1. Consider a REIT that holds high quality office buildings in some of the best locations in the US. The REIT is currently traded at a price of $65/share and there are 110 million shares outstanding. Using the information below answer the following questions:
Expected next year total revenue: $680M Expected next year total expenses (including interest and depreciation): $350M Expected next year depreciation: $80M Expected next year interest: $60M Total debt: $2.0B Current office CAP in the US: 4.5% to 6.0% depending on quality and location. a. What is your estimation for a fair market value for a share of the REIT described? Show your work! b. What is your estimation for a fair price to pay for a share of the REIT described, if you require an 8.0% rate of return on an unlevered basis and expect the REIT to increase NOI at an average rate of 2.25%? Should you buy shares of that REIT? Show your work!
2. PLAM and ARM: a. What is the main difference between a PLAM and an ARM? Briefly explain. b. Under which economic circumstances a PLAM type loan is greatly needed? Briefly explain. c. What is the main difference between negatively amortized mortgage and reversed annuity mortgage?
3. For each of the factors listed below indicate whether the factor, independently, is likely to cause a particular income producing property to trade for a lower or higher CAP rate compared with an average property. For this question, no explanation is needed. Indicating "higher" or "lower" for factors a through g is sufficient. a. Lower volatility in rent prices and occupancy rates. b. Worse location c. High inflation environment d. High risk premium environment e. High expected NOI growth f. Lower construction quality g. High quality tenants
4. Consider an income producing property that according to your assumptions and estimations is currently worth $4M on an unlevered basis when a 7.5% required rate of return is applied. One of the assumptions that you have made when arriving at that estimate is that you will sell the property in 6 years for a CAP of 7%, which translates to $4.8M at that future point in time. a. At what price will you sell the property in 6 years if all your assumptions materialized except that you will sell the property for a CAP of 8% instead of 7%? Show your calculations. b. All other things equal, by how much the situation described in part a affects the current value of the property. Show your calculations.
5. According to the Truth-in-Lending-Act (TILA) lenders must provide borrowers with an APR in addition to the interest rate to be charged on the loan. a. What is the purpose of providing borrowers with an APR? Briefly explain. b. What is the main problem with APR? Briefly explain. c. Consider a potential borrower who evaluates two mortgages options. One with higher upfront fees and the other with lower upfront fees, but the two options have the same APR. Which option would you advise the borrower to take if the borrower expects to stay in the home for a relatively short time period? Briefly explain.
6. Real estate market inefficiency: a. Briefly describe 5 factors that cause the stock market to be more efficient than the real estate market. b. Can investors make money in an efficient market? Briefly explain. c. Do educated and informed investors rather operate in an efficient or inefficient market? Briefly explain.
7. DCR: a. Calculate the DCR for an income producing property to be acquired at a price of $8M and a CAP of 6%. The down payment on the property is 30% of the property value and the mortgage on the remaining balance is a fixed-rate interest only loan at a rate of 4%. b. What is the meaning of a DCR of 1.30, for example? Please explain. c. List and briefly explain three different factors that are likely to cause the lender to require a higher DCR from investors?
8. Four years ago, when you were 24, you graduated from college and landed a good paying job. At that time you purchased your "starter home" for $200K. Since then, the housing market in the city where your home is located experienced unusually high rate of price appreciation and a local real estate agent informed you that if you were to put your home on the market today, you will be able to sell it for about $350K. a. Did the recent abnormal housing price appreciation benefited you? Explain in 3-4 sentences. b. What kind of individuals benefited the most from the recent price appreciation described in this question? Explain in 2-3 sentences. c. What kind of individuals suffered the most from the recent price appreciation described in this question? Explain in 2-3 sentences.