IB Interview Prep: Real Estate

What is the difference between FFO and AFFO?

AFFO = FFO + Non Recurring Expenses - CAPEX

How did Industry 4.0 help bridge the gap between OEMs and their customers?

Before industry 4.0 the original equipment manager would produce replacement parts in which service contractors would then preform the planned maintenance and reactive repars on their behald.

What are the three methods for valuing real estate assets?

Cap rates: Property Value = NOI / Cap Rate Comparables: Replacement Cost method: what would it cost to build the house

Describe the four main real estate investment strategies.

Core Investments: new properties in great locations Core-Plus: similar might require small investments Value-add: risker and found in various places needing meaningful capital investment, poorer credit tenants Opportunistic: Riskiest, includes new development or re-development

Which valuation multiples are most often used to value companies in industrials?

EV/EBITDA for industrial tech EV/(EBITDA - Capex) for manufacturing

Lets say your looking at an industrials company. What business and industry characteristics would you first consider?

End markets: look at the relationship between the company and their customers, and how essential their products are will determine how recurring their revenue is. Supply chain: How efficient they are and how many suppliers they have. Product Value/Upgrade Cycles: Competitive Landscape:

Define funds from operation (FFO) and why it is important?

FFO = Net Income + D&A - gain on sale + Non Controlling Interest - Cash to Non Controlling Interest EBITDA attempts to capture profitability from operations FFO is levered an attempts to capture the affect of non-common equity claims against the business such as debt and preferred shares

If you have had two identical buildings right next to each other in the same condition, what factors would you look at to determine is which property is more valuable?

Focus on the cashflows: Average rents, vacancy, look at the rent roll and determine the creditworthiness of the tenants and their leases. Look at the value thought NOI/Cap rate

Compare the cap rates and risk profiles for each of the main property types.

Hotels: Highest cap rates because stays are short term. Retail: The creditworthiness of retail tenants is increasingly in questions due to trends in e-commerce. Office: Sector is closely correlated with the broader economic market but has longer-term leases. Industrial: Sector benefits from e-commerce trends and long-term leases. Multifamily: Looked as the most safest because no matter how bad the economy is people will always need a place to live.

Walk me through the stages from Industry 1.0 to Industry 4.0.

Industry 1.0: Referred to as the "Industrial Revolution," this was when manufacturing moved from human labor to reliance on machines. The machines were fueled by water, steam, and coal power, and the production process became easier and faster. Industry 2.0: Often called the "Technological Revolution," this is when electrical technology entered and allowed greater production volume and more sophistication in the machines used. Industry 3.0: Known as the "Digital Revolution" and began with the early days of computers, which were massive despite the minimal computing power provided. However, this period planted the seeds for the electronics and IT infrastructure for the future stage of reliance on computer technology. Industry 4.0: This is where our society is currently at and is often described as the "Automation Revolution." Industry 4.0 is most notably characterized by the new capabilities of automation in which machines can decide and govern themselves using key innovations such as IoT, cloud computing, and big data. Other examples of developments include smart factories, sensor technology, and voice/facial recognition, to name a few.

What is industry 5.0?

Industry 5.0 is best described as humans working a long side robots.

Why is a cap rate important and why?

Its common real estate multiple and it measures the properties unlevered profitability against a properties value.

What are some concern surrounding Industry 4.0 the exist today?

Machine-to-machine communication has its limitations in terms of reliability. Security concerns because of the vast amount of data. Costly mistakes

Why have industrials shifted their focus towards the aftermarket?

Manufactures want to mitigate the risk of the natural cyclical economy so they do more maintenance, spare part delivery and other value add services.

What is an NOI and why is it important?

NOI = Rental Income - Operating Expenses

What are the most common methods for valuing REITS?

Net Asset Value: Price to Book: Relative Valuation: Refers to comp analysis Intrinsic Value of REITS: REIT Valuation Multiples: FFO = Equity Value / Funds from Operations AFFO = Equity / Adjusted Funds from Operations Intrinsic REIT Valuation Methods: - Dividend discount model - Discounted Cash Flow Model

Do REITS pay taxes?

Not at the corporate level, they get taxed at the shareholder level through dividends. REITs must have at least 90% of the profit go the shareholders in the form of dividends.

Walk me through an income statement on a REIT.

On the income statement, rental income is the primary source of revenue. Maybe management fees. Expenses include utilities, marketing, payroll, maintenance and property taxes. Revenues - Direct Expenses = REIT operating income Next subtract overhead, SG&A, and depreciation to get operating profit. Next subtract interest expense which is usually large. Lastly buy and selling revenues and expenses

Why might NAV be preferable to DCF for REITS?

REIT balance sheets carry real estate assets for which there are often comparable assets with observable market values.

An industrials company has shown COVID-related impaired revenue. What metric would you look at to assess the damage and predict the pace of recovery?

The metric the interviewer is looking for is the build-up of backlog (or the lack of it). Ideally, the company's backlog should have significantly increased despite the decrease in revenue.

Why is there such a high level M&A in the manufacturing space?

There is a constant innovation in the product development because of the highly specialized nature of the industry. For those reasons existing companies buy other companies with buy other companies with these technologies in place to avoid incurring high R&D expenses.

For REITS valuing properties, how do regulations differ between GAAP and IFRS?

Under IFRS, REITS must value properties as "Investment Properties", meaning no depreciation is recognized, instead properties are marked to market (which is recognized as a gain on the income statement.

Walk me through NAV valuation

Value NOI-Generating Assets: This step involves identifying the NOI generating assets from the real estate portfolio and then dividing it by a cap rate assumption. Value Other Income Streams: Reduce NAV by Required Future Expenditures: Next, NAV must be adjusted down by the present value of future expected capital expenditures and corporate overhead required to sustain the properties that are not included in the NOI. Add "Non-Operating" REIT Assets: Any assets not already included in the NAV build up like cash and construction in progress should be added to the NAV buildup. Subtract Debt & Other Non-Equity Claims: NAV-Derived Equity Value: The end result represents the REIT's NAV-derived equity value. This can be compared against its market cap or divided by shares outstanding to compare against its share price.