Professional Documents
Culture Documents
In
this
lesson
I'm
going
to
give
you
an
overview
of
real
estate
and
REIT
modeling,
and
explain
exactly
what
we're
going
to
cover
in
the
course,
how
we're
going
to
approach
it,
what
some
of
the
key
differences
are
between
real
estate
and
other
industries,
and
then
some
of
the
key
challenges
we're
going
to
face,
and
how
we're
going
to
deal
with
them,
and
go
through
everything
in
this
course.
So,
to
get
started,
first
we
want
to
define
what
exactly
we
mean
by
real
estate.
What
types
of
real
estate
we're
going
to
look
at.
What
the
two
major
categories
really
are,
and
then
the
subcategories
that
we're
going
to
spend
most
of
our
time,
in
this
course
focused
on.
So,
when
you
talk
about
real
estate,
there
are
two
ways
to
approach
it
from
the
modeling
and
valuation
angle.
The
first
method
is
to
look
at
individual
properties.
This
is
pretty
straightforward.
We're
talking
about
things
like;
offices,
hotels,
apartment
complexes,
storage
facilities,
shopping
malls,
and
then
you
have
more
specialized
properties,
such
as
nursing
homes,
that
are
in
the
health
care
vertical.
[1:00]
So,
these
are
individual
properties,
and
although
they
are
not
companies,
you
can
still
analyze
them
and
think
about
them,
as
if
they
were
companies,
assuming
that
the
purpose
of
these
properties
is
to
actually
generate
a
profit.
So,
within
this
area
we're
really
going
to
focus
on
the
first
three
here;
offices,
hotels
and
residential
complexes.
In
terms
of
our
focus
in
the
course,
we're
going
to
spend
some
time
going
over
how
to
construct,
and
develop,
and
then
ultimately
sell
an
office
complex.
Then
we're
going
to
go
over
how
you
acquire
and
renovate
a
hotel.
Then
the
residential
properties
are
going
to
come
into
play
when
we
look
at
our
REIT
modeling
there,
on
our
real
estate
investment
trust
modeling
later
on,
and
we're
going
to
look
at
a
company
that
aggregates
a
lot
of
individual
residential
complexes.
So,
that's
going
to
be
our
focus.
And
within
those
again,
even
though
they're
not
companies,
you
can
still
think
about
them
in
terms
of
revenue,
expenses,
how
much
in
operating
income
they're
generating
and
other
metrics
like
that.
[02:00]
http://breakingintowallstreet.com
Even
though
they're
not
companies,
you
may
still
have
to
take
on
debt.
You
may
still
have
to
raise
equity
to
finance
the
acquisition
or
the
renovation
or
the
construction
of
these
properties.
So
yes,
they
are
not
companies
but
the
way
we're
going
to
analyze
them
is
through
the
lens
of
how
they
compare
to
actual
companies,
and
how
they
compare
to
what
you
do
in
corporate
finance.
Now
when
you
move
beyond
that,
as
I
just
mentioned,
you
get
into
the
level
of
real
estate
investment
trusts,
otherwise
known
as
REITs.
Now,
I'm
not
going
to
go
over
all
the
requirements
here,
and
what's
involved
and
what
constitutes
a
REIT.
But
the
basic
idea
for
REITs
is
that
they
aggregate
all
these
individual
properties.
So
in
a
sense,
they're
sort
of
like
private
equity
firms,
but
for
real
estate
rather
than
for
companies.
So,
for
example,
you
might
have
a
real
estate
investment
trust
that
buys
a
lot
of
office
complexes,
or
a
real
estate
investment
trust
that
buys
a
lot
of
hotels,
or
a
lot
of
apartment
complexes,
and
then
they
hold
on
to
these
assets
for
a
while.
They
develop
new
assets.
They
start
the
construction
of
new
assets,
as
well.
They
improve
the
assets
they
have,
and
then
over
time
they
sell
them.
And
then
they
go
on,
and
buy
new
assets,
keep
selling
them,
and
keep
buying
new
assets,
over
time.
[3:00]
Within
this
category,
there
are
a
couple
of
different
types
of
REITs.
The
first
major
division
is
between
equity,
mortgage,
and
hybrid
REITs.
Equity
REITs
are
pretty
straightforward.
These
are
simply
companies
that
simply
buy
and
sell
individual
properties,
also
improving
their
properties,
renovating
them
over
time.
Mortgage
REITs
differ
because,
rather
than
investing
directly
in
properties
like
that,
instead
they
simply
invest
in
mortgages
that
these
properties
have
associated
with
them.
So,
let's
say
that
you
as
a
homeowner
go
in
and
buy
a
house.
You
take
out
a
mortgage
to
buy
the
house.
There
might
be
a
real
estate
investment
trust
that
invests
in
mortgages,
and
that's
their
entire
business
model.
So,
whereas
an
equity
REIT
will
earn
most
of
its
revenue
from
rent,
from
offices
or
apartments;
or
in
the
case
of
hotels
from
guests
paying
the
nightly
rate
to
stay
there;
a
mortgage
REIT
by
contrast,
is
going
to
earn
most
of
its
revenue
from
the
interest,
on
the
mortgages
that
it
has
invested
in,
also
from
people
paying
back
their
mortgages.
[4:00]
http://breakingintowallstreet.com
Also,
from
possibly
fees
people
pay
on
those
mortgages,
and
so
on.
Then
there's
a
third
category
which
is
called
hybrid,
and
these
types
of
REITS,
actually
combine
both
equity
and
mortgage,
and
they
buy
and
sell
individual
properties,
but
then
they
also
buy
and
sell
mortgages
on
those
properties.
So,
those
are
the
three
major
categories
of
REITs.
And
then,
within
that
you
can
also
have
different
categories,
depending
on
what
the
REITs
themselves
actually
invest
in.
So,
some
real
estate
investment
trusts
invest
only
in
offices,
or
in
industrial
complexes.
Some
focus
on
hotels,
some
focus
on
residential
complexes,
some
focus
on
storage
facilities,
some
focus
on
shopping
malls,
some
focus
on
health
care
and
more
specialized
industries.
Like
the
nursing
home
example,
I
just
mentioned
before.
So,
you
have
their
investment
strategy
what
type
of
industry
they
want
to
focus
on,
whether
it's
offices,
hotels,
residential
and
so
on,
and
so
by
combining
these
two
you
can
classify
REITs
by
whether
they're
equity,
mortgage
or
hybrid,
and
then
by
the
subsector
within
real
estate
that
they
actually
invest
in.
[5:00]
Now
in
this
course,
we're
going
to
be
focused
on
equity
REITs
for
the
most
part.
The
reason
being
that,
equity
REITs
comprise
the
vast
majority
of
what's
out
there
on
the
stock
market,
in
pretty
much
any
country
that
actually
has
REITs.
They're
the
most
common
in
the
US
by
far,
but
they
do
exist
in
many
other
countries
as
well,
and
no
matter
where
you
look
equity
REITs
tend
to
dominate
what
is
out
there
on
the
public
markets.
So,
that's
the
one
that
we're
going
to
be
focused
on
in
this
course.
So
now
that
we've
been
over
the
major
categories
of
real
estate,
how
exactly
is
it
different?
What
are
the
differences
that
we
look
at
when
we
compare
real
estate
and
REITs
to
normal
companies?
So,
on
the
real
estate
development
side,
looking
at
individual
properties,
one
of
the
key
differences
here
is
that
it's
much
more
granular,
than
what
you
see
for
the
standard
company
that
you
go
and
model.
Now
when
you
look
at
a
normal
company,
you
might
look
at
their
revenue
growth,
their
EBITDA
margins
and
so
on,
their
working
capital
requirements,
and
it's
a
very
high-‐level
overview,
because
you
don't
usually
get
into
the
individual
stores
they
have,
or
the
individual
customers,
http://breakingintowallstreet.com
or
expenses
for
very
granular
items
like
advertising,
or
promotional
materials
or
anything
like
that.
[06:00]
But
when
you
look
at
individual
properties,
whether
you're
dealing
with
offices
or
hotels
or
apartments,
for
example,
you
get
into
very
granular
detail,
here.
You
look
at
how
many
floors
the
building
has.
You
look
at
how
many
square
feet
or
how
many
square
meters
it
takes
up.
You
look
at,
for
example,
how
many
parking
spaces
it
has,
how
many
floors
the
parking
complex
has.
You
look
at
how
many
elevators
it
has,
and
you
look
at
how
much
all
this
costs.
So
you
get
into
a
lot
of
granular
detail
that
you
just
never
normally
look
at,
in
the
scope
of
normal
investment
banking
The
other
difference
on
the
real
estate
development
side
is
that
when
you're
modeling
the
construction
of
a
new
complex,
a
new
office,
a
new
apartment
complex,
and
so
on
it's
sort
of
like
a
start-‐up
meets
an
LBO.
What
I
mean
by
this
is
that
with
a
leveraged
buyout
transaction,
a
private
equity
firm
goes
in
and
buys
a
company
using
debt
and
equity,
similar
to
buying
a
house,
a
down
payment,
and
then
taking
out
a
mortgage
on
a
house.
[7:00]
Well,
with
real
estate
development
it's
the
same
thing.
You're
always
going
to
use
a
combination
of
equity
the
down
payment,
and
then
taking
out
debt
from
third
party
investors
to
finance
the
transaction,
to
finance
the
construction
of
your
new
real
estate
property.
But
the
difference
is
that
when
you're
making
a
new
property,
when
you're
developing
a
new
property
like
this,
it's
not
like
a
normal
company
where
when
a
PE
firm
goes
in
and
buys
them,
they're
already
operational,
they
already
have
revenue,
and
they
already
have
profit.
They
have
nothing.
You
have
nothing
when
you
first
start
constructing
a
property.
And
so,
over
time
you're
going
to
attract
tenants.
You're
going
to
attract
customers
if
it's
a
hotel,
for
example.
And
you're
going
to
build
up
your
revenue
and
your
expenses
over
time.
But
when
you
first
start
out,
you
literally
have
nothing,
and
it
takes
a
very
long
time
to
actually
develop
it,
and
to
start
generating
profit,
with
the
property
that
you're
creating.
So
in
a
sense,
it's
sort
of
like
looking
at
an
LBO,
but
then
applying
it
to
a
start-‐up,
and
to
assume
that
the
company
is
really
starting
from
nothing,
and
then
developing
everything,
over
time.
[8:00]
http://breakingintowallstreet.com
Now,
in
the
real
estate
investment
trust
side,
a
couple
of
the
key
differences
here.
First
off,
it's
asset-‐centric.
So,
unlike
say,
a
consumer
company
or
a
retail
company
or
a
technology
company,
those
types
of
companies
are
very
focused
on
individual
product
sales
to
customers,
for
the
most
part.
So,
the
key
metrics
there
are
usually
not
related
to
the
balance
sheet
of
the
company.
Usually
you're
looking
more
at
revenue,
at
expenses,
things
like
that.
But,
with
real
estate
investment
trusts,
remember
they
just
aggregate
all
these
individual
properties.
So,
you're
not
going
to
be
looking
at
revenue
in
the
sense
of
projecting
a
revenue
growth
rate.
What
you're
going
to
do
instead,
is
look
at
how
many
assets
they
have.
How
much
are
they
buying
each
year?
How
much
are
they
selling?
How
much
are
they
disposing
of?
How
much
are
they
renovating
each
year?
How
much
are
they
developing?
How
much
are
they
creating
each
year?
So,
you
have
to
look
at
these
types
of
metrics,
and
then
look
at
how
much
in
profit
all
these
different
types
of
assets,
are
actually
going
to
be
generating
over
time.
And
so,
that's
how
you
really
go
about
projecting
what
a
real
estate
investment
trust
will
look
like
going
into
the
future,
unlike
a
normal
company
where
you
get
a
very
high-‐level
overview
with
revenue
growth,
margins
and
so
on.
[9:00]
With
real
estate
it's
all
about
looking
at
the
individual
properties
that
they're
buying,
selling,
improving,
developing
each
year,
and
then
aggregating
those
together,
to
get
a
picture
of
what
revenue
and
expenses
look
like,
for
the
real
estate
investment
trust.
Another
difference
with
REITs
is
that
in
pretty
much
all
countries
they
exist
in,
they
have
a
requirement
to
issue
a
certain
amount
of
dividends
each
year.
In
the
US,
for
example,
most
real
estate
investment
trusts
have
to
issue
90.0%
of
their
taxable
income,
taxable
net
income,
as
dividends
each
year,
in
order
to
continue
qualifying
as
real
estate
investment
trusts.
What
this
means
is
that
they
save
up
very
little
cash,
over
time.
If
you
think
about
what
a
normal
company
does
they
may
issue
dividends,
but
there's
no
requirement
that
they
have
to
issue
a
certain
amount.
There
is
a
requirement
for
some
industries,
for
example,
commercial
banks
in
the
sense
that
they
cannot
issue
over
a
certain
amount.
But
in
real
estate,
it's
kind
of
the
opposite
they
have
to
issue
at
least,
a
certain
amount
in
dividends
each
year.
[10:00]
http://breakingintowallstreet.com
What
this
means
is
that
they
have
very
little
cash
flow
available
to
buy
properties,
to
develop
new
properties,
and
so
on.
And
so,
they
are
constantly
issuing
debt.
They
are
constantly
issuing
equity.
They
are
constantly
disposing
of
properties,
and
then
acquiring
new
properties.
Sometimes
if
they
need
extra
cash
flow,
they
may
have
to
sell
a
property
to
get
it,
if
they
cannot
issue
debt
or
equity.
So,
they
are
very
acquisitive.
They
have
a
lot
of
acquisitions
and
dispositions
going
on
each
year.
They
are
issuing
debt
and
equity
all
the
time.
For
normal
companies
these
are
really
considered
one-‐time
events,
but
for
real
estate
investment
trusts
these
are
more
like
recurring
events
that
happen
each
year.
And
so,
when
you
project
them,
when
you
look
at
them
in
a
model
you
have
to
take
into
account
all
of
this,
and
assume
that
they're
going
to
be
doing
more
and
more
of
this
over
time.
And
then
finally,
a
lot
of
the
terminology
and
the
key
metrics
for
real
estate
investment
trusts
are
different.
If
you've
been
through
the
other
industry-‐specific
modeling
courses
on
this
site,
you're
used
to
this,
and
you're
used
to
some
of
the
other
key
differences
that
you
commonly
see
here.
But
just
as
with
other
industries,
there's
a
lot
of
jargon
to
get
to
know
with
real
estate.
[11:00]
The
key
metrics
are
all
different.
You
can
look
at
things
like
revenue
growth,
EBITDA
margins,
and
so
on
for
real
estate
investment
trusts,
but
they
are
not
the
most
meaningful
metrics.
So,
there's
a
whole
set
of
other
metrics
and
terminology
you're
going
to
need
to
learn,
if
you
want
to
analyze
both
individual
properties
for
real
estate,
and
then
also
real
estate
investment
trusts.
So,
what
are
the
key
challenges
we're
going
to
have
to
overcome,
in
order
to
create
this
course,
and
to
go
through
and
create
models
for
everything
here?
Well,
on
the
real
estate
development
side,
one
of
the
key
challenges
here,
will
be
to
determine
the
proper
timing
for
everything,
and
the
proper
cost
of
everything.
I
mentioned
before
that
it's
much
more
granular
than
what
you
see
for
normal
companies.
And
so,
what
that
means
is
that
you
have
to
sanity
check
everything,
and
tie
this
together
and
make
sure
that
your
costs
on
a
per
square
foot,
or
a
per
square
meter
basis
are
correct
and
reasonable,
given
the
market
that
you're
operating
in.
I
also
mentioned
before
that
it
takes
time
to
develop
new
properties,
to
renovate
properties.
[12:00]
http://breakingintowallstreet.com
And
so,
we're
going
to
have
to
go
into
more
granular
detail
here,
and
look
at
this
in
terms
of
months
required
to
complete
certain
aspects
of
the
construction
of
the
property.
It's
not
terribly
difficult
conceptually
to
do
that,
but
it
is
a
lot
more
detail
than
you're
used
to
seeing
in
normal
models.
Another
difference
is
that
with
real
estate
development,
debt
and
equity
are
used
a
little
bit
differently
than
they
are
for
normal
companies,
and
the
way
they
play
out
in
the
model
is
a
little
bit
different
from
what
you've
seen
if
you've
only
looked
at
corporate
finance,
and
only
looked
at
leveraged
buyouts,
and
debt
models
for
those,
before.
What
I
mean
here
is
that
with
real
estate
development,
generally
what
happens
is
that
as
the
costs
come
up,
so
as
they
have
a
requirement
to
spend
a
certain
amount
to
excavate
or
to
develop
a
property
or
to
buy
concrete
or
something
like
that,
they
will
draw
on
the
equity
they
have
first.
After
they've
exhausted
the
supply
of
equity
that
investors
have
given
to
them,
then
the
developers
are
going
to
start
drawing
on
debt,
and
then
you're
going
to
start
seeing
debt
being
used
in
the
construction.
[13:00]
But
it's
a
little
bit
different
from
normal
companies,
in
an
LBO
for
example,
where
you
draw
on
100%
of
the
debt
and
equity
all
at
once.
With
real
estate
development,
it's
more
of
a
gradual
process,
and
you
draw
on
these
over
time,
as
you
need
them,
instead
of
drawing
on
everything,
100%
of
the
debt
and
equity
all
at
once,
as
you
see
in
a
typical
LBO
model.
Now,
on
the
real
estate
investment
trust
side,
one
key
challenge
will
be
to
estimate
the
assets.
What
I
mean
by
this
is
estimating
how
much
they're
actually
buying.
How
much
they're
selling.
How
much
they're
developing.
How
much
they're
renovating
and
so
on,
each
year.
This
sounds
straightforward,
but
the
way
that
many
real
estate
investment
trust
filings
are
set
up,
it
makes
it
very
difficult
to
actually
see
what's
going
on,
and
to
accurately
assess
on
an
ongoing
basis
about
how
much
of
this
they're
doing
each
year.
So,
to
estimate
this
we're
going
to
have
to
look
at
not
only
their
filings,
but
also
investor
presentations
and
equity
research,
and
other
sources,
and
sort
of
triangulate
to
come
up
with
reasonable
numbers
for
their
assets.
[14:00]
http://breakingintowallstreet.com
And
then
also
how
much
in
profit
and
how
much
in
terms
of
gains
and
losses
on
sales,
for
example,
their
assets
and
the
asset
sales
are
actually
generating
each
year.
And
then
finally,
there's
a
lot
of
tricky
accounting
when
it
comes
to
real
estate
investment
trusts.
We're
going
to
see
topics
like
discontinued
operations,
for
example,
that
you've
probably
not
seen
before,
or
at
least
not
been
exposed
to
too
much
in
the
past.
If
you
look
at
even
something
simple,
like
the
cash
flow
statement
of
a
real
estate
investment
trust,
there
are
a
lot
of
unfamiliar
items
on
there
that
you've
probably
not
seen
before.
So
we're
going
to
go
through
that
in
detail,
and
look
at
what
all
these
different
items
mean.
The
way
that
the
corporate
structure
and
the
legal
structure
of
these
trusts
is
set
up,
also
makes
it
difficult
to
analyze
what's
going
on
sometimes,
and
also
makes
the
accounting
extra
tricky.
Because
if
you
have
an
operating
partnership
and
then
a
trust
that
owns
the
operating
partnership
or
vice
versa,
it
can
get
very
confusing
determining
exactly
how
much
it's
worth,
and
also
how
the
accounting
for
many
of
these
items
actually
works
for
REITs.
[15:00]
So,
what's
our
plan
of
attack
for
this
course?
First
off
we're
going
to
start
with
a
few
overview
lessons.
After
this,
where
we
go
into
the
key
terms
that
you
need
to
know
for
real
estate
development,
and
also
for
REITs,
we’re
going
to
look
at
some
simplified
financial
statements
for
REITs,
and
see
how
individual
properties
can
be
aggregated,
and
how
individual
property
sales,
acquisitions
and
so
on,
can
tie
together
to
form
the
financial
statements
for
a
REIT,
as
well.
After
that,
we're
going
to
look
at
the
office
development
and
sale.
We're
going
to
go
into
real
estate
development
modeling
here,
and
look
at
how
you
might
model
out
the
costs
and
the
timing
associated
with
an
office
development,
and
then
what
kind
of
return
you
can
expect,
when
you
go
and
sell
this
office
at
some
point
in
the
future.
Then
on
the
real
estate
development
side
once
again,
we're
going
to
look
at
a
hotel
acquisition
and
renovation,
and
see
how
much
it
would
cost
to
actually
acquire
a
hotel,
how
much
it
would
cost
to
renovate
it,
how
to
think
about
the
income
statement,
and
the
profit,
and
the
revenue
of
a
hotel
versus
what
we
saw
for
the
office
development
and
sale
before.
[16:00]
So,
we're
going
to
look
at
that
in
detail
and
again
look
at
the
type
of
IRR,
or
internal
rate
of
return
that
investors
could
expect
when
they
acquire,
and
renovate,
and
sell
a
hotel.
http://breakingintowallstreet.com
Then,
we're
going
to
get
into
the
REIT
side
and
first
look
at
an
operating
model.
We're
going
to
look
at
a
company
called
Avalon
Bay,
which
is
a
residential-‐focused
REIT
that
buys
apartments
and
multi-‐family
complexes.
We're
going
to
see
how
to
estimate
the
assets
in
their
portfolio,
how
to
estimate
how
much
they're
buying,
selling,
developing,
re-‐developing
and
so
on
each
year,
how
much
profit
all
that
is
generating,
and
then
how
to
link
together
and
estimate
the
three
statements,
and
also
how
the
debt
schedules
for
a
REIT
work.
Those
can
be
a
little
bit
more
complicated
than
what
you
see
from
normal
companies
as
well,
so
we'll
spend
some
time
delving
into
that.
And
then
we'll
conclude
with
a
REIT
valuation.
We're
going
to
look
at
how
to
actually
value
Avalon
Bay.
We'll
go
through
all
the
different
methodologies
that
you
see
for
REITs.
Public
company
comparables,
precedent
transactions,
same
as
for
more
normal
companies,
but
you
look
at
different
metrics
and
different
valuation
multiples.
[17:00]
We're
also
going
to
look
at
a
DCF,
a
dividend
discount
model,
something
called
a
net
asset
value
model,
and
then
also
something
called
a
replacement
value
or
replacement
cost
method,
specifically
for
valuing
real
estate.
So
that's
our
plan
of
attack
for
this
course.
As
you
can
see,
there's
quite
a
lot
here.
We're
going
to
cover
quite
a
few
different
topics
ranging
from
overview,
and
the
high-‐level
thinking
behind
REITs,
to
real
estate
development,
real
estate
acquisition,
renovation,
selling
real
estate,
and
then
looking
at
real
estate
investment
trusts,
which
aggregate
everything
together.
So
now
that
we've
been
over
that
we're
going
to
jump
into
the
first
topic
here,
which
is
to
go
over
some
of
the
key
terminology
that
you
need
to
know
for
real
estate
development.
After
that
we'll
look
at
an
overview
of
real
estate
development,
a
simplified
example
and
then
we'll
get
into
an
overview
of
REITs,
and
some
of
the
key
metrics
associated
with
them.
http://breakingintowallstreet.com