BUSI 422 Homework 7 REITs and RE Investment Performance Assignment solutions complete answers

BUSI 422 Homework 7 REITs and RE Investment Performance Assignment solutions complete answers 

 

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You have been presented with the following set of financial statements for National Property Trust, a REIT that is about to make an initial stock offering to the public. This REIT specializes in the acquisition and management of warehouses. Your firm, Blue Street Advisors, is an investment management company that is considering the purchase of National Property Trust shares. You have been asked to prepare a financial analysis of the REIT.

a. Develop a set of financial ratios that will provide Blue Street Advisors with useful information in the evaluation and comparison of National Property Trust with other REITs.

b. Your research also indicates that the shares of comparable REITs specializing in warehouse acquisitions in the same regions are selling at dividend yields in the range of 8 percent. Price multiples for these REITs are about 12 current FFO. What price range does this suggest for National shares?

c. What is the NAV for National Property Trust assuming that a blended capitalization rate of 10 percent would be applicable for the properties owned by Blue Street Advisors?

 

Atlantis REIT expects an income of $34 per share. This includes a deduction of $28 per share for depreciation. Atlantis did not have any gains from the sale of real estate. Its properties are mainly apartments, and you believe that apartments are currently selling on average at about an 8 percent cap rate. Atlantis has 1 million shares outstanding and its balance sheet shows liabilities of $144 million. Comparable REITs have FFO multiples of about 10. Atlantis is expected to pay a dividend during the next fiscal year of $6 per share and to increase those dividends at about 2 percent per year in the future. Investors in REITs like Atlantis usually expect a return of about 12 percent.

a. What is the FFO and value per share based on an FFO multiple?

b. What value per share is indicated using a dividend discount model?

c. What is the value per share implied by the net asset value of the properties?

 

An institutional investor is comparing management fees for two competing real estate investment funds. Both funds expect to begin operations and are accepting capital commitments. When the funds begin acquiring properties, capital calls will be made for capital contributions during the investment period. Fund A will charge a fee of 45 BP on capital committed and 60 BP on capital invested after the investment period ends. Fund B will charge a fee of 50 BP on capital committed and 55 BP on capital invested after the investment period ends. Both funds expect to have $509,500,000 in capital commitments when the fund commences operations and both project a five-year cycle for startup and acquisitions. Capital flows are expected as follows:

a. What will total fees be for Fund (A)? For Fund (B)?

b. Would one of the fee structures cause the manager to want to hold the properties longer before selling than the other fee structure? if so, which one?

Which one of the fee structures would cause the manager to want to hold the properties longer?

 

A closed-end, commingled opportunity fund is being created with an expected three-year life. It expects to acquire properties that it expects to turnaround and sell at the end of three years for a gain. It also plans a minimum target return of 10 percent to investors, which will be based on cash distributions from operations and from the sale of properties at the end of the life of the fund. The opportunity fund manager expects to receive a promote equal to 25 percent of cash flows remaining after sale of the assets and after equity investors receive their minimum 10 percent target return. Cash flows are expected as follows:

a. What must be the cash flows to equity investors at the end of year 3 in order to achieve their total target 10 percent return on equity investment?

b. How much of the proceeds from property sales must the fund manager receive in order to earn its 25 percent promote?

c. After the equity investors earn their 10 percent target return (IRR) and the fund manager earns the 25 percent promote, how much will be distributed to equity investors?

 

A commercial real estate investment fund must report its quarterly investment performance to investors. A summary of its (1) beginning and end-of-quarter assets and equity and (2) cash inflows and outflows during the quarter are as follows:

Other investments will earn 4% interest (1% per quarter) and property debt will be at a 6% rate (1.5% per quarter).

The properties were appraised at the end of the quarter for $672 million.

Assume any interest on short-term investments is offset by interest paid on short-term debt.

a. What would be the beginning equity value?

b. What would be the ending equity value (MVEE)?

c. Assuming that all cash flows from operations, equity contributions, acquisitions, and distributions occurred at the end of the quarter, what would be the quarterly return (IRR)?

d. Assume that all cash distributions to investors occurred equally in 30-day intervals during the quarter. (Investor contributions still occur at the end of the quarter.) What would be an approximation to the IRR using the Modified Dietz approach?

e. Assume that all cash distributions to investors occurred equally in 30-day intervals during the quarter. What would the return be before fees? (Investor contributions still occur at the end of the quarter.)

f. Assume that all cash distributions to investors occurred equally in 30-day intervals during the quarter. What would be return at the property level? (Investor contributions still occur at the end of the quarter.)

 

An investor is evaluating the historical performance of an investment fund. The following annual returns are provided to the investor:

a. Calculate the investment returns for each year.

b. Compute the arithmetic mean return.

c. Calculate the geometric mean return.

 

The following data is reported for a fund and an appropriate benchmark as well as the risk-free rate each year:

a. What is the Sharpe ratio for the fund and the benchmark?

b. What is the Treynor ratio for the fund and the benchmark?

c. What is the fund tracking error?

d. What is the beta for the fund?

e. What is Jensen’s alpha for the fund?