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Leveraged Breakdowns

Public REIT Valuation Part Five: Development and Redevelopment


Real estate private equity jobs are just as much about reading and learning as they are about modeling. This is part five in a series in which we will ultimately build a full-scale M&A model for a publicly traded real estate company. But first, I want to make you read the source materials the same way we do it at megafund real estate private equity firms. If you’re just joining us, start back at part one. If you’re joining us from part four, welcome back. We are now going to talk about development and redevelopment as it specifically pertains to Aimco’s business model.

Development and Redevelopment Capital

Aimco’s second line of business is redevelopment and development. This is where it repositions communities within its portfolio. In lay terms:

  • Redevelopment is when Aimco spends a bunch of money to make certain property nicer so they can charge higher rents
  • Development is when Aimco builds a new building on an empty piece of land

Certain elements of this development/redevelopment business will obviously be halted because of COVID-19, but other elements have to go on. Luckily, Aimco does a good job of telling us about its future spend and expected future income from these developments so we might accordingly adjust our own forecasts of its future business.

Future Development Spend Estimating

So, when we model capex, we will want to flag that Aimco has reduced its 2020E capex by 45%, or $150M. This represents five long-cycle redevelopments and developments currently underway. The all-in estimated cost to complete these developments is ~$212M, which we’ll pick apart in more detail soon enough. Aimco assumes that three of these developments will be completed in 2020, and two will finish in 2021. And finally, the stabilized NOI is ~$30M.

Why would they want to do this? Back to our discussion in the previous article on liquidity, during times of crisis it is best to keep as much cash on hand as possible. Redevelopments and developments can be shut on and off, especially during the earlier phases. While “carrying costs” (minimal ongoing costs to maintain the pulse of your paused developments) will drag down your returns somewhat, you certainly don’t want to be pursuing pre-pandemic developments in the middle of a crisis.

What is the Yield on Cost?

Let’s take a quick foray into measuring development performance. Though development isn’t a core business line, it’s substantial enough that we should at least understand some basics. So, there’s a fancy ratio that REPE investors always mention when discussing developments named Yield on Cost. The yield on cost (YoC) of a development represents the stabilized NOI divided by the total cost to generate the incremental NOI. If you’re redeveloping, YoC will be the additional NOI over the renovation cost. If you’re developing ground-up, the YoC will be the full stabilized project NOI over the full cost to develop.

With the information shared above, what would be the yield on cost for the developments that Aimco is pursuing? Well, you’re expecting to get $30M of stabilized annual NOI for an all-in spend of $212M. That means you’re expecting a 14.2% yield on cost. When you read through filings, REPE investors always calculate obvious metrics like yield on cost, cap rate, and pricing PSF. These metrics will feel nonsensical as a complete newbie. But the more frequently you see them, the more you’ll develop a sixth sense.


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