What financial modelling is done in a RE debt fun?

Hi, was wondering what type of modelling would be required for a real estate debt fund that does all sorts of investments from lending loans/development finance/mezzanine etc..

Also was wondering what sort of hours to expect in this type of role at one of the largecap PE funds?

thanks

 

Typically if you're talking just a Pref/Mezz loan, it's as simple as building out a normal financial model, getting to cash flow available before debt service, then incorporating your senior debt table, then running the remaining cash flow through another debt table for pref/mezz. The emphasis of the analysis is does the debt service cover with an acceptable buffer at relatively stressed assumptions. Little different than building models when you're the common equity because in those cases every little facet of your business plan that adds or subtracts a penny off of cash flow is going to affect your IRR. With debt you typically just take a T-12, assume super modest growth rates and exit caps and then look for a certain minimum DSCR and reversionary payoff ratio. It's sort of a binary analysis because it's a fixed income investment and if the deal isn't going to cover on paper you're just not going to do it period.

When you start getting into hybrid deals and/or A/B notes the execution and legal process is typically what gets trickier but the modeling is all the same.

 
Most Helpful

Depends entirely on the transaction. If a reputable debt broker is involved, you’ll often get a good quality model with the majority of flexibility / outputs required. If it’s a bilateral negotiation with a less sophisticated sponsor, it may just be a simple cash flow. Then there’s other factors like how hairy the deal is, how complex the capital structure is, what level of leverage is being sought etc.

Fund I’m at invests across the capital structure, and generally speaking if I need to build my own model for a new transaction I’ll just take a previous model from the same asset class and adjust it accordingly. Only real difference is how many layers are needed in the cash flow waterfall, I.e. are you just modelling down to a senior debt tranche, or are you in the equity and have to model out the whole cap structure above.

For hours, if you’re looking at vanilla lends and getting good quality info it can be pretty light. If you’re working on complex deals with patchy info it can get heavy. Given large caps generally have a fairly high minimum ticket size requirement, particularly if they’re leveraging their position, I would assume this comes with better quality info from more sophisticated sponsors / brokers, which helps reduce the hours.

 

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