Glossary for Investors
Assets Under Management (or “AUM”) refers to the total market value of investments that an advisor, investment management firm, real estate developer, fund, or other entity that manages invested capital handles on behalf of investor customers. The volume of assets under management varies substantially across the investment management space, from local RIAs who may manage hundreds of thousands of dollars on behalf of a handful of clients, to national and transnational institutional asset managers, such as Blackstone, with over $500 billion in assets under management. Assets under management for any particular entity/customer relationship may also refer to any number of asset classes – from a single type of investment to an entire portfolio.
In many cases, fee structures are determined by volumes of assets under management: a higher AUM for any particular customer will result in a lower tier of fees. This tends to be the case with mutual funds, roboadvisors, and stock trading platforms. This is not always the case, however.
Investors may judge quality of an asset manager by total AUM, though assets under management alone are not purely a measure of manager skill – market conditions or asset class dynamics may also factor into total AUM, and historical returns provide a better measure of asset manager quality. Statistics on EquityMultiple’s total assets under management and portfolio performance can be found on our Track Record utility. More information on how EquityMultiple’s Asset Management Team operates as a steward of capital can be found here.
Accrued interest is the interest on a loan accumulated over a period of time either as an expense (for the borrower) or revenue (for the lender) and paid at maturity or final payoff.
Key Takeaways:
- Accrued interest is a general finance concept. In real estate, it applies mostly to debt and bridge financing instruments.
- The concept is important to consider for individual investors, as it carries implications for cash flow timeline.
- In the case of EquityMultiple’s investments, accrual usually takes place on a monthly basis over a period of 9 to 36 months depending on the term of the investment.
In the case of some real estate debt instruments and other bridge financing, it can provide the borrower with flexibility – with respect to the repayment schedule – while offering the lender or investor a more attractive total return. Many of EquityMultiple’s preferred equity investments offer both a current preferred return and a total, accrued return, which effectively functions as accrued interest.
Accrued Interest – What it Means for Investors
The period of time in which interest accrues is a critical detail, both for lenders (investors) and borrowers. A feature of some single-family home mortgages is accrual of interest over the each day of a standard monthly billing period; timely monthly payments in this case save the mortgage borrower interest that would otherwise accrue throughout the month. In the case of EquityMultiple investments, the accrual typically takes place over the course of the term, and is assessed to the borrower (and delivered to investors) as a form of accrued return during the latter periods of the investment or as a single distribution at exit.
Like IRR, “accrued interest” is a term used generally throughout the realm of finance, including in reference to the bond market. In real estate, the term carries particular relevance, applying most heavily to debt and bridge financing instruments. It is an important concept for individual investors to understand, as it pertains to the cash flow profile of the investment. In our investor documents, we will explicitly call out the breakdown and schedule of current distributions versus accrued interest.
For more on accrued interest and accounting principles, please refer to this article.
Investment categories other than traditional securities or long-only stock and bond portfolios; they include hedge funds, venture capital, private equity, and real estate. Alternative investments often employ strategies typically unavailable to long-only managers, such as the use of derivatives, the ability to short, and the ability to hold illiquid assets.
Alternative investments tend to be less liquid, exhibit lower correlations with public markets, and are generally constituent of less efficient private markets.
Investments offered through real estate platforms like EQUITYMULTIPLE, or equity crowdfunding platforms, are typically regarded as Alternative Investments.
For further discussion of alternative real estate investments, please refer to this article.
In investing, alpha (α) refers to the return on investment beyond the expected rate of return. Also called the active return, this is often attributed to an investment manager’s skill, being the result of active management rather than market conditions.
The benchmark used for alpha valuation is calculated using a capital asset pricing model (CAPM), which projects the potential returns of an investment portfolio. Alpha is then calculated using:
Alpha = (End Price + Distribution per Share – Start Price) / Start Price
Alpha is typically denoted as a number referring to the percentage points above or below the benchmark (+2.0 indicates returns 2% higher, while -4.0 indicates returns 4% lower). An alpha of 0 would indicate a portfolio performing in line with the benchmark index, lacking any additional value from a portfolio manager. Investors should be wary of fees when choosing advisors, as a return with an alpha of 0 is a net loss for the investor after fees. Similarly, when fees exceed positive returns, investors also earn less than the normal market rate.
Alpha and Beta
Alpha and beta (β) are both measures of past performance as well as being technical investment risk ratios, with other popular metrics being R Squared, standard deviation, and the Sharpe ratio. All five indicators are used in Modern Portfolio Theory and in determining the risk-return profile of a portfolio.
While alpha examines the active return of a portfolio, beta accounts for systematic market risk and volatility. Alpha indicates how well an investment has performed in relation to the benchmark market index, while beta indicates how volatile an investment is compared to the overall market.
Beta is used by investors when deciding if an investment’s volatility is worth its risk. With a baseline of 1 indicating a correlation directly with the market, less than 1 has a relatively nonvolatile price and greater than 1 is a relatively volatile investment.
Beta= Covariance of Asset’s Return with Market’s Return / Variance of Market’s Return
Alpha in Real Estate
While commonly used in evaluating stocks, this concept is extensible to real estate investing as well. At a portfolio level, diversification is key to generating outsized returns, as it balances risk, and a real estate allocation can provide this diversification into alternative assets. At an individual investment level, savvy investors can generate alpha through skilled asset management.
Returns for private, illiquid real estate depend on skill in asset management and discovering value that stems from market inefficiencies: entering into a market or submarket that is undervalued; acquiring a property at below-market value; leveraging superior scale and operational capability to update multi-unit properties and bring rents to market rate; introducing new amenities or technology; or some combination thereof.
Additionally, values of private real estate assets tend to be less responsive to market shocks (particularly in certain real estate asset classes, like self-storage or industrial). In other words, private-market real estate carries a greater potential for achieving alpha and entails a lower degree of systematic risk than is generally observed in public asset markets.
The Bottom Line
In short, alpha is a measurement of an investment that has managed to beat the market return over some period, compared against a benchmark of performance and as the result of a particular strategy, trader, or portfolio manager. For more on the topic, please read this current article.
An annual percentage rate (APR) is the annual rate charged for borrowing or earned through an investment, and is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction but does not take compounding into account. As loans or credit agreements can vary in terms of interest-rate structure, transaction fees, late penalties and other factors, a standardized computation such as the APR provides borrowers with a bottom-line number they can easily compare to rates charged by other lenders.
Returns on debt deals offered through EQUITYMULTIPLE are typically quoted in APR, and are net of any fees from EQUITYMULTIPLE or the originating lender.
Ancillary tenants are smaller tenants of a shopping mall which occupy less space and pay a higher rent rate.
The anchor tenant of a shopping mall is a major retail or department store that is one of the larger stores in the mall. As a reward for bringing people to the mall, anchor tenants often receive discounted rents.
Amortization is a repayment model where the balance is repaid in multiple installments over time with each installment consisting of both principal and interest.
The Adjusted Tax Basis is the proportionate value of an asset or security after adjusting for any deductions taken on, or capital improvements to the asset or security.
Adjustable-Rate Mortgages are mortgages whose interest rates vary according to some benchmark. Generally, the loan starts with a fixed rate for a period, then moves to one where the rate is adjusted every month.
The federal securities laws define an accredited investor as any of the following: (i) a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; (ii) a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person; (iii) a corporation, partnership or charitable organization with assets exceeding $5 million; (iv) a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchase is directed by a sophisticated person; (v) a director, executive officer, or general partner of the company selling the securities; (vi) a business in which all the equity owners are accredited investors (vii) a bank, insurance company, registered investment company, business development company, or small business investment company; (viii) an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million; or (ix) a qualified natural person that holds one of the following financial professional license in good standing: Series 7 65, 82. For the full SEC definition click here.
A clause in a contract that allows a lender to demand full repayment or partial repayment of an outstanding loan if certain requirements are not met by the borrower.
Absorption rate is the rate at which available homes are sold in a specific real estate market during a given time period. The figure indicates how many months it will take to exhaust the current supply of homes on the market.