RE Debt and Preferred Equity interview modelling test
I have been invited to a modelling test with a RE Debt MF and could use some help/tips.
I'm coming from an IB background and kinda stumbled across the position. It's a big name and what they do seems very interesting (it's not BX), so I thought I'd give it my best and see where it leads.
Just to provide a bit more colour, they do mostly mez and preferred equity, they originate debt (not acquiring existing), and underwrite anything anything in RE.
I have found a few RE models here, which have been very helpful. I've been familiarising myself with RE modelling, but all the models are for acquisitions. I've searched for RE Debt modelling topics, but there wasn't much.
They have't given any hints of what the modelling test will include. Only that it will be on excel (no ARGUS). I assume that I'll have to project cashflows, create a debt schedule, and assess the investor's ability to meet the interest and principal repayments (most likely bullet, since they do a lot of mez), calculate levered and unlevered IRR.
Is there anything I am missing? Can anyone provide further insights into RE Debt modelling and/or additional resources for practice?
I have experience modeling across the capital structure in RE, and IMHO if you can model the equity, debt will be a cinch (since modeling equity investments also requires modeling the debt). They will probably want to you to put together the cap stack and show relevant metrics for the sub-debt (DY, dscr, last dollar basis, etc). So long as the model is dynamic, you should be fine. As the great Michael Scott says, K-I-S-S. Keep it simple stupid.
You should include a mortgagability analysis at the bottom of your annual CF schedule. Use permanent financing assumptions (i-rate & amortization) to calculate the mortgage constant. Divide the NOI by an acceptable DSCR, let's say 1.3x, to determine how much DS the annual NOI would be able to support on perm financing. DS / constant = max loan amount. Show the percentage that the max loan amt = relative to total debt balance at the end of the year. Should be >= 100% at stabilization of the property.
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Interview question - perpetual preferred equity (Originally Posted: 01/19/2013)
Many PE shops seem to structure their equity investment as a perpetual preferred equity with quarterly divided. Preferred shares are convertible to common shares at any time. Why are the advantages to the PE shop for structuring such transaction? there are number of firms that use this transaction structure in most of their corporate buyout / carveouts. How does this affect the lbo model / statements?
Any thoughts are appreciated
conversion is standard and the dividend pays for the heavy expenses (dinners etc) and keeps the LPs happy!
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