Interview REPE Study Question
- What's the value of a property with an $200,000 NOI and an 8% cap rate?
$2,500,000
Why Real Estate Private Equity?
- I think at its core I like the fact that it's a measurable business, it's a competitive business like sports. So at the end of every investment you can see did I double your capital, did I return it, did I lose it. And you have a track record so being able to deliver for your investors becomes something to be proud and make a name for yourself as well as the firm. And then I love the Rubik's cube part of it, where you have to think about how to unlock opportunity. Things like, how do I deploy capital into this market or this sector different than somewhere else. And then I love the people part of the industry and the relationships you form along the way and all the social elements that contribute to finding opportunities or even just making friends. - 1) In tough times capital flies to quality = safe, real assets. Real estate provides these almost bond like yields whereas other safe commodities like gold do not cash flow. Gold also does not allow you to depreciate your investment or leverage your asset. And I really enjoy the fact that the asset class is separated from the public marketplace, which has become so deeply rooted in investor speculation. Now, that doesn't mean that real estate isn't susceptible to economic cycles, but having a diverse set of secure deals that have been properly vetted certainly helps provide an element of protection against massive loss. In addition, understanding that like the economy, real estate is cyclical and you have to be prepared to ride the highs and utilize the troughs to your benefit is a great way to capitalize on investing within the real estate industry.
How do you underwrite a General Partner/investment manager?
- To underwrite the manager, you'd generally start with the senior people. o What are their professional and academic backgrounds? How long have they worked together? - Then you'd look at the rest of the organization - do they have enough qualified junior guys; o do they have a strong finance function and acceptable internal operations? o Do they have a disciplined investment process? - Then you'd look at investment track record and deal history. o What have they bought and how has it performed, have they bought/sold at the right times? o do they have internal design, development, leasing or financial expertise that allows them to add value over the hold period? - And of course, you'd want to consider integrity. o How do previous investors that have worked with this GP think of the GP? o Do they always act in the best interest of their LPs? - Then you'd consider the type of investment vehicle they want to raise, the structure, fees, promote, and so forth. o Is this reasonable/competitive? - Then you'd consider investment strategy: o what is the strategy they want to raise capital for, and do you agree with the thesis? - If all that checked out and you wanted to work with them, then you'd have to convince them in your ability to raise capital... and then of course, deliver the $$$.
If a project has zero NPV and the discount rate is 10%; what will be the project IRR?
10%. Internal rate of return is the discount rate at which the project NPV equals zero.
- If you have a property w/ $8M in NOI, senior debt of $40M, junior debt of $20M, and the cap-rate is 10%, what is your LTV? What if the cap-rate increases to 12%?
75% LTV at 10% 90% at 12%
Where do you see opportunities right now?
Assuming you're interviewing for a national, product-agnostic platform, maybe cook up something like "I think assisted living currently presents an attractive investment opportunity for fundamental reasons, namely the huge aging demographic trend in the U.S. blah blah blah." If you're interviewing for a more local operator/developer, maybe it's more like "my uncle works for Exxon and knows Sharif who owns the Mobil station at Santa Monica and Vine and my ex-girlfriend's dad is a leasing rep for Starbucks and they want a drive thru there and blah blah blah"
What is the biggest immediate concerns if a shopping center anchor tenant blows out?
Co-tenancy clauses - Neiman Marcus Hudson Yard example.
What factors do you consider when computing an estimated property value?
Comparable sales Market capitalization rate Value per unit (multifamily) Value per SF (commercial) After renovation/development value
How do you calculate the cost of equity?
Cost of equity is the return a firm theoretically pays to its equity investors. Capital Asset Pricing Model (CAPM) is the most commonly used method of determining the appropriate cost of equity. According to CAPM: Cost of Equity, Re = Rf + b (Rm-Rf), where; Re = Cost of EquityRf = Risk-free rate of returnRm = The historical return of the stock market / equity marketb = is a number describing the correlated volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to.
What is the most volatile product type?
Hospitality typically shows the most volatility and typically contracts first in an economic contraction.
Strength?
I'm someone who likes to get actively involved in anything, whether that extends to a workplace environment or various social settings. I'm not someone that you will find running the show from the corner or hiding behind the curtain. I went through the induction process for Alpha Epsilon Pi in the spring of my first year at NYU, and two days after I had been welcomed as a member, I was elected to one of the highest-ranking executive board positions - vice president. I ran for the position against seniors who were running as co-candidates and I was able to persuade an entire room of over 100 members that had barely gotten to know me over the span of a couple short months that I was a better fit to run the fraternity than two members who had built up a 3 year reputation. After I had completed my first term, my peers re-elected as philanthropy chair and placed their faith in me once again to manage what they deem as one of the most vital aspects of the fraternity. Other than providing leadership, I am a dependable person who always finishes what I start. I am the kind of person who will stay and finish whatever needs to get done no matter what the time is and no matter how long it takes.
If you have to decide a project's merit on the basis of only one performance indicator, which indicator will you choose?
IRR! Why? Because it is easiest to calculate and least prone to subjective judgment error.
All else equal, if your cap rate increases/decreases, what happens to price?
If your cap rate goes from x to y, by how much does NOI need to grow/shrink for value to remain the same? The answer is (y-x)/x. Typically asked where x is lower than y, probably followed by some ultra-dry conversation where you get to postulate on what will happen to real estate values if and when FOMC ever raises rates again.
What are the best / worst performing asset classes in the current market situation? Why one should invest in these assets or why not?
In any given market, one asset will be better performing than others. Assume in my area, hotel is the worst performer and residential is the best performer. But a developer cannot just keep building residential assets, as soon oversupply will make it the worst performing asset. Also, a large development cannot be successful without having a proper mix of various assets.
In mixed-use development how do you allocate the infra cost / land cost / service charge?
Infra cost and land cost can be allocated on the basis of gross floor area (GFA), net sellable area (NSA) or in proportion to the projected revenue. Service Charges can also be allocated on similar basis. I personally prefer the allocation based on GFA as it makes life easier (accounting reasons).
What is the least volatile product type?
Multifamily
What is the value of a property with $10 million NOI at an 8% Capitalization Rate?
NOI divided by Capitalization Rate = Value. $10 million/8% = $125 million
- How do you calculate Debt Yield?
NOI/Loan amount
What is the impact of depreciation on the project IRR?
No impact. Project IRR is calculated on the basis of cash flow and depreciation is a non-cash flow item.
In calculating project IRR should we consider financing cash flow?
No, project IRR doesn't take into consideration the financing cash flows. Equity IRR does.
One word to describe yourself
Polar - My attitude can vary quite largely, but not in a manner that makes my behavior unpredictable or inappropriate. I'll be the one to stay in the office until 1 a.m. and work intently to make sure a project is done properly and all things that are considered. Yet at the same time, I'm the guy that's for the most part easy-going, I'll crack jokes in the office, and be easily approachable to my colleagues while also maintaining a strong element of professionalism. And one of my personal strengths is knowing when to turn the knob towards either side in a given situation.
What are the prevalent area measurement methodologies? Why should you use RICS and not BOMA?
RICS and BOMA are the two most commonly used area measurement standard in the industry. RICS is the area measurement standards from Royal Institution of Chartered Surveyors, whereas BOMA is the area measurement standards from Building Owners and Managers Association, USA. Why should choose one over other? There can be various reasons, but we should go with the industry practice in our area of operation.
What is the difference between rental yield and cap rate?
Rental yield is the net amount of money a landlord receives in rent over one year (after deducting operating expenses), shown as a percentage of the amount of money invested in the property. So, Rental Yield = (Net Annual Rental Income / Cost) X 100 Note that rental yield is calculated on Net Operating Income without considering interest payment, tax and depreciation. Cap rate (or capitalization rate) is the ratio between the net operating income produced by a real estate asset and its cost (or current market value). So, Cap Rate = Net Operating Income / Value (or cost) If you notice, both rental yield and cap rate appears to be same! Rental yield is used to calculate the yield (return) of an asset whereas the cap rate is used to find the value (capitalized value) of an income generating real estate asset.
If your cap rate goes from 8% to 10%, by how much does NOI need to grow/shrink for value to remain the same?
The answer is (10%-8%)/8%, or NOI would have to grow by 25%. This questions typically prompts conversation about FOMC actions and the future of interest rates.
What product type is the best hedge against inflation?
The best analysts have a global understanding of the real estate market and the flow of money between asset types. An experienced analyst should be able to recognize that hotels and multifamily are the best inflation hedges as they re-price at daily and yearly intervals, respectively.
If you had $100 million to invest in real estate, how would you invest it?
The goal with this question it to test if your real estate analyst can speak thoughtfully and knowledgeably about a particular asset class. The analyst should have the ability to clearly articulate the value proposition of their proposed investment.
Would IRR be higher for a property generating high cash flow, or one generating nothing at all?
This is a partial trick question - it depends on the ability to sell the property at a desirable value. A property that is purchased at $15M and sold at $30M within a few years can have an project IRR that is higher than a property generating high cash flow that is sold at an undesirable amount to the investors (down market).
How do you manage your projects and all the moving parts that come along with new developments?
While in college, I became a huge fan of prioritization, using the calendar on my smartphone and color-coding tasks according to urgency or category. I plan to use a similar style of project organization here at LaSalle Investment Management, to help me stay on top of every important project detail.
What is going on with the RE market?
With an ever-growing number of households throughout the U.S., homebuyer activity has highlighted the housing shortage across the U.S. in 2021 - in particular for homes at entry- and mid-level price ranges. With supply chain issues, labor shortages and regulatory practices further slowing new home construction, houses aren't being built fast enough to meet demand, and home prices are rising fast as a result. Looking ahead at the next year, homebuyers, sellers, renters and investors can expect some more of the same when it comes to continued high demand, with some return to seasonality and a rise in interest rates that may have a mild impact on real estate transactions. Here are a few housing market trends shaping up for 2022: The inventory of available homes will remain tight, and rising prices will put pressure on affordability. Interest rates will rise, but wage growth may help to provide a balance for buyers. The rental market will see continued growth, but likely stabilize somewhat compared to the last two years. There's a lot of anticipation for new home construction, but when labor and supply issues ease enough for homes to be completed is unclear.
Explain why the terminal capitalization rate is higher than going-in?
Your analyst should recognize the risk associated with rising interest rates in commercial real estate. As rates rise, capitalization rates typically increase, negatively impacting property values. The terminal capitalization rate should be higher to account for a possible increase in interest rates during the lifetime of the investment.
- How do you underwrite a property?
o Are there any leans on the property or title issues? o Where is it located? § What are the local real estate market conditions? · Is it an oversaturated market? § What is the income growth per capita? § What is the population growth per capita? § What is the job growth per capita? o Asses the physical characteristics of the property § What is the net income? § What are the expenses? § Who are the tenants o Does it have a high vacancy rate?/how is it preforming? § If its underperforming is it because of management or subpar property conditions?
Weakness?
o Placing too much pressure on myself I used to have issues with delegating work to my peers, I felt that if I wanted something done right, I would have to do it myself - whether it had to do with running the fraternity or working on various projects within a job role. However, this approach only made me feel overworked and stressed. I ultimately decided that I needed help and that I should learn to trust others with important tasks instead of placing all of the pressure on myself. So, I formed a social committee to aid in my roles as social chair, assigning responsibilities tailored to the individual talents of those I had elected. On a more professional note, during my time at compass I had been working on almost all parts of listing process from the back end, while other members of my group had been dealing more with client relations and showing properties themselves. In response, I began involving my co-workers when it came to tasks like creating buyer sheets and scheduling open houses, and in return I began to take hold on the more formal side of brokerage, such as meeting and dealing with clients - and that's when my group dubbed me as one of the "team leaders." I still sometimes struggle with deciding when to delegate certain tasks, as my initial subconscious reaction to most assignments is to work them out myself. However, my past experiences have proven to me that working together with others is more beneficial for everyone and it is something that I am actively working on and hoping to hone-in on in the future.
