Leveraged Breakdowns

REPE Interview Prep: Efficient Markets, Opportunity Zones, and Same-Store Reporting

Introduction

The interview process is more than just building real estate private equity models. You have to learn to think and speak like a true megafund investor. In addition to providing the best real estate private equity course on the market, we have created this series to help you practice the most common interview questions. We only advise you to practice each of the below deliberately, without looking directly at the answer, and until you can answer not just from memory, but from a perspective of understanding.

Please explain how the efficient markets hypothesis impacts take-private investment strategies.

An efficiently priced market would imply that any company’s share price accurately incorporates all publicly available information. Thus, public REITs should always trade on par with their underlying asset value. However, the success of REIT take-private investments hinges on the assumption that inefficiency could exist. This inefficiency basically means that investors are pricing a company at a discount its net asset value.

In other words, take-privates only make theoretical sense if you accept that market inefficiency is possible. If markets were perfectly efficient, take-private strategies would not be successful on average over the long term. Yet if you accept that a degree of market inefficiency might exist, then a capable investor could opportunistically exploit fundamental dislocations between net asset value and share price.

What do you know about Opportunity Zones?

Opportunity Zones are designated areas across the United States that have experienced minimal capital and business investment, usually due to higher levels of poverty and unemployment. Opportunity Zones incentivize investors to re-invest their unrealized capital gains to improve areas of the United States otherwise neglected by capital. New investments in Opportunity Zones exceeding ten years are exempt from capital gains taxes, and 1031 exchanges into an Opportunity Zone project are eligible for a step up in basis of 10% after five years, and another 5% after seven years. Thus, funds targeting development in Opportunity Zones can be very attractive options for limited partners that are more exposed to such taxation. Yet certain limited partners exempt from capital gains taxes, such as pension funds, may not be as drawn to opportunity zone investing.

When real estate portfolios such as REITs or even private funds report “same store” operating results, what do they mean by same-store?

Real estate portfolios change shape and size every year. Thus, investors and management alike need to somehow distinguish operational metrics that come from existing stores or retained properties from that of properties either opened or closed during the course of the year. Same store operational metrics, such as revenue, expense and NOI, do not consider properties that did not exist in the portfolio for the full extent of two periods being compared. The goal is to benchmark the performance of the core fleet of properties and determine if performance is improving or declining.

As investors, same-store metrics allow us to study organic growth rates. If you were to include new revenue from recent acquisitions or lost revenue from recent dispositions in your figures, your view of performance would be distorted. Thus, same store metrics do a much better job of revealing fundamental performance.

Learn with Leveraged Breakdowns

There’s a reason students consider Leveraged Breakdowns the best real estate private equity course. We are megafund investors who broke into this industry from non-target backgrounds. We have committed our limited free time to educating those looking to follow in our footsteps. In the most efficient manner possible, we teach you all you need to know how to build a real estate private equity model from scratch, give free case studies, and much more. Join us today to kickstart your REPE career.

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