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IBET Pension Fund

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Kevin Lehman

on 1 May 2013

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Transcript of IBET Pension Fund

IBET Pension Fund Lisa Carey
Robert Rosin
Kevin Lehman Introduction Building Descriptions Recommendations Conclusion Marisa Caris Real Estate Portfolio Summary 1 Bonhomme Place 2 Greenway Point 3 The Lakes at Brice 4 Garden City 5 Northwest Business Park 6 Dallas Land 7 Lincoln Heights 8 Empire Hotel IBET Pension Fund Clayton, MO First Class Office
101,313 sq. ft.

Built in 1990
Acquired in 1995
Cost: $12,847,000

96% Occupancy Property Basics Columbia, MD Property Basics Research & Development
129,374 sq. ft.

Built in 1988
Acquired in 1997
Cost: $11,400,000

92% Occupancy

$8.5 million mortgage at 8% interest maturing in 2002 Situation Summary ~ Market in equilibrium at 5% vacancy on 4 million sq. ft. market

~ Two new properties under construction in Columbia Columbus, OH Property Basics Garden Flats & Townhouse Apartments
256 units / 270,432 sq. ft.

Built in 1994
Acquired in 1994
Cost: $15,049,000

95% Occupancy Situation Summary ~ Recent comparable sales $52,632-$58,712 per unit from 1997-1999 or $49-56 sq. ft.

~ Newer construction with minimal new supply coming online

~ Increased rents by 10% over two years with incremental capital costs of $940,000

~ 41.1% of population ages 18-44

~ Population growth 25.9% in the 1990's with 27.7% in household growth Cranston, RI Property Basics Specialty / Power Center Retail
394,478 sq. ft.

Built in 1971 (with additions thereafter)
Acquired in 1998
Cost $54,200,000

92% Occupancy Situation Summary ~ Shopping center has two components: The Village (a fashion-oriented specialty center) & The Commons (strongly anchored power center)

~ Leased to mostly good credit tenants

~ Anchors typically sign leases for 10 to 20 years

~ Inline stores and offices sign leases for about 5 years

~ A new mall is under construction five miles away, but Garden City is expected to remain dominant in the region because of its history and location Indianapolis, IN Property Basics Bulk Industrial
343,200 sq. ft.

Built in 1994
Acquired in 1994
Cost: $12,655,000

51% Occupancy Situation Summary ~ Property will remain at 51% occupancy for the next two years, and achieve 95% occupancy in year three only

~ Some new competitive buildings are being added in a neighboring community with better tax rates

~ Rental rates are decreased from $3.80 per sq. ft. to $2.95 per sq.ft. Dallas, TX Property Basics Two parcels of land in downtown Dallas
Parcel 1: 20,000 sq. ft.
Parcel 2: 46,000 sq. ft.

Year of Construction: N/A
Acquired in 1996
Cost: $1,000,000

Parcel 1: Leased for 15 years for parking lease
Parcel 2: Leased for parking until 2000 (not expected to renew lease) Situation Summary ~ Parcel 2 does not have new prospects to take over the lease in 2000

~ Comparable land was sold nearby for $32 per sq. ft.

~ Downtown (CBD) vacancy: 32.4%; Whole market vacancy: 17.8%; CBD Class A: 16.6%

~ Extremely strong employment / demographic growth San Antonio, TX Property Basics Community Shopping Center
221,606 sq. ft.

Build in 1987
Acquired in 1997
Cost: $26,500,000

97% Occupancy Situation Summary ~ 100% of the leases are expected to renew

~ In 2002, leasing commissions will rise by 50% and tenant improvements by 20%

~ Additional 4.2 acres included with the Shopping Center to the rear of the site available for additional development Rochester, NY Property Basics Hotel
364 Rooms

Built in 1969
Acquired in 1994
Cost: $9,800,000

60% Occupancy Situation Summary ~ Substantially renovated in 1985

~ Lead hotel in price range in downtown: average $72 per night

~ Has a restaurant, lounge health club with pool, 14 banquet and meeting rooms with a grand ballroom

~ Located near the new $40 million convention center

~ Occupancy in market recently moving upward

~ No new hotels planned in area Bonhomme Place Greenway Point The Lakes at Brice Garden City Northwest Business Park Downtown Dallas Land Lincoln Heights Empire Hotel Summary Property Invested
($000s) Acquired Market Value
($000S) Hold/Sell Bonhomme Place

Greenway Point

The Lakes at Brice

Garden City

NW Business Park

Dallas Land

Lincoln Heights

Empire Hotel 12,847

11,400
(8.5M debt)
15,049

54,200

12,655

1,000

26,500

9,800 1995

1997

1994

1998

1994

1996

1997

1994 ~ Type: Office

~ Amount Invested: $12,847,000

~ Acquisition Year: 1995

~ Market Value: $15,900,000

~ Hold/Sell: Sell

~ Comments: Given the increased supply and competition expected in the market, it is likely rents will drop and it would therefore be appropriate to select a cap rate at the high end of the range, perhaps 9% or 9.5%. You should calculate a hypothetical adjusted CFO of $1,213k if rents were to decline by $2/sf over the next two years with 25% renewal. The range of possible values therefore stretches from $12.8 million to $15.9 million.

Caris should sell the Bonhomme Place property. The market outlook is unfavorable. Increasing supply and competition will likely lead to a decline in rents and drop in value for Bonhomme place. In addition, a disproportionate percentage (25%) of the funds existing holdings is concentrated in the Midwest. Selling Bonhomme Place would free up as much $15million to be invested in another region, or in other more promising office properties. ~ Type: R & D

~ Amount Invested: $11,400,000 including $8,500,000 of debt

~ Acquisition Year: 1997

~ Market Value: $12,863,000

~ Hold/Sell: Hold

~ Comments: Under the income method, Greenway Point has a market value of approximately $12,863,000. A small capitalization rate of 9.5% for Research & Development properties was utilized in determining the current market value. The property is expected to continue to grow in the following year as well. Its current market value holds a dollar amount higher than the amount invested into the property. Despite the higher current market value of the property, a hold position is still recommended because of the property’s upside growth potential in the next year. In addition, Greenway Point offers a more competitive rental rate at $13-$15/sq NNN while the two new properties under construction have projected rates of $15/sq NNN. Renewal for tenants on Research & Development properties is 70% and Greenway Point’s lead leasing tenants have leases for 4-10 more years on the property. ~ Type: Apartments

~ Amount Invested: $15,049,000

~ Acquisition Year: 1994

~ Market Value: $19,533,000

~ Hold/Sell: Hold

~ Comments: The capitalization rates range from 7.5% to 9.5% for apartments. A low capitalization rate of 7.5% was chosen for this particular property because of its location in a new and developing area and its proximity to downtown Columbus and the Port Columbus International Airport. The property also has the opportunity to increase rentals and rental rates due to the addition of the new amenities. Rents are expected to increase 5% in the first year and 10% (over current rents) in the second year. The Lakes at Brice has a current market value of $15,049,000 under the low 7.5% capitalization rate. Under the same rate, at the end of year two, the projected market value of the property is $23,333,000. However, under a high capitalization rate of 9.5% in year two, the market value is projected to be $18,421,000. All values are higher than the initial amount of investment, however, it is only recommended to hold this property until the end of year two if the capitalization rate is still relatively low. ~ Type: Retail

~ Amount Invested: $54,200,000

~ Acquisition Year: 1998

~ Market Value: $61,850,000

~ Hold/Sell: Sell

~ Comments: Its current market value was determined using the capitalization rate for Retail which ranged between 9.0% and 11.0%. The market value of Garden City is currently $61,850,000. A cap rate of 10% was chosen for this particular property because Garden City is still expected to be dominant in the region despite the addition of a new mall in August 1999. This is due to the history and location of the Garden City property. Considerable capital improvements were made to the property in 1998. Despite the recent capital improvements, we believe that Garden City is a fully mature property and has reached its full potential. $61,850,000 would be freed up to be invested in another region or another promising property. ~ Type: Industrial

~ Amount Invested: $12,655,000

~ Acquisition Year: 1994

~ Market Value: $4,084,000

~ Hold/Sell: Hold until full occupancy

~ Comments: $12,655,000 was invested into the property. The industrial property currently has a market value of $4,084,000. The current market value was calculated using the Discounted Cash Flows Model. The DCF Model is ideal for valuing a property, such as Northwest Business Park, that has not achieved a stabilized cash flow. The property is currently operating at a 51% which can be partially credited to the negative absorption for the quarter. Occupancy is expected to stay at 51% for the next two years and achieve 95% occupancy in year three only. Competitive buildings are being added to a neighboring community which offers better tax rates than the Northwest Business Park property. We are implementing a hold recommendation until occupancy norms are achieved and cash flows from operations have become stabilized. Once these conditions have been met, returns on the investment will start to be realized. ~ Type: Land

~ Amount Invested: $1,000,000

~ Acquisition Year: 1996

~ Market Value (Parcel 1): $470,000; (Parcel 2): $833,333

~ Hold/Sell (Parcel 1): Sell; (Parcel 2): Sell

~ Comments: A cap rate of 10% was applied to Parcel 1 in order to determine its current market value of $470,000. A low cap rate was chosen for this particular parcel because of the strong employment and demographic growth in the area that would give the land upside potential. The land is considered to be valuable because there are few comparable land sales in the area. We are also recommending that Parcel 2 be sold as well. A cap rate of 12% was applied to Parcel 2 resulting in a current market value of $833,333. The sale of Parcel 2 would free up at least $833,333 that could be invested in another region or other more promising properties. Since the lease for Parcel 2 expires at the end of 2000 and is not expected to renew nor are there any new prospects on the horizon. ~ Type: Retail

~ Amount Invested: $26,500,000

~ Acquisition Year: 1997

~ Market Value: $26,707,000

~ Hold/Sell: Hold

~ Comments: Lincoln Heights’ current market value was estimated using the Discounted Cash Flows Model. With a discount rate of 12%, the estimated present value of the property is $25,613,000. The market value is approximately $900,000 less than the amount invested into the property. We are recommending a hold position for this particular property because of high demand and its room for growth. Among many Retail properties, the probability of tenant renewal is 70%. For Lincoln Heights, 100% of leases are expected to renew. This creates high demand for businesses looking to join the network of companies gathered on this particular property. However, the property could entice more renters into the area by developing the adjacent 4.2 acres. Upon lease renewal in 2002, the increases in lease commissions and tenant improvements will lower the Cash Flow after Capital; however, Cash Flow from Operations will not be affected by these renewals. ~ Type: Hotel

~ Amount Invested: $9,800,000

~ Acquisition Year: 1994

~ Market Value: 12,157,000

~ Hold/Sell: Hold

~ Comments: The hold or sell recommendation for the Empire Hotel considers the current market value of the property using capitalization rate. Using a low cap rate of 10% for a hotel property, Empire Hotel’s estimated current market value is $12,151,000. The low cap rate was chosen for this property because of the high demand for its competitive room rates, convenient location, and reputation. We are recommending a hold position for this particular property because occupancy rates are expected to rise in the area and there are no plans for new competitor hotels. ~ The IBET Pension Fund's portfolio manager charge of real estate investments

~ Must determine how to reshape and expand the existing portfolio for the company

~ She currently needs to determine a business strategy going forward for the company ~ IBET has been involved in the real estate market since 1994

~ The real estate investments provide diversification to their portfolio, hedge against inflation, and lower the volatility of the pension portfolio

~ Hired a Separate Account Advisor for their real estate investments since it allows them to receive the benefits of real estate ownership without the non-financial risk that is associated with direct ownership Allocation by Property Type Allocation by Region Situation Summary ~ 500,000 sq. ft. is under construction on Bonhomme Ave.

~ 5 million sq. ft. in submarket; just west of St. Louis

~ 25% of the tenant leases come due over the next two years 15,084

12,863

19,533

61,850

4,084

Par. 1: 470; Par. 2: 833

26,707

12,157 Sell

Hold

Hold

Sell

Hold

Par. 1: Sell; Par. 2: Sell

Hold

Hold ($000s) ($000s) Develop 4.2 Acres at Lincoln Heights ~ Some of the capital should be used to develop the 4.2 acres adjacent to the Lincoln Heights property.

~Expanding the property will be profitable given Lincoln Height’s proven track record, high demand, and high occupancy. Invest In Non-Retail Properties ~ IBET invested heavily in retail type properties.

~We suggest that it diversify its funds into a more “well-rounded” investment. Therefore, IBET should purchase non-retail properties. Invest In Other Regions ~ IBET needs to have more regional diversity. As is, it only has properties in the Northeast, Midwest, and South. We recommend that properties in cities with strong economies and population growth, such as Phoenix, Los Angeles, Miami, Seattle, Atlanta, or Denver. Increase Debt ~ IBET needs to take advantage of the tax shield that interest payments afford. By resisting the urge to buy properties outright, IBET can purchase more properties, diversify its investment, and enjoy lower taxes.
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