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Leveraged Breakdowns

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  • Lev
    Keymaster

    Charlie,

    Before I respond to your questions in order, I wanted to list off some strengths you seem to have right off the bat. All-in, you strike me as a solid candidate

    • Prestige: Went to a name-brand school, which gives you a leg up. This speaks for itself on your resume, not much to actively do but great that you have it. I assume you got what would be considered a good GPA.
    • Analytics: Your data analytics background strong, strong analytical background will support you as industry shifts to embrace modern methods of analysis. I would emphasize a “moneyball” approach to real estate investing, could be a nice edge on your competition.
    • Hands-On Downturn: Spin your first job as witnessing firsthand the effects of a downturn. Could make you a more prudent investor.

    I’d also like to apologize for my delay in response. I realize your phone interview came and went. Yet looking at the above and reading your questions, I’d hope your qualities shone through and you’ve proceeded into the next rounds. With optimism, I hope you still might find the below helpful.

    Worried You’re Lost in Details

    I cannot speak to the quality or content of the WSP Real Estate Modeling course. However, I understand your concern. You want to speak “big picture.” The REPE Starter Kit is an REPE career development course designed with the candidate in mind who has less than a day to figure out the core information required for LBO modeling. That said, modeling rounds usually come after verbal technicals, which you can better prepare via the technical interview guide.

    Imposter Syndrome

    Imposter syndrome is largely an internal battle against negative self-talk. It also helps to realize that many other people, even in high places with status on their resume, feel the same. It can be hard to shake, but hopefully you find some solidarity in the fact that you’re not alone.

    Looking at the issue differently, a lot of REPE is flying by the seat of your pants. That’s to say, you’ll hardly ever know what to do. Investing is quite literally facing uncertainty and putting money on the table. Plenty of REPE case studies attempt to simulate this uncertainty, and test if you’re able to make a quick decision and explain how you managed limited information.

    The most effective professionals combine intuition with proven methods of decision-making. It takes guts, and you’ll never have all the answers. So your imposter syndrome, to a degree, reflects a level of skepticism (albeit in yourself) that would serve you well when drilling through due diligence on a live transaction.

    Best way to Land REPE Job

    If you don’t land a position at a reputable firm, there is no shame seeking employment at scrappier startups. I believe the best REPE gig is one that exposes you to various teams. So if you can’t work at a big fund, you could seek a smaller shop that will allow you to wear many different hats. Importantly, you could always lateral from a smaller shop into a more reputable outfit in a couple years. I’ve found that REPE teams care less about prestige, focusing more on finding the best athletes for the job.

    Prepping for Advanced Rounds

    I pour a lot of effort and soul into my courses. Years ago, I was a hungry yet clueless outsider eager to break into a dynamic and growing industry. Lacking insider guidance, I got in by the skin of my teeth. I’ve since dedicated this site, and the products I launch, with the hungry outsider in mind.

    I always recommend the complete bundle. The best way to attack it would be:

    • Knock out the REPE Starter Kit in a day or two. Then repeat it, but don’t watch the video and try to finish the REPE case study from scratch just from the prompts. Repeat until you can build this model quickly and understand each component and how each concept could be expanded to drive finer-grained detail.
    • Once you grasp the REPE Starter Kit, move onto Breaking Down REPE. This course goes through a full underwriting as you’d experience it live on the job. But it’d be best to grasp the starter kit fundamentals for embarking.
    • While working through the two above, practice the Technical Interview Guide three nights per week for at least ten minutes a session. When you practice the questions, speak out loud to a wall as if you’re responding to a person. Do not look at any cheat sheets, and actually use your voice to speak. You will improve most quickly in this fashion.

    I do not yet have an REPE career development course related to behavioral interview questions. You can expect that to launch in a few months. That said, check out the more recent posts on the blog. I’m doing a bit of ideation on the subject and I think I’ve hit some helpful points.

    in reply to: REPE Questions#24140
    Lev
    Keymaster

    Howdy BFP, thanks for stopping by our forums. I appreciate the chance to connect directly with aspiring REPE investors such as yourself. It always feels great to speak directly to you vs. the typical indirect communication via blog posts, newsletters, courses and such. And glad to hear you found the free real estate private equity career path helpful! In case others reading don’t know, you get a free guide when you register a free basic account with us. And just a quick disclaimer that my responses below pertain to front office investing (acquisitions) roles, as you already mentioned.

    Q1: What do you consider a megafund in the REPE space? Anything on the PERE 100?

    Colloquially, we might refer to a single firm as a megafund, such as Blackstone, Carlyle, or TPG. But, I would specifically consider a megafund to be any singular fund with at least $1B of equity commitments. So any company managing at least one megafund ($1B equity commitments) could be referred to as a megafund.

    A few more details:

    1. Strategy: the particular strategy may vary. For instance, Blackstone’s core fund BREIT is just as much a megafund as Starwood’s opportunistic SOF X
    1. Equity commitments, not AUM: I’m not talking about aggregate assets under management (AUM), I mean a single fund’s equity commitment determines status as a megafund. For example, if a core-plus fund has $1B AUM, then its equity commitment is at most $500M (assuming a standard 50% LTV). Though the equity commitment is probably even less since the AUM trends upwords as the assets are written up (though technically they could be written down if the fund is tanking).
    2. One fund is $1B, not several together: I’m sure people try to get cute with the definition, say a single GP manages four $300M funds, they may consider themselves a megafund. But none of the individual funds is a megafund – they’re just in control of a megafund amount of capital split between four separate funds.

    Q2: How do hours compare to a career like investment banking at various stages in your career?

    Out the gate I’m going to say a career in REPE has a much better, though still difficult, lifestyle when compared to IB.

    First, you aren’t client service. Sure, you put money to work for investors and you’re ultimately responsible to answer their questions. But fundraising and investor dialogue is often coordinated by an entirely separate investor relations (IR) team. So, the only element of client service is often not part of your daily routine. And that’s a beautiful thing, because clients require lots of time, effort, and attention – and weekends are a luxury that goes away when you need to be responsive to a client. This is true in IB and REPE.

    Second, REPE investors control most processes they’re in. So you set the timeline and you drive everyone forward. That said, lifestyles ebb and flow with dealflow. Like bankers, investors are expected to commit their entire lives to their jobs. It’s just that REPE jobs naturally have downtime between deals, whereas bankers fill their downtime with late-night pitch deck grinds that never end. Bankers never want to appear idle, so they’ll keep their juniors grinding constantly. And if you make it to a senior position, you’ll constantly be grinding your juniors, reviewing the materials, and picking up the phone to chat with clients.

    In concrete terms, I’d say junior REPE investors work ~65 hours per week versus junior bankers work ~75 hours per week, with the monthly or bi-monthly +10/20 hours. It hardly ever sinks below those counts, though.

    Q3: In the same spirit, how does compensation compare to careers like investment banking as a Post-MBA Associate, VP, SVP, and eventually principal?

    You can make a lot of money in both fields. If we’re speaking about uncapped wealth generation into the billions, obviously investor is the best choice. But the distributions of both career paths’ compensations are likely similar enough, both ending in the millions of dollars per year if you’re successful. Thus, this will be more of a discussion on compensation structure at the senior level rather than total compensation dollars, because they’re pretty even at the junior level.

    So, the quick distinction:

    1. REPE compensation is tied to fund performance. You can make inordinate sums of money if you get carry in the right fund.
    2. Banking compensation is tied to your skill as a salesperson.

    Let’s unpack this, first with REPE fund compensation. REPE compensation has two elements:

    1. First, the quantity of awards you receive will be directly linked to your perceived skill as an investor.
      1. Skill is demonstrated in myriad ways, the most obvious being a history as a smart investor with high returns. Other things that affect your perceived skill are how smart people think you are, your political clout, and your ability to make headaches disappear.
      2. The quantity you receive will come in various forms: base salary, annual cash bonus, stock options (if you’re at a public megafund), and carry.
    2. Second, the performance of the funds in which you receive carry and equity-like instruments will play a major role in your compensation. It’s hard to guess which funds are going to go gangbusters until all is said and done. But if you get carry in the right funds, you will walk away very happy.

    Back to banking. At the start, banking is a predominantly quantitative role as a junior analyst and associate. But as you climb the ladder, your job becomes a sales function with a quantitative flavor. Investment bankers are compensated when they sell. The products a banker sells are the firm’s expensive services, either as an M&A advisor, as an equity or debt capital markets syndicator, or as any other of the myriad roles a bank fulfills for its clients.

    Hopefully this helps. Juniors in both careers can make similar amounts, and the pay equally tapers off as you move away from the megafunds/BBs into the regionals/mid-markets, etc.

    Q4: After working at a smaller PERE100 firm, is it possible to lateral to larger funds (i.e., Oaktree, Carlyle, or Blackstone) after you have gotten more experience?

    Yes, assuming you mean working as an investor at a smaller PERE100 firm. REPE funds aren’t so snooty about background.

    Prep Materials

    By the way, if you decide to pursue a real estate private equity career path, you should check out the courses and interview guide we’ve put together. Interviewing for a career in REPE is all about sounding like you’ve already got the proper experience. We help you think like an insider so you can speak like an insider when you’re networking and interviewing.

    Hope this helped. And happy to answer any follow-up.

    in reply to: REPE Starter Kit – Build the LBO Model in Excel#24026
    Lev
    Keymaster

    REPE investors generally capitalize the NTM NOI, or next twelve months Net Operating Income. So if my property sells in year 5, I need to know what my NOI will be in year 6 to have the NTM NOI at exit in year 5. Make sense?

    in reply to: LBO Model#23736
    Lev
    Keymaster

    There is no download for the LBO model. I teach you how to build it yourself from scratch through the course. If you have difficulty building it, I’m happy to answer any questions here.

    in reply to: Excel Cheat Sheet#23117
    Lev
    Keymaster

    It’s great to hear these things because it lets me know what you benefit from the most. I think what would make the most sense is just producing a new course that goes slower and has better Excel documentation. Perhaps I’ll make that the next major project (just finished the technical guide).

    in reply to: Breaking down REPE Course#23105
    Lev
    Keymaster

    Sorry – MoC means Multiple on Capital (sometimes also called Multiple on Cash). It’s a really basic concept. You put in X dollars, you get out Y dollars. MoC = Y/X. So if you buy a building for $100 and sell it for $220, your MoC is a 2.2x.

    in reply to: Excel Cheat Sheet#23104
    Lev
    Keymaster

    I’ve considered something like that. I’ll move it up on my list of items to create – but honestly the best instructor on that front is practice and repetition. I always aim to keep my hand off the mouse, and do anything faster.

    in reply to: SFR info, Rent to Own?#22527
    Lev
    Keymaster

    The multifamily model taught in Breaking Down REPE is a great launching point for modeling the SFR space. There are two key things I’d like to highlight if you’re looking to model SFR on your own:

    1. Single-Family Rentals will incur much higher operating costs. Freestanding homes are simply less cost-efficient than a multifamily structure. You need to drive further to service them, they’re less energy efficient, there is more surface area to repair, they have larger footprints, and so on. Thus, the firms are typically structured with higher OpEx and more distributed controls to efficiently manage a network of local professionals rather than a centralized group of on-site staff for maintenance, concierge, leasing, etc.
    2. Residential home prices more directly impact the SFR market. If a person buys a home next door for personal use, that will obviously impact the value of your property. This is important to understand because different factors drive demand for home buyers than multifamily renters. Of course, home prices tangentially impact multifamily valuations as well. For instance, there probably would be less renters in San Francisco if the home prices weren’t so high. All this means that SFR models typically involve some form of home price index, Zillow scrapes, etc. to value their properties in addition to a direct cap / DCF method.

    Hope this helps, feel free to follow-up here.

    in reply to: Development Career Path#19464
    Lev
    Keymaster

    The most straightforward path I’ve seen is to just begin work at a development shop as an analyst. There you’ll learn everything you need to know, and eventually you can strike out and make your own firm. I really couldn’t tell you how long it takes to make your own development firm, but I’d recommend you get at least one business cycle worth of experience before starting your own shop.

    in reply to: Mezzanine Debt Modeling#19462
    Lev
    Keymaster

    Modeling Mezzanine Debt

    Sounds like you’re asking from the perspective of the equity investor. So first, make sure you read our blog on the capital stack, with focus on seniority. I just want to be clear that mezzanine debt is by no means equity, it is just a subordinate tranche of debt. So when a real estate private equity firm raises mezzanine debt, they are giving up no control of their equity stake. They’re just adding a slice of the capital stack between themselves and the senior debt.

    On modeling mezzanine from the REPE perspective, again, it’s just another piece of debt. So you can just show an additional line for the incremental amortization and the incremental interest expense.

    LTV

    Typical LTV for senior debt goes up to ~50 to ~60%. So, mezzanine debt then fills in anywhere from 60% to 80%. However, a lot of REPE funds’ LP agreements cap fund leverage around ~70%, so you’ll only see mezz filling in that final slice between 50%/60% up until 70%. Anything after that LTV is usually structured as preferred equity, but then you’re really getting aggressive with your financing.

    Rates

    On rates, this really depends on market conditions. I’d recommend checking Bloomberg / SNL for recent issuance if you have a subscription, or a free alternative if not. Otherwise company filings can be helpful too. If it’s any help, I’ve seen the same core building’s mortgage price ~L+2.30% and its mezz price ~L+5.25%. So you can see some healthy spreads between the two, often more drastic than that.

    in reply to: Underwriting and DD Processes#19459
    Lev
    Keymaster

    I can speak to acquisitions due diligence with greater detail, so I’ll focus on that in my response.

    What is Due DIligence?

    So first off, due diligence is the process where you try to figure out as much as you can about a property You want to leave no stone unturned. Because once you buy a property, any avoidable issues that arise will be your responsibility.

    DD is Split into Phases, the First is Desktop Underwriting

    Due diligence is split into the same phases as a deal usually follows. During the first phase, you really just confirm what you can from your desktop computer, which is why phase one diligence is often called desktop underwriting. So in step one, you receive a teaser. If you like what you see, you sign an NDA. Once you sign the NDA, you get access to the dataroom. The part right after you sign the NDA is where our course Breaking Down REPE kicks off. This phase is called the desktop underwriting. So if you’ve worked through our course, you actually know exactly how a desktop underwriting works.

    You Trust Seller Data during Desktop Underwriting

    This is where you do the bulk of your modeling work, the only caveat is you generally take the seller and their broker at their word that their data is comprehensive and they aren’t hiding anything material. At the end of the day when you sign a final purchase-and-sale agreement, the seller signs that the data they gave you in the dataroom is true and accurate and they’ll compensate you if you underwrote off any false information. All this to say, during phase one diligence you usually just underwrite with the files they give you and any sort of data you can pull from comps databases, tax assessors’ offices, research reports, etc.

    Moving Forward into Exclusivity

    If the deal makes sense from a desktop underwriting, you’ll submit a non-binding bid. If your bid wins against the competition, then you’ll sign a letter of interest (LOI) that is like a non-binding agreement that clearly states the pricing you are both working towards. At this point you enter exclusivity and you are the only buyer. Once you’re exclusive, it makes sense to spend real money on diligence reports from third parties.

    Hiring Third-Party Consultants

    Once you’re in exclusivity, you begin checking the facts independently. This is when you hire third-party consultants to do environmental reports, engineering quality checks, and such. Though you may have walked the property during the competitive first round for a casual look, you’ll likely go back to more thoroughly inspect it now that you’re expecting to buy it.

    DD Checklists

    So far in my response, I’ve skimmed over the nitty gritty details of what you actually check-off during due diligence. A quick google search will show you several lists, all of which look pretty solid. For instance, I thought this was a good list of common DD items. Just keep in mind that you usually don’t pay for the third-party reports until you’re pretty sure you want to buy this property and you’re in exclusivity.

    Reps and Warranties

    Final note – if you find something wrong with the property during final diligence, that doesn’t necessarily kill the deal. You’ll just revise pricing or add a clause to your reps and warranties. For instance we once found a rooftop pool was leaking through into the building and would cost $20M to fix. So we just included in our final purchase-and-sale agreement (PSA)’s reps and warranties section that the seller would cover all costs to fix the problem.

    in reply to: Bullish on Infrastructure REITS?#15821
    Lev
    Keymaster

    First, Colony was able to opportunistically time the sale of their industrial portfolio. Growing e-commerce tailwinds continue to puff up industrial valuations, so now was a great time to sell. On top of that, now might be perceived as a good time to exit an historically long-winded bull market. So there were two secular forces in favor of a big sale at Colony: 1) industrial has been crushing it for the last decade, and 2) real estate in general is beggining to feel a bit toppy to many institutional investors.

    And fortunately for Colony, there are a lot of buyers who were able to bid up that portfolio. The ultimate buyer, BREIT, is blackstone’s REIT vehicle which can stomach much lower returns than its op funds.

    Regarding the cell towers / data centers. From a 20,000 foot perspective, demand for data centers and cell towers likely won’t stop anytime soon. So, if you’re worried we’re at the top of the real estate cycle yet want to make a defensive investment, cell towers and data centers certainly makes sense. As one anecdotal data point, there is not enough existing 4G LTE bandwidth for the broad adoption of self-driving cars. Couple that with the exponential demands of the growing Internet-of-Things (even your fridge will have a wifi chip), it’s pretty clear that we’ll continue to need these facilities.

    Wrapping it up. If you’re Colony and have just killed it on an industrial investment, a logical exit to protect that capital would certainly be to plow the proceeds into a sector that shows no signs of slowing any time soon. And data centers / cell towers certainly fit the bill.

    in reply to: Another Case Study#15487
    Lev
    Keymaster

    Can you link to the file here?

    in reply to: Top REPE firms in Dallas#15484
    Lev
    Keymaster

    Hey there,

    If we’re strictly keeping to the top 100 REPE funds per the PERE 100, you see two Dallas REPE funds (note this only considers headquarters):

    7. Lone Star Funds

    27. Crow Holdings Capital Partners

    Starwood Capital isn’t headquartered in Dallas, so that must be a satellite office you are picking up. In terms of other firms, you’ll have to perform a bit of research. Please share your findings here so we can help other users. In the spirit of helping, though, here is a list I managed to generate manually (in no meaningful order):

    So let’s be naive here and assume these funds range from $435M – $2.2B in size. To put that (admittedly rough) metric into perspective, Lone Star funds manages $85 billion. That’s 85 HC2’s & RSF’s, 38 RCP’s, and 195 2gr’s. So if you want to go big, you really only have one, and maybe two, options.

    But the experience you would get at a smaller fund is not necessarily worse. You will just have to hustle and network to uncover all of the funds that exist in the market by speaking with industry locals.

    in reply to: Basic REPE Questions#14968
    Lev
    Keymaster

    Those are all great questions, erlwang! To start, I would say your first question is really just one question, because risk = return, and cap rates are effectively the return that investors are expecting to receive. Based on that, the higher the cap rate, the higher the return, and the higher the risk.

    That being said, here is our perspective at Leveraged Breakdowns, from lowest risk (therefore lowest return and lowest cap rate) to highest in today’s market (parentheses are average cap rates in primary markets for 2Q19 according to NGKF):

    1. Industrial (4.7%)
    2. Multi-family (4.8%)
    3. Office (5.5%)
    4. Retail (5.7%)
    5. Hospitality (6.6%)

    With regards to REPE vs RE Debt, the rule of thumb is that owners always earn more than lenders. Knowing that risk = reward, that does mean that an owner takes more risk. The answer is really a question about your appetite for risk.

    Finally, if I were looking for assets in Manhattan today, it all depends on my risk appetite. I invest out of different funds, and those funds are backed by investors with different priorities. If I were targeting core-plus fund returns (~11%), I would allocate more capital toward market-rate newer rental apartment towers, high-credit office buildings, and prime location industrial warehouses. If I were chasing opportunistic returns (~18%), I’d crank the risk dial up by investing in older, value-add buildings or offices with an upcoming major lease roll that I think I can fill.

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