REPE Entity level investment
Can anybody in the industry talk about their experience with a company that does entity level investment in REPE? I am just curious about the different skill set it takes to value and invest in an operating company versus just asset level investment.
I feel like you'd get more responses on the PE forum, because that is closer to conventional private equity (albeit, real estate company focused).
The closest I know of are some larger firms (Apollo, Bain, KKR), that will find operators and give them a blank check to do as many deals as possible.
The DD and analysis is more focused on the operating company and the macro-level business strategy. Of course, they have to approve each asset-level investment, but it's more of a rubber stamp at that point.
So the operators that these PE firms partner with are doing the actual follow-on asset-level acquisitions (and not the acquisition teams themselves)? Do the REPE teams at these firms work on both asset level and entity level investments?
following - interested in similar topic on infra side if anyone has color
This is an area not covered by many people on the forum, so I'll do my best to help out. But keep in mind I'm still learning as well.
promoteseeker already explained this it at a high level. You're still evaluating real estate assets as you normally would (at least in the initial portfolio), but you're also asking broader questions about the company and setting some parameters for future acquisitions, exit strategy etc. Some potential questions you might ask when evaluating one of these deals:
* Who is the management team and what is their track record? Have they successfully exited (sold a REIT before) either through an IPO or portfolio sale?
* What is the plan for an exit? Typical options are IPO or large portfolio sale to a behemoth. Or in the case of an entity level preferred equity investment, they could grow the portfolio's size to a point that they could refi out the preferred with senior debt
* If the plan is to IPO, how big does the company feel they need to be to constitute a competitive offering (one that won't fail to secure anchor investors at real estate focused hedge funds and asset managers)? There might need to be some public comps work here to see if an IPO is feasible
* What was the company's strategy when acquiring their current assets? What cap rates were they acquiring at and what cap rate would the preferred or common equity investment be valuing the portfolio at? If there's any cap rate compression, the company would have to justify why
* How effective is the company's "acquisition machine"? Are they constrained by deal flow or by capital? What's the $ Value of assets they could acquire per year if they weren't capital constrained? Are they using brokers, sourcing off-market deals, overall what is their reputation as a buyer within their niche?
* You'd look at the portfolio as a whole and consider things like WALT, upcoming maturities leasing / debt maturities, the company's cash flow and liquidity situation
From a modeling perspective, it is slightly more complex because you have to roll up an entire portfolio and project future acquisitions, potential sales, refis, future draw-downs on the entity level investment into a 5 or 10 year 3 statement model. This can result in some pretty massive "assumptions" tabs. If it's an investment into an externally managed private REIT, you could potentially skip the three statement model and just look at a roll-up of all the assets in the form of a real estate income statement, add the external management fee below the line, and make some simple assumptions on the sale (eg IPO valuation at an 8-cap, management retains xyz% of equity, selling costs of 7% results in proceeds of xyz etc).
The income statement is straightforward, but being able to project a balance sheet, cash flow statement, and debt table is generally required on these deals. All of the deals I've seen were small enough that there is a tab for each asset level income statement or Argus output, all of which would flow into the three statement model. You'd have a debt tab that tracks upcoming maturities, and then you'd model a refinance based on this and make sure it's captured in the BS / CFS. I'm not sure how this works if you're working with a company with 100+ shopping centers or something, maybe there just a single tab that has the NOI for each property and then you cap it at the market cap rate?
Learning how to do one of these models is pretty daunting if you just look at the finished product, but I suggest starting small and making a very simple three statement operating model using a public reit's 10-k as a starting point. I'd recommend skipping some of the more complex accounting adjustments that you can't make realistic assumptions for. Then just start adding things to it, like an acquisition in year 3, a refi in year 4 and try to understand how all of these items would be flow through the three statements.
Everything above is referring to an entity level investment into a REIT. If you're looking at a take-private of a public REIT, I actually think that can be more straightforward. You're just buying the outstanding equity + a premium + any change of control costs + adjusting for debt and NWC to arrive at a net liquidation value. Don't have much experience there though
If anyone else has this type of experience here, let me know if I missed anything
This is one of the better posts I've ever seen on here. Thanks for sharing.
Thank you for the insights! This is a fantastic framework.
Is there any tendency for each player in REPE? Blackstone is doing both asset-level and corporate-level (or entity-level) deals. How about Starwood Capital, Brookfield?
Guess there may be some regional difference if we look deeper. IMHO, Blackstone in Japan / Asia tends to do basically asset-level deals.
Bump- Would love to know the answer to this as well
Awesome post
Thanks, very helpful.
"If the plan is to IPO, how big does the company feel they need to be to constitute a competitive offering (one that won't fail to secure anchor investors at real estate focused hedge funds and asset managers)?"
^ Got a quick question wrt this. If the IPO is too small, does that mean that the company won't be able to attract as much institutional interest as a bigger IPO?
Yes... you basically put my answer in question form
Bumping this - anyone have any detail on comp at shops that do Entity-level investments only? Seems like it should be higher than asset-level shops with similar AUM, but I may be wrong.
I’ve interviewed or have data points at a couple of the entity level shops. The answer is that they’re on the upper end of the spectrum along with reputable asset level shops. But they’re not going to blow you away or anything. $200-$250 for associates but I’ve also seen lower than $200
If you think about it, the business model is identical to asset level shops. They’re managing similar amounts of equity, investing similar levels of equity per year, and seeking similar return levels as any group that chases large single asset and portfolio deals.
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