessment, seismic risk assessment, zoning, and survey reports. High-Level, Why do I Care about a Property Condition Report? The main purpose of property condition reports is to tell you what the property is like. In broad terms, you probably want to know that the edifice you’re about to purchase is not caving in. Are there cracks in the wall? Is the rainwater runoff eroding part of the grade beneath the main superstructure? Are any of the toilets broken? Technical Description of Property Condition Reports In technical terms, property condition reports follow this set of standards called ASTM E2018-15, the “Standard Guide for Property Condition Assessments: Baseline Property Condition Assessment Process” along with any additional scope set forth in the engagement letter. The typical purpose of a property condition report is to identify conspicuous defects or material deferred maintenance, and to present an opinion of costs to remedy the observed conditions. These reports are conducted by impartial third parties. Partner Engineering and Science, Inc. is one of the larger players in the space, so you’ll often read reports produced by them. The Key Takeaways of a Property Condition Report When I personally read a property condition report, I look for three things:
Learn with Leveraged Breakdowns Have an upcoming real estate private equity interview? Look no further than Leveraged Breakdowns! We dive into the weeds, providing insider knowledge on the real estate private equity industry. Detailed knowledge such as property condition reports will set you apart from your competition. See how else you can gain an edge with all Leveraged Breakdowns has to offer on real estate private equity for beginners!
Back to Blog
What are Real Estate Concessions?7/21/2020 Introduction
This article will discuss concessions. Concessions are a critical line item in any real estate model. Concessions frequently show up in multifamily underwriting. If you work in a real estate private equity job focused on longer-lease buildings, the same concept is often referred to as free rent. Regardless, real estate private equity firms would certainly expect you to understand concessions before you walk into an interview. Concessions Concessions are free rent. Properties offer free rent to tenants to entice them into signing a lease. Ideally, concessions burn off over time until you offer no concessions. Concessions are often found at properties in lease up. Lease up is the phase between a property’s development completion where people slowly fill the building before it stabilizes at its full ~95% occupancy. Property lease up is a critical period that is impactful to returns. Given the time value of money, lease up is at the most impactful period at the front of the investment timeline. Thus, you want to minimize your losses. Concessions are one of many tools property managers use to cut down their lease up period. Stabilized properties also offer concessions, though it is very market driven. First, let’s say there are 10,000 luxury rental units in a major city. None of these properties are offering concessions and rents are rising. A few developers notice this hot market and decide to construct 5,000 more units of luxury rental apartments. Now those original 10,000 units are competing against a 50% increase of new supply that is taller, shinier, and sexier. In this scenario, the success of the market brings competition which forces the hands of those stabilized apartment units to offer concessions to maintain a competitive edge. Remember, most residential leases last one year and tenants are generally not hesitant to move. When a local economy is hit hard, stabilized properties also suffer. Jobs decline, less people are moving into the city, and supply is abundant. Houston and oil-rich Texas offer a case study in economically-driven concessions. Because oil dropped so low in 2014 and remained quite low, the local industry declined. I personally know some people who signed a two year lease in Houston with ten months free rent. Learn with Leveraged Breakdowns Recruiting for real estate private equity jobs can be difficult. But that’s why Leveraged Breakdowns is here to help! We work at megafund real estate private equity firms and share our knowledge with outsiders. Check out our various resources such as interview guides and case study lectures that help you break into this exclusive industry.
Back to Blog
Hi. If you don’t know me, I run a real estate private equity blog and work full-time at a manhattan mega fund. Okay, so I went to a random letter generator and got D as my result. Now, I’m going to pick a real estate stock that starts with a D and build you what we call a “capital stack.” Then I’m going to explain what the heck it all means. The purpose of this exercise is to show you how I learn, and also teach you about capital stacks.
We randomly chose to explore Digital Realty Trust But first, let’s pick a D stock. I go to Yahoo Finance’s Free Stock Screener to look for U.S. domiciled REIT stocks, click go, and the first one I find starting with D is Digital Realty Trust (NYSE: DLR). That’s our stock. And here is some quick context per their Yahoo Finance profile: Digital Realty supports the data center, colocation and interconnection strategies of customers across the Americas, EMEA and APAC, ranging from cloud and information technology services, communications and social networking to financial services, manufacturing, energy, healthcare and consumer products.= What is a capital stack? Let’s put a pin in exploring their business for now. This moment, our goal is to understand their capital stack. A capital stack is really just a company’s enterprise value, shown layer-by-layer. If you don’t know what enterprise value is, Google it. REPE investment memos will always show a capital stack. This is a staple that you learn to build rapidly. We’re going to build this together in real-time because I want to show you my process. Where do we begin? We’ll get started in their filings. I’m writing this post on May 4, 2020, which means DLR’s latest filing is their 2019 10-K. Before we dive in, below is a list of the crucial we’ll search for:
In the next article, we will get our hands dirty.
Back to Blog
Introduction
This post continues our series on the real estate private equity M&A process, a common arc within any real estate private equity career path. You might expect questions relevant to this article during a real estate investment case study, so we recommend you pay close attention. At this point, we know that a company is worth buying if its net asset value (NAV) is meaningfully above the current share price. To know NAV, simplistically put, you need to know the value of the debt and the gross value of the assets. You subtract the value of the debt from the gross value of the assets, and you get the NAV. Again -- if the NAV per share is meaningfully greater than the stock price, then the company is a good buy. Congratulations, investor! Debt Principal is Straightforward, Asset Value not so Much Figuring out the principal due on outstanding debt is pretty easy. It’s a contractual principal balance, so you can pretty quickly figure it out in a matter of minutes. Every public company reports this, and any private company for sale will tell you this and give you all supporting legal documents. Where the magic comes into play is figuring out the value of the assets. How do you know the true value of an office building on 5th Avenue and 42nd Street in Manhattan? Extrinsic Asset Valuation: Sales Comps Well, the trite answer is any building is worth the most that somebody will pay you for it. To figure out how much somebody will pay us for a building, we approach the question both extrinsically and intrinsically. Extrinsically, we look to see how much similar buildings nearby have sold for on a per-square-foot basis. If our building is brand new with quality tenants, and other brand new buildings with quality tenants have sold for $1,850 PSF, then our building is probably worth something similar to buyers. Extrinsic valuation is pretty straightforward too, you just go to a website like CoStar or Real Capital Analytics where this data is aggregated, or even the local news. Intrinsic valuation is a bit trickier. Intrinsic Asset Valuation: Discounted Cash Flows Intrinsically, we value the building by discounting future cash flows. We look to the future cash flows this office building is likely to produce over the next ten years. We then cap a future sale ten years out, and discount all future operational cash flows and that future sale back at an applicable unlevered discount rate. We dive into the nuances of discount rates in our course Breaking Down REPE, but a good proxy for the unlevered discount rate you might see core office buyers solve for would be whatever is the prevailing cap rate in the market. So if core office buildings are selling for 5.0% cap rates, we’d probably use a 5.0% discount rate to NPV those future cash flows. The NPV of those cash flows results in the price we’d be willing to pay. This approach is called the NPV approach. The inverse is a hurdle rate valuation, which is basically the exact same analysis, except you figure out whatever price you need to pay in order to achieve that discount rate you’re targeting (aka the hurdle rate). If this sounds like the same thing, it’s because it pretty much is. Side note: if the terms discount rate and NPV are a foreign language to you, you should take a few hours out of your day to run through our REPE Starter Kit where we cut to the chase to explain relevant financial jargon as efficiently as possible. Your Extrinsic and Intrinsic Valuations Should Triangulate We like having several valuation methodologies because it allows us to build a “valuation football field.” A football field is just a sideways bar chart that shows the valuations implied by multiple approaches. If you value the asset with several methodologies, you’d hope they all say more or less the same thing so you can triangulate an appropriate range. So if you’ve done your analysis correctly, the result of your discounted cash flow analyses should land somewhere close to your sales comps of $1,850 PSF. No single methodology will be perfect, but if each methodology you employ gets to a similar answer, then your pricing expectations are robust. Learn with Leveraged Breakdowns Leveraged Breakdowns exists to help outsiders take their first steps on their real estate private equity career path. Check out our blog for a trove of free information written by mega fund insiders who remember how hard it was to break into this tough industry. Though we offer premium technical content such as our REPE Starter Kit, we also offer free resources such as our open real estate investment case study challenge.
Back to Blog
The REPE M&A Process, Part Three: Equity3/11/2020 Like what we have to say and want to learn more? Support us with a Leveraged Breakdowns membership, which grants access to the best real estate private equity course available online.
Beyond debt, onto preferred equity and equity This series provides a high-level view of the REPE M&A investment process. Right now, we’re discussing the capital stack so we can better understand the true meaning of net asset value. The previous post covered the following: (i) what is the capital stack, (ii) who is the most senior member of the capital stack, and (iii) how the cost of capital is tied to risk and return. This post will focus on the final two pieces of the capital stack after debt: preferred equity and equity. Who else is in the capital stack? Preferred equity Every layer of the capital stack has an increasing cost of capital because each layer accepts an increased risk that they will not get their money back. After debt, you have preferred equity. Preferred equity is just a fancy name, it is basically debt and hardly ever exercises any actual control. They just lend money and get a higher interest rate than debt. It’s important to note that a lot of preferred equity can PIK, which stands for payment-in-kind. This just means that the company can pay the preferred equity holders with “IOUs” that increase their balance. But be careful, because PIK coupons accrue, and in future quarters you will be charged interest on the total balance representing the old balance plus the new PIK. Equity is the residual claimant The final member of the capital stack is equity. There is a special name for this final position: the residual claimant. After everybody else gets paid their fixed share, equity has the right to claim all of the remaining money. Equity’s residual claim is important for two reasons: equity will command the highest cost of capital, but equity also has unlimited upside. Equity will command the highest cost of capital because it gets its money back last, after all debt and preferred equity. Yet because it is last in line, it gets everything that’s left. All other tranches of the capital stack claim a fixed dollar figure, after which their position runs out and they move on with their lives. Equity however, has unlimited upside because it gets everything that is left over. And that could be a lot. Or a little, or nothing. But that’s the nature of equity risk, and it’s why equity is the riskiest investment available. What is private equity? Private equity just refers to the ownership vehicle. Public equity is available for exchange on public markets such as the NASDAQ and NYSE. Private equity, however, is raised in private funds and available only to accredited investors with deep pockets. Furthermore, private equity generally has a fixed life, since funds are meant to last for ten years or so before returning the capital back to their investors. Thus, private equity funds are under the gun to find suitable deals that meet their return targets (aka hurdle rate IRRs). Conclusion After reading this post and the previous post, you should understand the following concepts: (i) what is the capital stack, (ii) what seniority is and what are the names of each common tranche, (iii) the interplay between risk, return, and the cost of capital, (iv) how equity is the residual claimant, (v) how equity is exposed to unlimited upside, and (vi) the core differences between private and public equity. Now if you’re ready to cut your teeth on a real estate private equity interview case study, check out what many call the best real estate private equity course -- only at Leveraged Breakdowns.
Back to Blog
Leveraged Breakdowns offers the best real estate private equity course. We share deep insider knowledge with outsiders looking to break into an REPE career. The topics we cover will teach you how to nail any interview. Why should you choose us to mentor you into real estate private equity?
Well, you probably don’t need us if your dad is an MD at a real estate private equity fund, or if you’re otherwise an REPE industry insider. But if you’re one of the thousands of hungry kids on the outside, willing to study anything it takes to break into a lucrative, yet highly competitive industry, then Leveraged Breakdowns might just be a great fit. How do we know what to teach you? Well, we know that landing a real estate private equity career is a job in and of itself. Yes, you need to know the facts. Yes, you need to spin up an LBO model in less than an hour. But you also need to know the strategy of recruiting. You need to understand the soft skills that cut the wheat from the chaff. In real estate private equity, hiring is a process of conformity. Whoever best conforms to the platonic ideal of an REPE interview candidate is the one that gets the job. But who can teach you how to act like an insider? How do you know which benign mistakes can actually make you appear utterly foolish? It’s really hard to clue yourself into these things if you’re an industry outsider. In fact, I failed just about 7 interviews before I got hired into real estate private equity. But did I fail because I’m stupid? I don’t think so. Since then, I have excelled in my real estate private equity career. I was promoted a year early, I received carry after just a year, and I can build from scratch an investment model for any company. So I like to think I didn’t fail because I am stupid. Rather, I just had no idea what these people were looking for. Which facet of my personality and professional acumen should I showcase the most? These are questions to which I sadly did not have the answers. Over time, I slowly learned how to interview for a real estate private equity career. This was a careful, yet brute force approach. Unfortunately, it was my only option. You see -- plenty of online resources teach you technical skills. They’ll teach you how to build an LBO model. They will teach you how to calculate NAV. But they do not teach you how to interview You need insider mentorship. And Leveraged Breakdowns is here to provide that. The folks at Leveraged Breakdowns are as insider as it gets. We work high powered investment jobs at megafunds in Manhattan. You need to learn from people who have been on the outside. Many real estate private equity investors seemingly forget their lives on the outside, before they crossed into this highly competitive industry. But the Manhattan megafund investors at Leveraged Breakdowns have made it their mission to bring their insider knowledge, working on public M&A transactions as much as asset- and portfolio-level buyouts. This is why Leveraged Breakdowns is the best real estate private equity course to launch your REPE career.
Back to Blog
A student recently asked the following question:
Before diving into my response, a few notes to make sure we’re on the same page. First, what is a “small family office REPE firm?” Basically, a family office is a private company that handles investment and wealth management for a wealthy family. Once a family hits a certain wealth threshold, typically around $100M, they establish an entire business to manage their dynastic nest egg. This particular family office invests in real estate (probably among other asset classes), and would like to add another position onto a team of five. With that background established, here is a list of key questions I would focus on, and reasons why each question is important to ask: Assets Under Management Question: What is the AUM (assets under management) of the family office? How many properties does the fund own? Reason: As an employee, greater size ensures greater stability and opportunity. On the stability side, a larger fund will not go under quite as easily over the next downturn. On the opportunity side, a larger fund will manage more asset classes under more strategies and encounter more specialized situations than a smaller fund. I do caveat this statement to say that small funds afford greater responsibility to individuals. So what you might lack in horizontal opportunity (diverse things to do), you may gain in vertical responsibility (managing complex people and processes at a much more junior level) when employed at a small family office. What is the Fund’s Allocation to Real Estate? Question: How and how often does the fund decide its capital allocation to real estate? What is the current allocation, and how has that changed over time? Reason: This family office fund likely invests in many diversified sectors other than strictly real estate (sovereign bonds, high yield debt, venture capital, etc.). But what percentage of its total AUM does it direct toward real estate? The more real estate this fund manages, the better for your career prospects there. So it’s good to know how this fund determines that percentage. Is it fixed forever in a founding document? Do they reassess every year? If they recently increased their allocation to real estate, why? Is it likely that they might downsize their allocation in the future (this one you may need to deduce yourself)? These questions are all important when planning your career in REPE. Does the Fund Perform Direct or Secondary Investments? Question: Does the office perform direct investments, or does it sidecar as a secondary to other investors? Reason: Direct investing is just as it sounds -- you buy assets outright, entirely or at least with a controlling >50% stake. Most importantly, you control the operations and you decide when to force a sale. Sidecar, or secondary, investments are less hands-on. Secondary teams are generally further from the source data, since they typically rely on the primary investor to feed them all the information. You might prefer a career in REPE on the secondary side if you value time with your wife and kid, since the hours in such roles are generally less demanding (though exceptions certainly apply). Just understand that it’s easier to move from direct to secondary investing than the other way around, if you ever wish to work in direct investments down the line. What Is the Fund’s Target Investment Strategy? Question: What is the fund’s target investment strategy? Core, core-plus, value-add, or opportunistic? Reason: Investment strategies range from core, core-plus, value-add, and opportunistic (more on this in the Leveraged Breakdowns course, Breaking Down REPE). Basically, each fund strategy invests in progressively riskier asset classes. A core fund will focus primarily on shiny trophy towers, whereas an opportunistic fund will pursue hairy assets in out-of favor sectors with operational upside. This is just a good fact to know to better understand the nature of the firm’s investment strategy and how to prepare for follow-up interviews. Most funds will perform a mix of strategies. Career Progression Question: What is the path for career progression five or ten years down the line at this firm? Reason: A family office has a lower ceiling for career progression vs. working at a major REPE fund like Blackstone, Carlyle, etc. because the power ends with the family. That said, you’ll gain similar skills to an REPE fund and could probably lateral if you hit a roadblock down the line in your career. So I wouldn’t fret too much about this if you are look. Investment Time Horizon Question: What time horizon does the fund assume for its investments? Five-year, ten-year, perhaps buy-and-hold (forever)? Reason: Most likely, the family office is a buy-and-hold investor that only disposes of its assets opportunistically. That just means they buy buildings and hold onto them forever, unless somebody offers a price that’s hard to refuse. This differs from a traditional REPE fund, which raises five- to ten-year buckets of capital which force it to ultimately sell each building it buys on a strict five- to ten-year timeline. But on the off chance this family office plans to wind down over the next few years, that would be good to know from the onset. Funding Sources Question: How many funding sources does the fund have? Is it just the single family? What is the family’s initial source of wealth, and does the fund intend to receive more funding? Reason: Likely, this family office manages the wealth of just one family (since you said it was small). However, there is a small chance it could actually manage the wealth of multiple families, and sometimes even institutions. This is rare, and oftentimes such pedigreed family offices blur the line and are effectively REPE funds / megafunds. See this article for a deeper dive into the sources of REPE funding. Is the Focus of the Role Investments or Portfolio Management? Question: Is this role more investments-focused, or more portfolio-management focused? Reason: The job description you posted sounds like this is either a middle-office, or front-office portfolio management role. However, you should directly ask this question to get a sense of the responsibilities. If you aren’t aware of the differences between portfolio management and acquisitions, check out the free guide we email you when you sign up for the newsletter on our front page. Bottom line, the REPE interview questions could vary drastically whether this is an investments or portfolio management position.
Back to Blog
Real Estate Private Equity Membership11/8/2019 If you’re searching for a private equity course online that will help you crack the code and land your first job in the business, one of the things you should look for is a course that helps you understand the business from an insider’s perspective. Real estate private equity membership is a tightly-knit network of professionals, and working your way in requires that you already think and speak like a member! Leveraged Breakdowns is here to help you do just that.
When you are working as an analyst for a REPE firm, part of the trick to underwriting deals is judging the quality of the tenant(s). When underwriting apartment deals, you look at demographics, receivable agings, and vacancy because of the sheer volume of tenants. When underwriting corporate clients, you may have to look at their financial statements, but often times you can look up their credit ratings. What is a Credit Rating? A credit rating is a score assigned to a company based on their financial position. Rating agencies look at things like their liquidity, leverage, historical profitability and cash flow as well as the outlook for cash flow and profitability. The goal is to determine a likelihood of default. These ratings will affect the company’s borrowing costs, as lenders will assign higher interest rates for borrowing if the company has a lower rating. The ages-old rule of investing applies, even if you are a lender: risk = reward. In the real estate private equity firms, particularly in net lease assets, cap rates tend to follow credit ratings. In other words, higher rated tenants are less of a risk of default, so a lower cap rate is warranted. Intuitively, would you rather pay more for a lease with Chase Bank or Office Depot? Remember, cap rates move opposite of price, so a lower cap rate equals a higher purchase price, just like bonds. Who Assigns These Credit Ratings? There are two primary ratings agencies - Standard & Poor’s (S&P) and Moody’s. You may occasionally run across a rating from Fitch, but most often you’ll see S&P or Moody’s. Moody’s ranks companies from Aaa down to C, with various gradations. Aaa is higher than Aa1, Aa3 is higher than A1, and so on. S&P ratings are similar, with AAA being the highest and D being the lowest. Again, gradations in the letters exist, with AAA rating higher than AA, A is higher than BBB, and so on. The Fitch rating scale is very similar to S&P, but Fitch will throw in a “+” or a “-,” such that the ranking would be AAA, AA+, AA, AA-, and so on. You can download an explanation of the Moody’s ratings here. You can download an explanation of the S&P ratings here. Fitch ratings are explained here. Real estate private equity membership, while not an official “club,” often feels like one. Breaking into the club can be challenging, especially if you didn’t graduate from a target school. But all of us at Leveraged Breakdowns know that quality talent comes from all over the world, not just the top schools. We exist to help REPE beginners breeze through interviews like industry veterans. Our private equity online courses, “REPE Starter Kit” and “Breaking Down Real Estate Private Equity” will help you think, speak, and carry yourself like an insider! |