MCN Posted April 11, 2018 Share Posted April 11, 2018 Hi all, I’m hoping to receive feedback on the following.. I have recently come across a somewhat unusual commercial real estate investment opportunity and was wondering what the curious minds here would make of it, in particular how to analyse it. I say unusual as it is more like an amortising bond or annuity type asset than a traditional piece of real estate. Essentially, the owner is seeking to sell 20 years of future rental payments of a real estate lease but retain the underlying fee/ freehold title of the real estate. As it is so unusual, I can’t be too specific with the details but they are as follows: Asset: 20 years real estate lease payments Location: Europe Asking Price: €1.2m Lease: Year 1 Pre tax net income €100k/yr, 20 year remaining with break option in 10 years, 0-5% annual increases depending on inflation The land houses critical infrastructure for the tenant, who has recently invested significant sums into the site, so it would seem that the tenant is not planning to leave any time soon. Tenant: Multinational corporate with multi Billion € balance sheet and BBB+ rating My main issues are- 1. How to value this? There is no residual value after year 20, so I imagine this is a straight forward dcf valuation. And, depending on the annual increase in the lease payments, the asking price seems to discount the cash flows at between 5.5% and 10.2%. However, how to factor in inflation risk? 2. There is no collateral if the lease fails or the 10yr break clause is triggered. How to hedge/ insure? 3. Liquidity. Non, pretty much locked in for the duration (unless it can be flipped?) Considering that the tenant’s long term bonds currently trade at a yield of 2.77% I’m wondering if this could be considered a cheap bond investment? I don’t like the idea of locking my money up for 20 years at a low yield so will most probably walk away but I am tempted to look into this further for any possibility of flipping to a bond investor. So I am wondering how would they look at something like this? Please feel free to throw rocks at this, all comments appreciated....Thanks! Link to comment Share on other sites More sharing options...
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