Buyside Case Study HELP - Six Hours...
Hi
I have a six hour case study (even longer if I need) to prepare a financial model + IC paper for the potential acquisition of an office portfolio (3 assets)
I need to hit [ 15-20% ] IRR - so confused about entry and exit yields...
1) How do I go about Entry / Exit Yields - I was going to do Entry Yield (Expansion / Compression) and then Sensitised Entry Yield and use that against the Y1 Income - I was going to do Entry Yield + Compression for the Exit Yield against that last period NOI - Is this the correct way to do this?
3) Reversionary Yields - is it worth showing this to say justify a higher purchase price due to upcoming lease renewals?
4) Anyone can suggest a 2 page IC structure?
Edit - Or hang on, should I DCF it? I don't do Offices usually other Operating Assets
High level for an office asset. I would ask first what information you were given.
Did they give you a going-in cap rate?
Start by calculating or inputting operating statement details.
Select growth rates / handle lease roll, include downtime and leasing costs (TIs & LCs).
Make sure you use a forward-looking 12M NOI to arrive at the sale price. (5-year hold, Year 6 NOI / exit cap)
I would come up with a reasonable cap rate going in and use an expansion of like 25-50bps (unless value add)
Debt on office right now going to be MSA and asset class dependent but just make sure you're using 5.5-6.75% if fixed. (if value add, download Chatham forward curve for SOFR and use a spread of 300-500 over)
You should be able to google a sample IC memo. But include at a minimum (no particular order)
Your thoughts on the deal
any risks / mitigants to those risks
proforma CF (copy and paste annualized CF from the model)
Assumption Summary
Financing Summary
market overview
if you could add comps for price on sales to support exit value or explain conviction by showing great buy on from a basis / going in cap rate perspective.
Thanks! You are extremely helpful!
Its a painful one - two rent reviews lease of 20 years and I forgot to mention it is as 2010
I am glad to say I've done similar to your approach on exit!
Long-story short long lease high break fees awful debt financing for a value-add fund... Going to have to try my best to swing it through 'IC' assume you'd only put an IC together if you think it would work as opposed to not.
Goal seek entry price to get to target IRR
1) sensitize entry yield / purchase price to rental growth or inflation.
3) yes. We always look at entry yield and reversionary yield.
4) - property info/ metrics (WALB/WALT etc) returns, entry and exit, financing
Understood - rent reviews are fixed every x years - I'm not entirely sure how I'd calcualte the reversionary yield.
Would it be NOI at that point in time / purchase cost you paid?
What type of firm is this for? Sponsor, LP, REPE, Are they only focused on office?
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