Real Estate Finance and Investment
Shady Trail case
Datum: 31-1-2012
Taco van der Hoest 303450
Dave Tettero 291138
Executive Summary
This report provides an analysis and evaluation of the current and prospective profitability of the Shady Trails property. Methods of analysis include trend, horizontal and vertical analysis as well as calculations such as Return on Assets, Return on Equity, Loan-to-Value ratio and the Gross Rent Multiplier. All calculations are found in the appendices.
Original Setup
Using the original assumptions our initial results regarding the desired profitability of the Shady trail are positive: * Net Operating Income (NOI), Cash Flow from Operations (CFO) and Cash Flow after Financing (CFAF)
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The Loan-to-Value Ratio (LTV) is the ratio between the balance of loans and the value of the property. It shows the amount of debt used to finance the property and can provide the lender with useful information: a high LTV ratio means a large part of the property is financed through a loan, which makes the owner of the loan more likely to default and thus increasing the risk for the lender. Shady Trails LTV ratio however is 70% (Table A4), which is considered acceptable for a small industrial property.
Return on Assets (ROA) of 8.74% and Return on Equity (ROE) of 12.4% are both positive. The ROE (cap-rate) is defined as the cash-flow from operations divided by the market value before financing with any debt. This is a simple approach which assumes that cash flows are equal over various periods. Of course in a more realistic approach these cash-flows are more varying over time. A cap of 8.74% is reasonable due to the fact that the property is fully occupied by 2 tenants for the next 5 years. So despites this there is the guarantee that the building will be fully occupied, and so the risk of vacancy is relatively low. If the carrying cost for the ROA is lower than the cap-rate, we can say that this mortgage will lead to for higher returns, also called positive leverages, and this also counts for the other way around, so negative leverage can occur. Our debt service is 7.19%, which is lower than our cap-rate of 8.74%, our
After analyzing the numbers and the market and property factors involved with Shady Trail, it is my opinion that this property is a reasonable one to invest in. It meets the criteria we had previously set forth in choosing an investment property as both the IRR and the current cash flows are in excess of the minimum we mandated. These numbers require that the assumptions we use in market rent, cap rate in 2003, vacancy rate, and our plans to sell the investment after 5 years all hold. If one of these assumptions doesn’t hold and the 5-year projection is below expectations, it can still be remedied by holding the asset for a longer time period.
xxv. Low total asset turnover (not bad but when compared to average they are low)
First of all, return on asset (ROA) is a ratio used to measure how efficient a company generates profit using its assets, which is the invested capital. We noticed that HH’s ROA was increasing from 2006 to 2010. However, HH’s ROA for 2011 dropped dramatically from 18.41%(year
The 6% Return on Assets percentage shows that Costco’s assets are being well-used to generating revenue. The ROE demonstrates $0.13 of profit for every dollar of net assets.
Angus Cartwright III, an investment advisor, was asked to provide investment advisory services for two clients, John DeRight and Judy DeRight. They both wanted to purchase a property that (1) is large enough to attract the interest of a professional real estate management company and (2) has a minimum leveraged return on their investments of 12% after
The current assessed value of the property is stated at $400,000, however with the improvements to be made by the current owner, there is a projected value of $500,000. However, with Mr. Alexander making the improvements to the property himself, along with the average rents in the area increasing, the value is now projected to be worth $562,500 a 12.5% increase.
When combining the figures for ROE, ROA and the DuPont analysis it appears that the company is using leverage favourably. ROE is greater than ROA and assets are greater than equity. This is a positive sign for shareholders as it suggests a good investment return in a company that is managing its shareholder equity well (Evans & McDowell, 2009).
The cash flow statement consists of three parts: cash flows provided by operating activities of $13,831, cash flows provided by investing activities, and cash flows provided by financing activities effect of exchange rate changes on cash and cash equivalents of ($204)
Return on Total Assets was 4.43% which is below five percent. That indicates that the company is not accurately converting its assets into profit. The total for Return on Stockholders’ Equity was 8.89%, however financial analysts prefer ROE to range between 15-20 %. The company’s low ROE indicates that the company is not generating profit with new investments. Lastly, Debt-to-Equity ratio for the company was 1.01 which indicates that investors and creditors are equally sharing assets. In the view of creditors, they see a high ratio as a risk factor because it can indicate that investors are not investing due to the company’s overall performance. The totals of these three ratios demonstrate that the company’s financial state is not as healthy as it should be.
| The ROE decreased in the last year but still in the good margin of profitability.
During this period, the Return on Assets increased from 5.7% in 2012 to 34.6% in 2013. This implies the number of cents earned on each dollar of assets increased from 2012 to 2013. This shows that the business has become more profitable. Equally, the Return on Equity also increased from 12.0% in 2012 to 46.5% in 2013. This similarly implies that the company in 2013 was more efficient in generating income from new investment. This, also can be attributed to the sale of the Digital Business Brand which enabled the company appraise its strategic plan.
The return on equity, ROE, is as high as 20.69% (above 15%). It illustrate that the RL Corporation uses the investors’ money pretty effectively. As of return of assets, equals to 13.10%, which reveals how much profit a company earns for every dollar of its assets. Both ROE and ROA for RL Corporation seems really good and they provide a picture that managers are doing a good job of generating return from shareholders’ investments.
Financial performance Revenue, DKK million Profit before special items, DKK million Tax on profit for the year, DKK million Net profit for the year, DKK million Operating margin (ROS) Return on equity (ROE) Return on invested capital (ROIC) 11,661 3,002 -683 2,204 24.9% 82.3% 139.5% 9,526 2,004 -500 1,352 22.0% 72.2% 101.8% 8,027 1,471 -386 1,028 18.1% 71.6% 69.7% 7,798 1,405 9 1,290 17.0% 147.1% 63.6%
1) The percentage of annual growth rate of NAV assuming reinvestment (the total return on investment.)
| Below is an excerpt from the cash flow statement of a firm for fiscal year 2003: Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Amortization of software Tax benefits of employee stock plans Special charges (Gains)/losses on investments Change in operating assets and liabilities: Receivables Inventories Pension assets Other assets Accounts payable Pension liabilities Other liabilities Net cash provided by operating activities Cash flows from investing activities: Payments for plant and other property Proceeds from disposition of plant and other property Investment in software Purchases of marketable securities and other investments Proceeds from disposition of marketable securities and other investments Net cash used in investing activities