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Leveraged Breakdowns

Live Case Study #1, Part One: Introduction

I think you’re going to like this one, so bear with me. Quick heads up, I’m going to try something different here. First, in order to produce more content, I want to write more in a stream of consciousness. Sorry if this appears less edited (because it is). Yet because I want to publish this information as quickly as possible (to help you more), allow me to write fast (even if that means I write a bit more poorly). Okay, so what are we talking about here? I want to teach you how I’d analyze an esoteric opportunity.


Alright, context. Real estate private equity firms sometimes invest in bonds. Most of the time this isn’t the case, but sometimes a bond is so attractive that a private equity fund would gladly acquire it. In this series, we’re going to figure out if a bond issued by a random company in an esoteric sector is worth acquiring. The random company will be Life Storage Inc. (NYSE: LSI) and the security we want to analyze is their 2029 notes. More context per their latest 10-K:

On June 3, 2019, the Operating Partnership issued $350 million in aggregate principal amount of 4.00% unsecured senior notes due June 15, 2029 (the “2029 Senior Notes”). The 2029 Senior Notes were issued at a 0.524% discount to par value. Interest on the 2029 Senior Notes is payable semi-annually in arrears on each June 15 and December 15. The 2029 Senior Notes are fully and unconditionally guaranteed by the Parent Company. In conjunction with the issuance of the 2029 Senior Notes, the Company repaid $100 million of principal on the term note provided for in the Company’s unsecured amended and restated credit agreement effective October 30, 2018 as further discussed in Note 5 to the Consolidated Financial Statements filed herewith.

We’ll unpack that sentence soon, but let’s make sure you understand the absolute basics. After all, I am explaining real estate private equity for beginners. So, LSI issued $350M of senior unsecured bonds that pay a coupon of 4.00% fixed. They mature in 2029. We can buy these bonds from private holders (more on this later). Right now I’m going to take a quick pause to be pedantic, then I’ll get right back to the good stuff.

Okay so why will this series be relevant to your needs? Well, I’m going to show you how investors “figure out” an investment from nothing. I basically threw mud on the wall, and we’re going to see together if it sticks. I want to take you through a genuine underwriting of a random public company in an esoteric sector, and I’m doing that for the following reasons:

  • Why public company? Public companies have the best data available for free. Real estate private equity firms have access to lots of fancy expensive tools (Bloomberg Terminals, S&P Capital IQ, FactSet, Broker relationships, etc.). However, there is a wealth of data in the public domain if you know how to sniff it out.
  • Why esoteric sector? I want to break the cookie-cutter mold of real estate private equity analysis (office, multi, etc.). This will teach you our thought process from a unique angle. Also, markets are efficient when they’re liquid and well-covered. Esoteric sectors can have the best opportunities (and the worst pitfalls), so why not go for gold?

We’re Going to Work Through This Together, from Scratch

I’m starting this journey with zero prior knowledge, so please forgive any mistakes or moments of ignorance. Rather, my aim is to show you how I’ve been taught to analyze investment opportunities. This is all because practical experience is the best way to teach real estate private equity for beginners. And because I think bonds are pretty cool, I wanted to show you this style of investing. In the next post, we will scour the internet for pricing data then analyze key terms therein.

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