Seminar in real estate finance Real Estate Securities & Investments




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Seminar in real estate finance

Real Estate Securities & Investments

R E 388 – unique 03725

M W, 11:00 – 12:30, GSB 3.120



Spring 2015


Professor Greg Hallman

Office GSB 5.161

Office Hours TBD

E-Mail Greg.Hallman@mccombs.utexas.edu

Office Phone 232-6831 (but send email)

Course Web Page via Canvas

Teaching Assistant Chao Bian and Harvey Jing

Course Objectives

This course’s primary objective is to examine real estate securities and real estate private equity investing. Students will learn about the various debt and equity securities available to investors, and will also learn about real estate private equity investing. Through lectures, readings, cases, and guest speakers, students will learn the benefits and risk of the various forms of investing in real estate securities and real estate private equity funds.


The course begins with a study of real estate debt markets and real estate debt securities, MBS (mortgage backed securities) and CMBS (commercial mortgage backed securities). The primary focus is on the structure and cash flow characteristics of real estate debt instruments. We start by studying the primary residential mortgage market and the mathematics and finance of residential mortgage cash flows and pricing. We then move into the secondary market for mortgage funds with a study of simple pass-through residential mortgage pass-through securities. The problems of prepayment and default and the complications that prepayment and default introduces to the valuation of mortgage backed securities is analyzed. The prepayment problem in simple residential mortgage pass-through securities drove structuring innovation in the early days of the market and the creation of Collateralized Mortgage Obligations (CMOs). Following our study of the prepayment problem we go directly to a study of the creation, structure, and pricing of CMOs, including a discussion of mortgage strip securities (IOs and POs), simple sequential tranching, and specialized CMO tranches including PACs and Zs. Students will analyze and model the tranches of an actual $250 million Fannie Mae CMO (REMIC) as a case assignment. After our study of prepayment structuring in agency MBS, we will study tranching and securitization structures used in non-agency private label MBS. Private label MBS came to be dominated by subprime MBS, and we will spend considerable time studying the creation of subprime MBS, CDOs, and CDS, and the causes and catastrophes related to the subprime crisis. After working through the residential mortgage instruments we will go directly into our study of Commercial Mortgage Backed Securities (CMBS). CMBS are very similar in spirit and structure to MBS, but significant differences in both prepayment and default characteristics make CMBS an interesting twist on the original MBS model.
The second half of the course is dedicated to the study of real estate equity markets and securities, both public and private. We will study how real estate fits within a diversified investor’s portfolio, and the various alternatives an institutional investor has to invest in commercial real estate. We will spend several meetings discussing Real Estate Investment Trusts (REITs), including their structure, corporate governance, and valuation. We will also analyze alternative ways to invest in private equity in the real estate sector, such as commingled real estate funds and limited partnerships.

Materials - books

Required:



Mortgage-Backed Securities, Second Edition, Fabozzi, Bhattacharya, and Berliner, 2011, Wiley.

Liar’s Poker, by Michael Lewis, 1989 Penguin Books – required reading for the quiz is chapters 5, 6, and 7. It’s best to start with the last 6 paragraphs of chapter 4, when the mortgage desk is introduced.
Recommended source textbook (potentially useful or enlightening):

Real Estate Finance and Investments: Risk and Opportunities, Peter Linneman, Ph.D., Third Edition, 2011.
Course Requirements and Grading

Grades will be based on the student’s performance on one quiz (on Liar’s Poker), two tests (debt test and equity test), and cases. The weights on each component of the overall course grade are as follows:


Class Participation ongoing 5%

Liar’s Poker Quiz Wed, Feb 4 5%

CMO Case Due Wed, Feb 18 20%

First half Debt test Wed, Mar 4 30%

Lions Industrial Case Date TBD 10%

Second half Equity test Wed, May 6 30%


Make-up and extra-credit assignments are generally not possible. Your grade will be determined solely by the components listed above. If you fail to turn in the case assignment or the problem set when they are due you will not be able to make up the assignment or the points. Please don’t miss the quiz or the tests.

Schedule and Topics


MEETING

DAY

DATE

TOPIC

READING
















1

Wed

Jan 21

Syllabus and course overview and description




2

Mon

Jan 26

The Primary Mortgage Market – Players and Products, Mortgage Math

Fabozzi C1

3

Wed

Jan 28

Constructing RMBS, pooling mechanics, basic Ginnie pass-throughs - fixed income (FI) primer with a look at Duration and Convexity in basic FI and in MBS (the rub)


Fabozzi C2

4

Mon

Feb 2

Understanding and modeling prepayment and default risk


Fabozzi Cs 3&4

5

Wed

Feb 4

Liar’s Poker quiz at beginning of class

Structuring around prepayment risk with IOs, POs, and basic sequential tranching in Agency RMBS.

More advanced structuring including PACs and Zs.

Fabozzi Cs 5&6



6

Mon

Feb 9

Finish RMBS Agency prepayment structuring

Assign and discuss CMO structuring case


Fabozzi Cs 5&6

7

Wed

Feb 11

Structuring Credit Risk in Private Label MBS

Subprime mortgages, ABS, and CDOs




Fabozzi C8

8

Mon

Feb 16

Structuring Mortgage ABS (subprimes), the role of CDOs and CDS in the making of the subprime crisis, a close look at within-pool correlation, overview and history of subprime crisis and update on casualties (almost over, but not quite)


Fabozzi C9

9

Wed

Feb 18

CMO Structuring case DUE

CMBS – Intro, structure, market history and performance







10

Mon

Feb 23

More CMBS including default and performance history, CMBS 2.0 and 3.0, and synthetic CMBX





11

Wed

Feb 25

Valuation and Analysis of MBS and CMBS

Yield Measures, Z-spreads, OAS analysis, credit performance and modeling, the use of CDS, synthetic Markit products – construction and pricing







12

Mon

Mar 2

Review/overview debt material





13

Wed

Mar 4

Midterm – Debt Test (in-class test)















GLOBAL TRIP WEEK (March 9-13) and

SPRING BREAK (March 16-20)
















MEETING

DAY

DATE

TOPIC

READING
















15

Mon

Mar 23

Return and review debt test – final discussion of debt markets and securitization products





16

Wed

Mar 25

Real Estate equity product overview –

  • Public, liquid investment in REITs

  • Private Equity products and funds

  • A look at the accuracy of appraisals and relative public private pricing







17

Mon

Mar 30

REITs – Industry overview, property types, return history, risk and return characteristics





18

Wed

April 1

REITs – Valuation and analysis





19

Mon

Apr 6

Managing against a Benchmark – managing a REIT portfolio against a publicly traded benchmark, and an extension of the idea to managing a private real estate portfolio against a private NCREIF benchmark





20

Wed

Apr 8

Deal structures and equity sharing rules, aka cash flow waterfalls





21

Mon

Apr 13

Tim Berry, Pennybacker speaking on Real Estate PE





22

Wed

Apr 15

Real Estate Capital Stack





23

Mon

Apr 20

Real Estate PE cap stack case: Lions Industrial Trust

Work case in class with Joshua Brown, EVP at First Washington Realty; I-banker on this deal





24

Wed

Apr 22

Real Estate in a Mixed Asset Institutional Portfolio –

The use and effectiveness of real estate as a means of diversification and Sharpe ratio enhancement







25

Mon

Apr 27

speaker TBD








26

Wed

Apr 29

Real Options in Real Estate –

Thinking about the value of land in a a real options framework






27

Mon

May 4

Review/overview for equity test





27

Wed

May 6

Equity Test (in-class)






This equity schedule is subject to change to accommodate the availability of guest speakers. I expect to get these speakers, and I know I will cover the topics listed, but I can’t nail down exact dates until I have the speakers booked. Once I confirm speakers and dates I will get a finalized second-half schedule together.



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