Question about Real Estate DCF
I'm getting ready for a REPE valuations modelling test, which will be a RE DCF. I'm just trying to understand something:
- Is the EV the NPV of your Unlevered CFs, and the equity value the NPV of your Levered CFs? Or do you get to equity value using the net debt bridge like in corporate DCFs?
I got some tips on the test from the recruiter and one of his points which confused me slightly was the following:
- To provide an alternative way to estimate equity value based on the levered cash flows and estimated WACD instead of using the net debt bridge, although ideally providing both
I'm a bit confused as to 1) Why you would use the WACD to get to equity value, since surely the cost of debt shouldn't be a factor? 2) What exactly is the alternative way to get to equity value?
In the very few specifically RE DCF models I've managed to find, they just apply the discount rate to unlevered cash flows to get the valuation, so I haven't seen any detailed examples that take debt into account and actually separate between equity value and EV, so I'm really curious as to how this works in RE valuation.
Equity value would just be levered CF discounted - don’t let him confuse you.
Only thing I can think of to use the WACD is to find the appropriate discount rate for the equity cash flow - if they give you a WACC and WACD and leverage you can find the cost of equity and use that as the discount rate
This makes so much sense actually, thanks so much!
Thanks!! And EV is just unlevered CF discounted by WACC?
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