Problems:
Problem 21-1: 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.
National Property Trust
PanelA. Operating Statement Summary
Net revenue $ 100,000,000 Less: Operating expenses 40,000,000 Depreciation and amortization 22,000,000 General and administrative expenses 6,000,000 Management expense 3,000,000 Income from operations 29,000,000
Less:
Interest expense* 6,400,000 Net income (loss) $ 22,600,000
*At 8% interest only.
Panel B. Balance Sheet Summary
Assets
Cash $ 51,500,000 Rents receivable 2,500,000 Properties @ cost 700,000,000
Less: Accumulated depreciation 450,000,000 Properties—net 250,000,000 Total net assets $304,000,000
Liabilities
Short term $12,000,000
Mortgage debt* 80,000,000 Total 92,000,000
Shareholder equity† 212,000,000
Total liabilities and equity $304,000,000
*At 8% interest only.
†10,000,000 shares outstanding.
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? What does this price range imply about the amount of dividend that National would have to pay to be in line with comparable REITs?
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?
Problem 22-1:As an investment advisor for MREAF (Momentum Real Estate Advisory Fund), you are about to make a presentation to the portfolio manager of the ET&T pension fund. You would like to show what would have happened had ET&T made an investment in MREAF during the past 13 quarters. The ET&T manager has provided you with historical data on the performance of its portfolio, which is made up entirely of common stock. Historical data for the ET&T portfolio and MREAF are as follows:
ET&T Common Stock FundMREAF Real Estate Fund
Period Ending Unit Value Quarterly DividendUnit Value Quarterly Dividend
Quarter 1$701.00 $8.28$70.00$2.17
2 752.50 8.11 80.05 2.14
3 850.5210.30 90.80 2.01
4 953.75 9.81 100.50 2.01
5 1,047.57 12.05 99.14 1.87
6 1,221.70 14.17 95.50 1.81
7 1,443.90 17.18 93.77 1.79
8 1,263.31 14.91 80.31 1.54
9 1,258.56 13.84 77.34 1.49
10 1,526.72 18.32 76.53 1.44
11 1,616.81 19.73 78.42 1.51
12 1,624.08 19.98 79.01 1.53
13 1,560.25 18.88 81.75 1.55
a.)Calculate the quarterly HPR for each investment.
b.)Calculate the arithmetic mean HPR, the standard deviation of the HPRs, and the geometric mean for each fund. Which fund contained more risk per unit of return?
c.)Was there any correlation between returns on the ET&T fund and MREAF?
d.)Would a portfolio that contained equal amounts of ET&T securities and MREAF have provided any investment diversification? Why?
e.)Optional. Assume each investment could have been combined in a portfolio with weights ranging from 0 percent to 100 percent. What pattern of risk and return would result if each investment were added (deleted) in increments of 10 percent (remember that the sum of the two proportions must always sum to 100%)? What combination of securities would have constituted the “efficient frontier” (if any)?
f.)If the manager of ET&T is considering making an investment in MREAF, of what use is this analysis?
Problem 22-2:Suppose the correlation between NCREIF and the S&P 500 is −20 percent. How does this change the standard deviation of the portfolio when 50 percent of the portfolio is allocated to each investment?