PE modeling vs. PERE modeling

Is Private Equity Real Estate modeling less complex/ easier than the normal PE modeling you would do?

If so how?
An example would be helpful.

(It seems to me there are less variables in Private Equity Real Estate modeling and it would be easier then the modeling you’d do in normal PE).

 

Multifamily? Hotel? yeah.


100 tenant shopping mall? Entity level investment into an office REIT? Not necessarily.

But on average, yes, modeling RE is a little easier. 

 

Depends on what type of PERE we're talking about. If a single asset, then the modelling can be "easier" because you don't really do 3 statement models etc. Of course in theory you can build a BS/IS/ CF Statement for the asset, but not really necessary. You just project future cash flows through NOI, CFAF, do an equity waterfall if with partners, calculate returns and bam you have your model.

If you're looking something like a take-private for a REIT, then the modelling is the same as doing an LBO for a company like Nike. Different drivers of revenues, costs, etc. but same thing.

 

In both models it all just comes down to revenue sources, expenses with running the business/building, and any debt/cap ex on it. Real Estate just have fewer (typically) sources of revenue than traditional companies and different overhead costs in running it making the overall model "simpler". The assumptions for both require knowledge of their respective markets to make good educated guesses on where you think market conditions will be over a extended time period. But, since Real Estate has leases involved, their cash flows are more predictable and the assumptions for each space are less involved than say a manufacturer bought out by a PE firm and needing to predict viability of the product and long term demand of it vs minimizing COGS and maximizing profits etc etc. 

I wouldn't say one is more complex since they are just boiled down to guessing on the future of current business operations, they are just different types of businesses

 
Most Helpful

I've never worked in traditional PE/Banking, but I have to assume that RE modeling is *significantly* easier.

Think about it this way... what are the typical line items for a RE asset? Revenue is mostly rent + maybe some ancillary income from things like utility or CAM reimbursement, vending/laundry income, parking income, etc.  Expenses are typically just Insurance, taxes, maintenance, utilities, mgmt fees, payroll, G&A....Capex is renovations/big repairs. It's all the same for pretty much any property and its all very easy to conceptualize and wrap your head around.  You can spend a few minutes reading the P&L for a real estate asset and get a good idea of how it operates.  And creating a pro forma cash flow isn't rocket science if you study the immediate market in which the property is located and look at demographics and comps.

Now think about business.... you can have dozens of revenue streams from multiple products/services (each with their own growth trajectory and cost allocations), research & development, intellectual property, thousands of employees, operations across different markets or different countries (in different currencies with different accounting standards), larger and more complex variety of capital sources and exit scenarios (a real estate asset isn't going to IPO or issue corporate bonds).  Does this sound simpler to you?

Personally the relative simplicity of RE vs traditional PE/banking is what drew me to this career path.  I don't think I have the mental capacity or desire to spend a million hours creating a 100 tab LBO model for a multinational pharmaceutical company or whatever.  I'd rather spend like an hour (or less) cranking out the initial underwriting for a RE asset and know if its worth pursuing. (ETA somebody above mentioned a shopping mall example.  Yes, very large multitenant commercial assets can take a lot longer to model and be a massive pain in the ass, but still are ultimately pretty simple business models - its still just a landlord providing space for tenants who pay rent.)

 
Ricky Sargulesh

I've never worked in traditional PE/Banking, but I have to assume that RE modeling is *significantly* easier.

Now think about business.... you can have dozens of revenue streams from multiple products/services (each with their own growth trajectory and cost allocations), research & development, intellectual property, thousands of employees, operations across different markets or different countries (in different currencies with different accounting standards), larger and more complex variety of capital sources and exit scenarios (a real estate asset isn't going to IPO or issue corporate bonds).  Does this sound simpler to you?

I mean, if you want to make it sound harder, sure, it sounds harder.  But you can underwrite a portfolio with dozens of individual assets and hundreds of employees, each in their own submarkets with their own unique demographic trends.  Each have their own capital budgets, because they're all of different construction vintages.  Each building has it's own credit risk in the individual tenant, some of whom pay more reliably than others and thus must have their future payments discounted less.  You might have to individually insure each property, depending on location, in order to achieve the best rates.  Utility prices will vary as well, of course, so that needs to be underwritten, as well as minimum wage, union contracts, contract maintenance work at each location, etc etc.

Lets be perfectly honest - the amount of work that goes into an LBO model in PE is probably excessive and meaningless.  You could easily put the same amount of time and diligence into a real estate model, it just doesn't actually effect the underlying assets; executing on the business plan does.  I agree that PE modeling is probably inherently more difficult, but the way you describe the two side by side is obviously going to lead someone to that conclusion.  Every single item you addressed for PE, can exist in a real estate transaction, up to and including the multinational aspect.

So sure, you can boil real estate down to "who is going to pay rent, and how much, versus what is the bare minimum I must spend to achieve those rents."  But you can do the same thing for PE, in that you're looking to generate the same amount of revenue and cut as much cost as possible while maintaining it.  Boiling one down to a basic statement and expanding on the other is of course going to make them seem vastly different, when they're not.  Supply contracts for a business are no different than maintenance contracts for a building.

 

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