Sensitivity Analysis.pptx

1 SENSITIVITY ANALYSIS 1 / 19 KEY LEARNING OUTCOMES 1. Understand sensitivity analysis 2. Understand sensitivity tables 3. Evaluate investment risk using sensitivity tables 4. Build sensitivity tables in Excel Key Learning Outcomes 2 / 19 3 1. UNDERSTANDING SENSITIVITY ANALYSIS 1. Understa...

1 SENSITIVITY ANALYSIS 1 / 19 KEY LEARNING OUTCOMES 1. Understand sensitivity analysis 2. Understand sensitivity tables 3. Evaluate investment risk using sensitivity tables 4. Build sensitivity tables in Excel Key Learning Outcomes 2 / 19 3 1. UNDERSTANDING SENSITIVITY ANALYSIS 1. Understanding Sensitivity Analysis 3 / 19 SENSITIVITY ANALYSIS USED BY PROFESSIONAL INVESTORS… TEST IMPACT OF CHANGING ASSUMPTIONS… ON RETURNS & KEY METRICS 1. Understanding Sensitivity Analysis 4 / 19 … TO EVALUATE IMPACT OF RISKS ASSUMPTIONS RETURNS • Interest rate • IRR • LTV • Equity Multiple • Rental growth rate • Cash-on-Cash • Exit cap rate • NPV • V/L 1. Understanding Sensitivity Analysis 5 / 19 6 2. UNDERSTANDING SENSITIVITY TABLES 2. Understanding Sensitivity Tables 6 / 19 SENSITIVITY TABLES = PRO TOOL ` 1-Sided ` OVERVIEW • Impact of 1 assumption • Tests unlimited outputs 2. Understanding Sensitivity Tables 7 / 19 TEST 2 VARIABLES SIMULTANEOUSLY ` 2-Sided ` OVERVIEW • Impact of 2 assumptions • Tests 1 output 2. Understanding Sensitivity Tables 8 / 19 DID 2019 INVESTORS SENSITIZE OFFICE V/L BEFORE THE PANDEMIC? 2. Understanding Sensitivity Tables 9 / 19 WHAT HAPPENS TO IRR IF V/L INCREASES FROM 5% TO 25%? V/L = 5% V/L = 25% 2. Understanding Sensitivity Tables 10 / 19 11 3. EVALUATING RISK WITH SENSITIVITY TABLES 3. Evaluating Risk With Sensitivity Tables 11 / 19 Q4 2019 SAN FRAN OFFICE REPORT OFFICE DEMAND STRONG • “Asking rents, the highest in the U.S.” • “Demand continues to be Robust” • Average rental growth rate at 9% • Average Rent at $82 psf 3. Evaluating Risk With Sensitivity Tables 12 / 19 IF THE MARKET STAYED STRONG, IRR FOR A TYPICAL CORE OFFICE WOULD BE 8% 3. Evaluating Risk With Sensitivity Tables 13 / 19 BUT SAN FRAN COLLAPSED DUE TO COVID. VACANCY 30%. NEGATIVE GROWTH. 3. Evaluating Risk With Sensitivity Tables 14 / 19 • Average rent at $70 psf • Net absorption -2.3M sf • Vacancy rate a 30.4% ACTUAL IRR OF -22%! DID INVESTORS SESITIZE ENOUGH? 3. Evaluating Risk With Sensitivity Tables 15 / 19 16 4. BUILDING SENSITIVITY TABLES 4. Building Sensitivity Tables 16 / 19 BUILD A 1-SIDED SENSITIVITY TABLE 4. Building Sensitivity Tables 17 / 19 BUILD A 2-SIDED SENSITIVITY TABLE 4. Building Sensitivity Tables 18 / 19 19 RELEVANT RESOURCES • Video Module on the Blended Teaching Platform: Link • Article: Out of office: US vacancy rates hit record high 19 / 19