Financial statement and Investment analysis

two ways RE financial analysis differs from corporate

analyzing single asset instead of an enterprise

revenue is looked at for next year not past year (except hotels)

single asset vs. enterprise

no aggregation in RE since each property has different leases, expenses, and loan terms and conditions

apartment lease type

full service, gross

apartment lease term

one year

LL expenses apartments

all recurring expenses except utilities

all capital improvements

office lease type

modified gross

office lease term

5-10 years

scheduled fixed rent increases

options to renew

LL expenses office

all base year recurring expenses

all capital improvements

Tenant expenses office

cumulative increase over the base year expenses

might pay additional rent to amortize TI

retail, industrial, lab lease type

triple net

retail, industrial, lab lease term

5 - 20 years

scheduled fixed rent increases

options to renew

LL expenses retail, industrial, lab

Recurring expenses on vacant space

Capital improvements

Tenant expenses retail, industrial, lab

reimburses their pro-rata share of recurring expenses

pro-rata share

however much space one tenant takes up compared to whole space

capital improvements examples

new roof

new parking lot

Special case lease for industrial

absolute net

absolute net lease term

10-20 years

scheduled fixed rent increases

options to renew

Why is absolute net different from triple net

tenant also pays for capital improvements

other income retail

% rent

% rent

landlord takes portion of retail store sales post break point on top of base rent

exclusive use

laarge grovery stores can be the only grocery store in a shopping center

co-tenancy

market research shows that my company shares a similar customer profile to whole foods, if they leave and another similar quality grocer doesn’t enter I can terminate lease

components of retail tenant occupancy cost ratio

annual rent

annual property expenses and property taxes on pro rata share

% rent

repayment of any TI allowance

Occupancy cost ratio non-retail

annual rent

expenses

TI allowance

why is occupancy cost ratio important

measure of whether a business generates enough sales to sustainably afford its physical location

NOI deterioration causes

tenants leaving

hole in occupancy

big inflation expenses like insurance

why are replacement reserves high for hotels

need to replace stuff to match brand image, if not disenfranchised

constant wear and tear from daily use

loan to value ratio

mortgage as a % of appraised value

how is a property appraised

based on how much property is worth at stabilized value s

stabilized value

maximum realistic occupancy

who makes appraisals

independent appraisers who have designation, member of appraisers institute

amortization

term to repay mortgage to zero

how is amortization paid

paid monthly with interest

why is the loan to value ratio important

lenders want to know there’s equity above loan, cushion for if property hits downturn in occupancy and rents

loan constant on long term RE financing

fixed payment amount (interest and principal) paid annually (debt service)

breakeven occupancy

measures the percentage of space you need leased to cover fixed costs

debt coverage ratio

ratio of NOI to annual debt service

why is debt coverage ratio important

determines the margin of safety of recurring cash flow from operations to cover the required loan payments, measure of profitability

operating leverage

cash flow and value change

increase occupancy, rents, and noi

operating leverage in practice

improve property to increase occupancy and rent on lease rollover exiting at a higher terminal value

financial leverage

borrow below cap rate

Financial leverage in practice

buy at 6.5% free and clear return, borrow at 5% leverage amplifying return on equity invested

cap rate compression

equity market key terms

return on equity

internal rate of return

equity multiple

return on equity

cash flow after financing divided by equity invested

roe importance

measures cash in over cash out, cash on cash return

internal rate of return

time weighted annualized return with and without leverage that includes annual cash received + return of capital and profit at sale

IRR importance

expected rate of return a property will generate over its lifetime

Equity multiple

multiple of cash received divided by cash invested, not time weighted

What does equity multiple include

cash received, return of capital, profit at sale

increase in interest rates takeaway

could result in loan default on refinancing