Sector and Asset Analysis Series

AGGIE INVESTMENT CLUB

WHAT TYPES OF REAL ESTATE?

Residential (1-4 “doors”) Duplexes, Triplexes, Quadplexes

Mildew trick

50% Rule: At least 50% of your rental income will be spent on expenses  So if you get $800/month in rent, $400 will be spent on expenses external to your mortgage/cost of capital

(DS)

This means that you have $400 left over to pay the mortgage and get your profit (CF)

2% Rule: Each month you should earn 2% on your investment. So if your house cost $50k, rent should be .02 * 50k = $1k  Both build confidence during acquisition phase to avoid “analysis paralysis”

Commercial (>= 5 “doors” or non-multi family classfi cation) Hospitality

Retail

Multifamily

Industrial

Special Purpose Hospitals and other Medical, Senior housing, Theaters, Churches, Agricultural

Brokerage Management

Asset Management vs Property Management

Finance Appraisal Consulting Development & Construction Corporate Asset Management Public Sector

CAREERS IN REAL ESTATE

WHO INVESTS IN REAL ESTATE?

Ind iv idua ls You & me

Users Corporations needing space 4 company

Other users (Famil ies in a residential homes)

Inst i tu t ions Pension Funds

ERIS A mandat ing i nc reased por t fo l i o d ivers ifi cat ion & encourag ing i nvestment i n RE equ i t i es ( s teady & p red ic tab le CFs)

REITs I n terna l Revenue Code rev i s ion exempt ing REITs earn ings f rom taxat i on at the corporate l eve l

Insurance Companies (Metl i fe, Prudential Etc.) S imi lar to pens ion funds

Banks and Savings & Loans (debt focus) Sav ings & Loans : Fi nanc ia l i nst i tut i on   that spec ia l i zes i n accept ing   sav ings  depos i t s and making  mortgage and other l oans .

Foreign Institutions Fore ign exchange rates [FX Rates] & Relat i ve i nterest rates between count r ies

FX Rate: rate at which one currency will be exchanged for another. It is also regarded as the value of one country's currency in terms of another currency.

Therefore, i f FX rates i nc rease i n Europe i n re lat i on to the U.S . ( I . e . Euro inc r. f rom $1 .1 to $1 .2 to the U .S . do l l ar ) , then U .S . RE becomes more appeal ing as a U .S . RE asset cost i ng $9mm dol l ars i s on ly wor th $7 .5mm Euros assuming you’ re l ook ing at a comparab le European p rop . that generates the same operat ing i ncome & has the same apprec iat i on potent i a l

Relat ive Int . Rates: When int . rates are h igher i n the U .S . than Europe, the h igher rates tend to depress U .S . RE p r i ces (b /c i t i nc reases cap rates whi ch decrease CRE p r i ces /va lues) whi l e l ower rates tend to infl ate p r i ces i n Europe making RE more appeal i ng i n the U .S b /c can acqui re at a depressed p r i ce .

Also, foreign RE may offer greater returns relative to risk or might reduce overall portfolio risk or hedge against political risk.

Int. rates comprise of the interest charged on top of principal pmt by banks lending money to those individuals looking to invest in RE

Private Funds (REPE)

REAL ESTATE INVESTMENTS: 4 QUADRANT INVESTING

CMBS: A type of mortgage-backed secur i ty (MBS) that is secured by the loan on a

commerc ia l property rather than res ident ia l property.

Lender has a l ien on the commercial property vs. a residential property

REIT: Type of secur i ty that invests in real estate through property (equi ty) or

mortgages on property (debt) and often trades on major exchanges l ike a stock.

Public Equity(REITS)

Private Equity

(Property)

Public Debt(CMBS)

Private Debt(Loans)Debt returns of income only (dividend or interest income)

Equity is income plus capital appreciation.

Diff erences

In the markets where they are traded Secondary markets where debt is traded

REIT markets segmented by property type

Appraisals

Large capital required

Low liquidity

Tax incentives Interest on debt & closing costs etc are tax-deductible

REIT tax incentives

Long Time Horizon Except REITs

Inflation Hedge

Long gestation period Economics during development

Your assumptions today may not materialize by time you finish your building

Sweat Equity Residential investing emphasis

WHY IS RE SPECIAL?(REAL ESTATE VS. OTHER

INVESTMENTS)

Utilitarian value: May pay more than a typical investor would i f i t provides

more ut i l i ty that is unique to your c ircumstance

Investment Value: Real Estate was late in adopting current fi nancial

theories ( I n v e s t m e n t Va l u e s i m i l a r t o i n t r i n s i c v a l u e )

Land Economics Principles and Valuation still in use: Appraisal Based

Cost to Construct Replacement Cost: The estimated cost to construct, at current prices (mkt prices), a building with utility equivalent to the building being

appraised, using modern materials and current standards, design, and layout

Income Approach A real estate appraisal method that allows investors to estimate the value of the property based on the income the property produces.

The income approach is computed by taking the NOI of the rent collected and dividing it by the capitalization rate (the investor's rate of return). It is most typically used for income producing properties and the formula is: Value= NOI/Cap Rate

Financial Theory now dominates with move to “Wall Street Players” such as REITs and Private Equity fi rms Discounted CF, IRR (unlevered/levered), NAV

RE Securit ies Valuation Methodologies: l i ke any other stock investment (Publ ic ) Dividend Discount Model (DDM)

Capital Asset Pr icing Model (CAPM)

Net Asset Value Per Share (NAV) - L ike Book Value

HOW IS REAL ESTATE VALUED?

STEPS IN THE INVESTMENT DECISION PROCESS

1) Estimate the stream of expected benefi ts• In essence, when you purchase a prop, you purchase a set of assumptions about the prop’s abil ity to

produce income over the proposed ownership period (CF’s & Reversionary CF)

• Market Research

2) Adjust for timing diff erences among expected streams of benefi ts fl owing from investment alternatives (Discount back)

(Sooner is typically better)—Depending on investors time preference of money• In general, the further in the future expected receipt of benefi ts (CFs) l ie, the less is their value

today • Due to discount ing of future CF’s – CFs further in future, more discount eff ect appl ied on those CFs

3) Adjust for perceived risk • Dealing w/ investors degree of certainty w/ their assumptions

• Reserves/cont ingency funds

4) Rank alternatives• Rank according to the relative desirabil ity of the perceived risk-return combos each alt embodies

• Most investors set a l imit at which they wil l not take on add risk no matter the return

Th i s i s a l l an ad ap ta t i o n o f capi ta l -budget ing techn iques (F INC 341)

REAL WORLD EXAMPLE

Argus: Typically from broker & used to drop CFs Argus generates into excel model Cap Rate: NOI/Value

Going in & Terminal/Reversionary Cap rate

MACRO NEWS UPDATES

Oil prices The Good: Retail, SFH The Bad: Existing Offi ce

Interest Rate Hikes The Good: Low inflation The Bad: RE Market as a whole (minus opportunistic shops)

Cap rate increases

Greece, Cuba, ChinaE-Commerce Trend

Retail

QUESTIONS / DISCUSSION

OIL AND GAS FINANCE

OVERVIEW OF OIL AND GAS

Comprised of hydrocarbons- contains hydrogen and carbon molecules

Originated from microscopic plants and animals living in ocean

Found inside rocks in formations called oil trapsOnce hydrocarbons are found, they are extracted and

transported to refineries and turned into the materials and energy we use every day

THREE MAJOR SECTORS

Upstream- Exploration and Production Onshore: Drilling underneath Earth surface Offshore: Drilling underneath sea bed

Midstream- Transportation Oil and gas are transported through pipelines from drilling

sites to refineriesDownstream- Refineries

Refineries convert and processes raw material to usable products

OIL MARKET IN THE PAST TEN YEARS

CAUSES FOR CURRENT LOW PRICES

SUPPLY/DEMAND RELATIONSHIP

U.S. domestic production has doubled over last six years, causing an oversupply of oil imports Fracking

Overproduction of oil by many countries U.S., Canada, Middle East

Economies of developing countries are weakening China’s economy slowed down, along with Russia, India,

and Brazil

OIL TRADING- FACTORS TO CONSIDER

Influences of supply and demand

Geopolitics OPEC (Organization of Petroleum Exporting Companies)-

Manages supply of oil in an effort to set price of oil

Infrastructure Changes/developments in pipelines

OIL TRADING

Futures Contract- An agreement to buy or sell a commodity at a pre-determined price in the future Anticipate price to go up or down and buy/sell a futures

contract accordingly

Three primary benchmarks for crude oil West Texas Intermediate (Mid-west and Gulf Coast of U.S.) Brent (North Sea) Dubai

Arbitrages and spread trading

ENERGY STOCKS

Upstream companies Direct relationship with oil price

Midstream companies Least dependent on oil price

Downstream companies Inverse relationship with price of oil

LEARN MORE

Oil 101 by Morgan Downey Must read for oil markets

Investopedia.com

Oil and Gas Journal- Ogj.com

POWER!

Electricity generation.Look around you… what “powers” the lights, the AC,

and the power to your computer that enables you to run excel models.

It is all around you…

WHAT IS POWER?

CoalNatural GasNuclearRenewables

WHERE DOES IT COME FROM?

“BASE LOAD” VS “PEAKING”

Megawatt… the most common unit used for generation. (equal to the power that could provide for 200-250 households)

Gigawatt… this one is less important. It is just a thousand megawatts

Heat Rate… effi ciency. (input energy/output power) lower numbers are better.

ISO/RTO… independent system operators or Regional Transmission Organizations.

BASIC TERMS

Day ahead Markets (DAM)… Off er a certain amount of generation the day before that you promise to produce. (based on forecasts)

Real-Time Markets (RT)… generate power in real time according to real time supply and demand.

BASIC TERMS CONTINUED

RTO/ISO

SUPPLY AND DEMAND!! The day consists mostly in forecasting demand and

analyzing possible supply and generation for the next day. Determinants of demand:

Weather Determinants of supply:

Its important to analyze the marginal units. Natural gas transportation. Pipeline congestion. Inclement weather causing outages Wind (especially in Texas) (wind credits exacerbate situation)

HOW DO YOU TRADE?

One of the single most important concepts is GRID RELIABILITY. This is electricity. It is what powers our hospitals and it isn’t

an option for the system to be unreliable.Very, very high volatility= All about getting consistent

Cash Flow Stay hedged (Heat Rate Call Options/HRCO) Commit to Day Ahead markets. Ancillary Services (small payment to commit to being able to

provide a in a certain time span in case you are needed)

IMPORTANT

You have generation in PJM, it is winter, and a cold front is sweeping through….

TRY IT OUT/SCENARIO ANALYSIS

Price would increase! This is because consumers would demand more

heating for their homes and offi ces due to the cold weather.

ANSWER

A natural gas tanker coming from Russia hits an iceberg and sinks….

TRY IT OUT/SCENARIO ANALYSIS

Prices would increase!This is because there would be less natural gas which

is a large source of power. Therefore less supply and the price must rise to compensate.

This would only be bad if you operated a natural gas power plant dependent on that gas.

ANSWER

A large nuclear generator experiences a meltdown. Ignoring the obvious hazard to everything in close proximity… what would occur with prices?

TRY IT OUT/SCENARIO ANALYSIS

Prices would rise!Lower supply in the market.As long as you are in a nuclear shelter…you would be

very happy.

ANSWER

There is a blizzard in Texas at 4am, and it snows so hard that roads are blocked…

TRY IT OUT/SCENARIO ANALYSIS

This was a trick question.Prices would actually fall.This is because of the fact that many business would

close so less power would be used. (houses run power no matter what, but business don’t)

Cold is not an absolute increasing factor. There is a point where more cold is a bad thing.

ANSWER

???

QUESTIONS?

SCIENCE!!!!!!

BIOTECHNOLOGY

WHAT IS BIOTECH?

INDUSTRIAL

AGRICULTURAL

MEDICAL

COMPUTATIONAL

RESEARCH PROCESS

FUNDING TIMELINE

HOW TO INVEST IN BIOTECH

POST IPO PERFORMANCE

FUTURE OF BIOTECH

Martin Shkreli is the founder and chief executive of Turing Pharmaceuticals, which raised the price of the drug Daraprim to $750 a tablet from $13.50

QUESTIONS?