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Michael Esser

on 20 February 2013

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What are we buying? Single-family homes for sale by homeowners.

Targeting top-end of middle-market.

Avg price $300k, living area 2,000 sqft, 3 bed, 2 bath, garden, garage.

Less competitive niche than apartment blocks or office towers due to low equity investment per home, long and expensive closing process, etc.

Supply: vast, even excluding foreclosures.

Demand: still low, due to economic uncertainty. When are we buying? March 2013 CEO to move to the US and start acquiring properties at pace of 12 homes/month.

Part-time employee already viewing properties. Where are we buying? Financial Assumptions Team Non-Executive Advisers Purchase Price per Square Foot
Rent per Month per Square Foot
Occupancy Rate
Home Appreciation Rate
Inflation Rate
Financing Rate Coral Gables:

Wealthy area 5 miles south of downtown Miami (15 minute commute).

Quiet, safe, family-oriented area with a vast supply of single-family properties.

Excellent offers in education and entertainment

Most severe home price contraction in U.S R2 Value Investment Residential Real Estate in Florida: In the Right Place at the Right Time Statement of Confidentiality and Non-Disclosure This document contains proprietary and confidential information. All data submitted to potential investors is provided in reliance upon the consent not to use or disclose any information contained herein except in the context of its business dealings with R2 Value Investment LLC. The recipient of this document agrees to inform its present and future employees and partners who view or have access to the document’s content of its confidential nature.

The recipient agrees to instruct each employee not to disclose any information concerning the document to others except to the extent that these matters are generally known to and are available for use by the public. The recipient also agrees not to duplicate or distribute or permit others to duplicate or distribute any material contained herein without R2 Value Investment‘s express written consent.

R2 Value Investment retains all title, ownership and intellectual property rights to the material and trademarks contained herein, including all supporting documentation, files, marketing materials and multimedia.

BY ACCEPTANCE OF THIS DOCUMENT, THE RECIPIENT AGREES TO BE BOUNDED BY THE AFOREMENTIONED STATEMENT. Executive Management Executive Management Non-Executive Advisers Expert in US Real Estate Why are we buying? How are we exiting? Expert in Private Equity Michael Esser is the co-founder of R2 Value Investment.
12 years work experience
- running small and medium sized businesses in Spain
- working for global investment banks in the United Kingdom
Management of c.a. 20 residential and commercial properties since 2005.
Master Degree in Business from London Business School and Columbia Business School.
Co-investor of 7.5% of fund’s equity. Hasan Shahid is co-founder of R2 Value Investment.
10 years work experience
- running his own information technology consulting firm
- purchasing a portfolio of multi-family homes in the U.S. and Canda
Master Degree in Business from London Business School and Columbia Business School.
Co-investor of 7.5% of fund’s equity. Tim Berry is founder and managing partner of Pennybacker Capital, a firm managing a $500m portfolio of real estate investments in Texas. Expert is US Legislation Expert in Florida Real Estate Florin Vasvari is an Associate Professor of Accounting at London Business School where he holds the London Business School Term Chair and a fellow at the Coller Institute for Private Equity. Alexander Reus, one of the two founding partners of Diaz Reus Attorneys, is one of the most respected and successful attorneys in Miami. William “Bill” Kerdyk, Jr. is the President/CEO of Kerdyk Real Estate, Inc., a multimillion dollar company specializing in commercial brokerage and property management in Coral Gables. Depth of Market: 1,301 Single-Family Homes for Sale in $200k- $400k range. Rental income yield 11%, following a home price contraction of 52% and a rent increase of 21% since 2007.
Inexpensive financing 3.5% 30-year fixed rate.
Population growth: Florida’s 1.89% population growth in the last 20 years is 73% above the US average of 1.09%.
Home ownership down from c.a. 70% to c.a. 65%.
Home affordability at all times high.
New household formation dropped 73% (from 1.5m households to 400k)
Attractive location for business (hub for Latin America) and pleasure (climate)
Scarcity of land as Miami surrounded by Pacific Ocean and Everglades. The exit strategy will be to sell the portfolio or the individual homes.

The investment period (2013-2015) is followed by a three year lock-up period (2016-2018).

By 2019, shareholders can exit the investment but will only receive their initial capital, plus 70% of the capital gain.

By 2019, the company will start exiting the investment by selling the portfolio or individual assets. How are we exiting? Exit scenarios 1 to 6 are based on the assumption that shareholders receive an annual dividend until the homes are sold; scenarios 7 to 12, assume that shareholders collect a dividend in 2016 and 2017 and then in 2019 receive the initial capital back as the firm increases the mortgages on the homes. Thereafter, shareholders would not receive a dividend until the homes are sold as cash flows would be allocated to interest expenses and debt reduction. Purchase price per square foot ($137) Rent per square foot per month ($1.26) Occupancy Rate: 93.4% Home Price Appreciation Rate: 4% Financing Rate: 3.5% The average price per square foot for single-family homes in Miami is $137.4, based on an analysis of 2,000 properties. The average top end of mid market home (4th and 5th percentile) is valued at $300,000; the percentile breakdown confirms that the assumption of $137 per square foot is reasonable for this market segment The average rent per month per square foot is $1.15 in Miami, based on the analysis of 500 homes.
Excluding the top end of the market, the average rent for mid-market properties is $1.28, which is where the firm aims to place its properties and slightly above the $1.26 of the forecast.

Alternative analysis of rental market for single-family homes in Coral Gables suggests rental income yields between 12% and 14%. The occupancy rate assumes a 5% vacancy rate, which is above the 4.5% national average, plus a 20% annual rotation of occupied properties. Assuming it takes one month to find a new tenant, the vacancy rate would raise to 6.6%. An average annual home price appreciation is slightly above the pre-bubble average: 1988 – 2012- 3.68% p.a.
1988 – 2001- 3.89% p.a. 10% deviation of initial 3.5% would only affect marginally IRR (+/- 0.45%). The 30-year fixed mortgage rate is at 3.5% and is unlikely to change until 2015 according to Federal Reserve statement. The most likely outcome is a net IRR to investors between 14% and 18% (142 of 350 scenarios). The probability of generating a net IRR to investors < 10% is 8.2% (18 of 350 scenarios). Internal Rate of Return The most important natural risk is a hurricane hitting Miami; home insurance policies include 1% to 2% hurricane deductibles, which limits the maximum financial loss to the range of $1.2m to $2.4m. Flooding is not a risk as the targeted area is 10 feet above sea level (map on the right). Risk Factors Flooding does not represent a serious hazard in Coral Gables according to the U.S. Governments flooding zone risk assessment. Fund Structure Equity: $30m
GP Mgmt Fee: 2.5%
LP Hurdle: 8%
GP Success Fee: 25%
Min. Investment: $3m Off Shore On Shore Home 1
Equity $75k
Mortgage $225 Home 2
Equity $75k
Mortgage $225 Home 3
Equity $75k
Mortgage $225 Home ...
Equity $75k
Mortgage $225 Home 5
Equity $75k
Mortgage $225 Key Take Aways US Economy to grow 2% & 2.8% in 2013 & 2014.
Homeownership rates are low.
New household formation rates are low.
US Unemployment to drop to 7% 2014.
Home affordability is close to all time high.

Attractive location for business (hub for Latin America) and leisure (climate, ocean).
Population growth in Florida 73% above the US average in the last two decades.
Scarcity of land as Miami surrounded by ocean and Everglades; new locations imply longer commutes. Strong ManagementTeam.
Tangible asset class.
Tax-efficient, transparent structure.
Investment pace flexible.
Cost savings opportunities (scale and liquidity).

Rental income yield 11%
Dividend yield 8% to 12%, once fully invested.
Financing rate at 3.5% for 30-year fixed mortgage.
IRR upside (most likely 14% to 18% net IRR to investors). Expert in US Real Estate Expert in Private Equity He teaches the Private Equity and Venture Capital and Financial Accounting courses to MBA and Executive MBA students in London and Dubai.

Professor Vasvari has been advising on private equity related issues several organizations, including a large fund-of-funds and a sovereign wealth fund. His main responsibilities include establishing the firm’s investment mandate, sourcing and negotiating investment opportunities, and team building.

Tim has earned an MBA at Columbia University and London Business School and previously earned a BBA and MPA in Accounting by the University of Texas at Austin. Reus is recognized as legal leader in Florida and earned a prestigious selection for his international legal work in 2011 by the Daily Business Review.

Reus’ partner Michael Diaz Jr. was selected one of the 100 most influential Latinos in Miami for his contribution to the economic, social and cultural development of the region. Expert in US Legislation Expert in Florida Real Estate He also serves as vice-mayor for the City of Coral Gables and is co-founder and Board Member of Bank of Coral Gables.

Bill is a Coral Gables High School graduate and holds a
Bachelor’s degree in Business Administration from Florida International University.
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