Request: Insight for Upcoming Mid-Market RE IB Interview
I’d like to get some insight on a first round phone interview I have with a middle-market investment bank that is scheduled very soon. As such, quick response turnaround would be much appreciated!
The opportunity is for an analyst position within their real estate group located in New York. I'll be speaking with two VPs and one MD. The job posting notes very general responsibilities such as: “build financial models… pitch books…research companies…analyze business operating risks…control deficiencies” among other things. Having briefly spoken with one of the VPs, it was mentioned the role functions at a portfolio level (rather than asset level) and focuses on REITs and M&A.
I graduated from a top-30 undergraduate business school (ranking via Businessweek) on the west coast with an emphasis in real estate and have been working for one of the Big Four banks as an analyst in their commercial real estate group for just over one year now. My experience thus far has been in restructuring/modifying debt with single-asset entities with primary focus at the asset level. The position includes functions such as negotiations with borrowers, direct cap underwriting, working with outside counsel, monitoring property operations, and drafting underwriting memos/loan approval packages for credit.
Given my commercial banking/asset-level experiences thus far, I’ve been diligently working to educate myself on REITs (reading a REIT 10-k, Bruggeman & Fisher textbook and Merg. & Inq. articles), but would really appreciate any insight or recommendations you gentlemen may have to share in regards to how I should prepare.
Thanks in advance for your time and please feel free to PM if need be.
I'm on the debt side of a MM bank but work with our IB team from time to time. Technical questions are more likely be on corporate level rather than asset level, however given your background, they may not dive too deep into corporate financials. I would focus on having a story on how your asset-level expertise could benefit the team.
Also have a view on how rising interest rates (and cap rates) will impact REIT valuations. REITs are highly attractive to equity investors in a low interest rate environment, but less so in a rising rate environment. This is the main headwind in the industry. You should check out the NAREIT website if you haven't already. A lot of good REIT related information/news on there.
For what's it's worth, our IB group focuses 80% on equity issuances and 20% on m&a. I don't think the mid market guys do much m&a. Key Bank probably has the most, but I don't think m&a is a big part of the pie for them either.
If they ask you anything about modeling I would beat around the bush when it comes to "direct cap" modeling. This may lead them to believe that that you have limited experience with longer range projections which often involve determining assumptions that may not be taken into consideration with year 1 valuations (i.e. inflation factors).
Threads because I would love to work in REIB or REIT
@Dr. Barnaby Fulton and others…. I’m thinking out loud and trying to respond to some of the suggestions made earlier. If anyone is interested in critiquing them I’d appreciate it!
In regards to: “I would focus on having a story on how your asset-level expertise could benefit the team.” -Great suggestion as this is probably one of my central weaknesses. I’d imagine trying to argue that having a fundamental understanding of the asset (which would include understanding: location/visibility/access, highest & best use, market conditions, cost/timing to stabilize/lease-up, etc…) provides me with the ability to recognize overall operational risks (loss of tenants, unaccounted cap-ex, stabilization issues, etc…), which would ultimately effect portfolio FFO, valuation, dividends, etc… Does this seem like a reasonable argument? Any additional thoughts I can add to this? I’m not quite satisfied with the response myself… :/ lol
In regards to: “Also have a view on how rising interest rates (and cap rates) will impact REIT valuations” -I presume that since REITs payout 90% of their earnings which results in relatively low liquidity levels, securing and servicing debt is a large part and cost for their operations. As interest rates increase, their debt service costs go up which ultimately drives down the yield on their investments. If the interest rates went up high enough, they could instead turn to the equity markets (sell more stock or do an IPO) or sell assets to get cheaper capital that way, correct? Also, if cap rates go up, the value of their assets go down which would indicate a higher leveraged portfolio and make it difficult to acquire more debt?
@REValuation… thanks for the input. So your saying don’t hone in on explaining how much I know about direct cap valuation to where they think that’s the only valuation method I know…?
I also have a generally solid (and I use that term loosely) understanding of DCF models. I can walk someone through how to build one and I can build a basic one myself too, it’s just not 2nd nature to me since I don’t build them from scratch for my role, I just look over them in appraisals. I have an example of a model I’ve built from scratch but can’t figure out how to post a snapshot of it.
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