how do you answer this question?
walk me through a real estate investment (similar to walk me through a dcf but retrofitting it to a real estate property). not sure exactly how to answer it for re IB
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Not sure I get the query - you can answer this question just like you were conducting a DCF, except the “business” would be the real estate and the cap rate would be used to determine terminal value. Depending on how in-the-weeds you want to get, you can discuss RE-specific drivers of your future cash flows (e.g., rental income, parking income, service fees) and / or market-driven adjustments to your building’s value.
Since they’re asking you to walk through the entire investment, you could also layer in some comparison to peer buildings or precedent commercial investment either in the space or the geography.
so you would use the cap rate to discount the projected NOI, and sum that with the terminal year NOI multiplied by multiples in comps?
No - the cap rate is more of a valuation metric applied to one year of NOI to derive the market value, not an expected rate of return. So you would do the following: project out the year-by-year NOI (think of this as the proxy for unlevered FCF in a normal DCF) for the investment period. Discount these back at (1+R)^t, where R is whatever blended rate of return you require from the property (proxy for WACC). Again depending on how in-depth you want to go, an example to quote could be the return from a comparable REIT for example (or you could just add a % to the risk free rate, lol). Then to derive terminal value you’d use your cap rate (NOI of final year / cap rate) and then discount that back.
Sum these up for your PV. Disclaimer I am in Coverage IB, not RE - this is just how I’m thinking through it so anyone feel free to chime in and correct me.
ohh so exit value is equivalent to terminal year NOI / cap rate.
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