Assignment on JKJ Pension Funds

Submitted By: Ayush Tiwari Silton Roy Pratik Agarwal Ritdhwara Data

1/13/2012

Table of Contents Investment Analysis of Property 1...................................................................................................... 3 Investment Analysis of Property 2...................................................................................................... 5 Investment Analysis of Property 3...................................................................................................... 6 Investment Analysis of Property 4...................................................................................................... 7 Investment analysis of Property 5 ...................................................................................................... 8 Investment analysis of property 6 ...................................................................................................... 9 Investment analysis of property 7 .................................................................................................... 10 Investment analysis of property 8 .................................................................................................... 11 Investment analysis of property 9 .................................................................................................... 12 Investment analysis of property 10 .................................................................................................. 13 Investment analysis of property 11 .................................................................................................. 14

Investment Analysis of Property 1

Out flow of Investment: $3,600,000 Undeveloped Land Los Angeles, CA LOT A : SELL Property outlook: y y y y y A 120,000 square foot land where 812000 SF can be built according to current zoning. Currently leased to adjacent hotel. All the expenses are recovered including rent, maintenance and insurance. Generates Annual return of $35,000. Hotel lease has 20 years to run.

Property Assumptions: y The capitalization rate bracket for retail and residential is 7.5 - 9.5%. Since the land is currently leased to hotel for 20 years so the level of risk is low. Therefore, we would take the capitalization rate as 9%.

Analysis: y y Selling the land would fetch a value of $3,840,000 today. If the company holds the property and continue to lease it would not be able to recover its investment in 20 years. Its NPV comes out to be -$381,962. Therefore, it should sell the property at $32 per SF.

LOT B : SELL
Property outlook: y y y A 180,000 SF where 900,000 SF space can be built. No interim users. Carrying costs - $24,000 per year

Property Assumptions: y The capitalization rate bracket for retail and residential is 7.5 - 9.5%. Since the risk is high because of low interim users. Therefore, we would take the capitalization rate as 7.5%.

Analysis: y y y y Selling the land would fetch a value of $5,760,000 today. The property is currently loss making. Development plans on this parcel would need a lot of approvals. Ex City Council, Planning Commission. So, Sarah should sell the parcel.

LOT C : HOLD
Property outlook: y y y A 60,000 square foot land where 270000 SF can be built according to current zoning. The parcel is rented regularly by civic organizations and community groups. After meeting its expenses, fund breaks even on this parcel.

Property Assumptions: y The capitalization rate bracket for retail and residential is 7.5 - 9.5%. Since the land is currently leased by civic organizations and community groups so the level of risk is low. Therefore, we would take the capitalization rate as 9%.

Analysis: y y y Selling the land would fetch a value of $1,920,000 today. The location of the parcel is certainly good as it suits civic organizations and community groups. There is potential for rise in prices of land in future. Therefore, the parcel should be kept on hold as of now.

Investment Analysis of Property 2

Out flow of Investment: $21,400,000 Wilshire Plaza Garage Los Angeles, CA DECISION : HOLD Property outlook: y y y y Garage with 3500 parking spaces. 1600 Monthly cars parking 1000 Transient spaces 900 Hotel parking

Property Assumptions: y The capitalization rate bracket for retail and residential is 10-12%. Since the garage is currently generating revenue by three different parking so the level of risk is moderate. Therefore, we would take the capitalization rate as 11%. Assuming growth in monthly parking as 8% and since 1997, lease of 900 spaces would be on monthly basis i.e. 834.5 per space. Operating expenses are growing at 5% p.a.

y y

Analysis: y y y y y The location of the land is good as it is beside the Royale Plaza Hotel and near office buildings. Intensive marketing program is being launched among the neighboring office buildings which would increase the net revenue of garage. The garage is manageable and the operators have no concerns in regard of lessee. The investment is huge and profitable as of now. Also, there is potential for rise in prices of land in future. Therefore, the garage should be kept on hold as of now.

Investment Analysis of Property 3

Out flow of Investment: $1,500,000 Wilshire Ground Leases Los Angeles, CA DECISION : HOLD Property outlook: y y y Wilshire East Associates (power plant) which has no renewal policy, lease would end in 2043 and fixed rent is of $58000. Sids Restaurant has renewal options of 2*5yrs@Fair market value, lease would end in 2017 and fixed rent is of $74996. Banco Los Angeles has no renewal policy, lease would end in 2023 and fixed rent is of $85000.

Property Assumptions: y The capitalization rate bracket for industrial properties is 8.5-10%. Since all the three are currently leased so the level of risk is low. Therefore, we would take the capitalization rate as 10%.

Analysis: y y y The land is well diversified into three sectors. Wilshire Ground Leases will achieve their breakeven in 11 years. Since the venture is profitable, it is easy to manage and well diversified. Sarah Griffin should hold this property.

Investment Analysis of Property 4

Out flow of Investment: $18750000 Riverbank Center Hotel Mobile, AL Property outlook: y y y y y y y y Managed by reputable nationwide operator 161618 square foot river bank center. 4-star, AAA 4-diamond hotel. Easy access via interstate 10 and 65 Close to Municipal auditorium complex and airport Best convention and meeting facilities Occupancy in 1993 was 53% and was expected to increase to 58% in 1994 and 60% in 1995. Main competitor was Radisson while others were budget hotels.

Property Assumptions: y To calculate the value of the hotel, DCF is used and since the hotel has limited competitors the capitalization rate bracket for hotels (9.5-12.00%) in considering the normal flow of operation 10% is assumed as it is moderate risky. Assumed the economy is performing well the occupancy rate would increase from 53% currently to 58% 1994 to 60% in 1995. Terminal growth rate is expected to be around 3% looking at the performance of economy.

y y

Analysis: y Market value comes out to be 13260517.17( the present value of the net cash flow for 1993 1994 1995 with terminal growth rate expected at the last i.e.1995 3% at perpetuity.

Comments The analysis give s us a snapshot that the present value as calculated by DCF model gives us a pv value of 13260517.17 =market value which i is less than the investment made. So my recommendation is to hold the property as current value is too low to sell as it wont fetch the basic outflow..apart the profit.

Investment analysis of Property 5

Investment outflow : $12400000 Riverbank center office building Mobile,

Features: y y y y y 13- storey, 161618 square foot premier office building Connected to riverbank center hotel by a walkway and a garage Lease for two major tenants was about to expire in 1997 and for the third tenant in 1999 In 1993 a tenant occupying two full floors moved out The closet competition from 2 newly rehabilated office space who are yet to settle so fewer competition.

Assumptions: y y y y It is assumed that the leased space increases till 1997 and then decreases as the lease for two major tenants was expiring in 1997. Gross rent is expected to increase every year. Capitalization rate is assumed to be 10% as it is a premier office building and hence less risky. To get net operating income we reduced revenue including not only current rental but also expense recovery though in the year 1994 there was no recovery then from that tenants costs are reduced.

Analysis: y y Market value comes out to be 11315719 Since the market value is less than the investment made, it is advisable to hold the property.

Investment analysis of property 6

Investment outflow: 14320000 Empire hotel Rochester new York

Property features y 7 storey containing 364 guest room location is at heart of downtown y Easily accessible to highways y Currently leading hotel in downtown with fair amount of goodwill in the market y Amazing parking spaces two full fledge restaurant . y Total area of 16000 square feet y Hotel market near by is amazed by the industrialization around.

Property analysis assumptions y y y y For the dcf the capitalization rate taken is 10 % looking at the recent trends its seems to be less risky and cask flow are more certain. We assume occupancy rate to remain stable to 60%over a given period of time. The time horizon for over analysis is 3 years. Growth rate is 3% To get the net cash flow for Dcf model house expenses and other cash expenditure thats are directly related to property are reduced and final figure is drawn.

Analysis and comments When calculated using DCF model the market value obtained is 28944671.77 which is higher then investment outflow its good to sell it at profit of the difference value of mv-investment value so in my suggestion to SELL.

Investment analysis of property 7

DECISION: SELL Reasons: 1. There is a demand for luxury residential complex in this area. But Maplewood Apartments are quite old. So, it will face tough competition against the coming up or newly constructed luxury apartments. Thus after 2-3 years (assuming the new projects take 2-3 yrs to complete) the vacancy rate will increase to 20% approximately. 2. The cash-flow analysis shows that this property is actually a loss making unit for JKJ Pension funds. Therefore it should be sold as soon as possible. 3. Assuming a 2.5% required rate of return on the property and an investment horizon of 12.67 years (the time equal to its replacement/restoration) the selling price comes to $16.1mn.

Assumptions in cash-flow analysis: 1. Due to increasing demand the vacancy will drop to 8% in next 2 years. 2. After that due to availability of new luxury apartments the vacancy rate will increase to 20%. 3. Operating expenses will increase by 2% p.a. which is quite close to the inflation rate. 4. Capitalization rate for the property is assumed to be 8.5%. 5. Required rate of return from the property is assumed at 2.5% p.a. 6. If the fund decides to hold the property it will hold it till its restoration is complete i.e. the investment horizon is 12.67 years.

Investment analysis of property 8

DECISION: HOLD Reasons: 1. It is located in a very good geographical position which made it easily accessible to regional and local residents. 2. Has easy accessibility of railways, roadways and airways. So, transportation cost is also very less. 3. The local residents have a higher residual income. So, a steady growth in demand will persist in future. 4. The mall is comparatively young when compared to the other malls of that area. So, it is expected to pull in more crowds and thus more business in future. 5. Due to anti-development sentiments and environmental problems scope of development of new malls in future is very less. So, there wont be any increased competition in the future. 6. Due to the increasing demand it is expected that the rents which were flat in 1992-93 will see a rise in the future. 7. The cash-flow analysis shows that JKJ pension fund can earn a good 23.51% holding period return on equity assuming a 3% terminal growth. But if the terminal growth ranges between 5% to 8% the returns zooms up to 38% to 166% i.e. average annual return of 3% to 14%.

Assumptions in cash-flow calculation: 1. Due to increase demand the vacant area of the mall will be filled up within 3 years. 2. The capitalization rate for this property is taken as 9% p.a. 3. The increase in overall expense is assumed to increase by 2%(which is almost equal to the inflation rate) in future. 4. Terminal growth of NOI is assumed at 3%.

Investment analysis of property 9

DECISION: SELL Reasons: 1. Though the strategic position of Alpha Centre is very good and there is a huge demand for office and R& D space, the centre has already been leased for 12 years. So there will be no growth in income for next 12 years. 2. Assuming a capitalization rate of 9% the holding period return for 12 years is coming as 14.74% whereas the required rate of holding period return is about 30%. 3. To get the required rate of return Sarah should sell the property at around $12.2mn.

Assumptions in cash-flow calculation: 1. Capitalization rate is taken as 9%. 2. Required rate of return on the property is assumed as 2.5% p.a.

Investment analysis of property 10

PATHMARK SUPERMARKET, FORT LEE, NJ The Fort Lee Pathmark Supermarket is one of the retail property owned by JKJ Pension Fund. The property consists of 2.3 acre site containing a 21,632 square foot market. The Supermarket currently pays rents of $4.78 per square foot. As per the option period starting March 1, 1990 till February 28, 2005, the supermarket generates rent at the same rate as mentioned above till the end of the period. When we compare the rent to the rent existing in other supermarkets such as New supermarkets in Bergen County where the rents ranges from $10.40 to $17.50 and the supermarket with average sales of $600 per sq. ft. having rent of $12 per sq. ft., it can be seen that the rent provided by the supermarket is very low and its better to do away with the property if the current rates exist for long. We also tried estimating the future cash flow for the property starting from projected cash flow of 1994 till 1999 in order to find if the present value of the cash flow generated is providing sufficient returns to the JKJ Pension Fund. The assumptions that were made for the estimation of Cash flow are as follows: 1. The rent remains constant as per the option period. 2. There is no credit loss. 3. The management fee assumed to increase at 2%. 4. Terminal Growth Rate = 3% 5. Capitalization Rate assumed to be 8.5% 6. Cash Flow calculated till 1999 and Terminal value calculated. 7. The return on the project calculated with n=11. As per the above assumptions, the PV of Cash flow comes to be $16,30,701 which when compared to initial investment of $900,000 seems favourable and shows a return of 5.5% as per BV of investment. However The firm has to earn atleast a Internal Rate of return of 11% which is not generated by this property. So Sarah Griffin can choose to sell the property.

Investment analysis of property 11

Flamingo Village, Miami, FL Flamingo Village, a multi family project located in Dade County was hit by recession of early 1990s soon after its completion. However, the Rental Housing Market in the vicinity of Flamingo village was facing stiff competition for tenants forcing the developers to provide greater amenities. The Vacancy rate saw a slight decrease in 1994 compared to last reporting period. Also the average monthly rent for stabilized apartment complexes in Dade County saw a increase of 0.4% compared to previous quarter. The Complex comprised of 220 units had an average rent of $703 per unit which was higher than the average rent for stabilized apartment complexes in Dade County. We tried estimating the future cash flow for the property starting from projected cash flow of 1994 till 1999 in order to find if the present value of the cash flow generated is favourable for JKJ Pension Fund. The assumptions that were made for the estimation of Cash flow are as follows: 1. The Rental income, furniture rentals and laundry income is assumed to increase at .4%. 2. The Vacancy rate is assumed to decrease by .4%. 3. Operating expense margin as a % of Effective Gross Income is assumed to remain constant. 4. Replacement Reserve as a % of Effective Gross Income is assumed to remain constant. 5. Terminal Growth Rate - 3%. 6. Capitalization Rate = 8.5% (Multifamily project). 7. The return on the project calculated with n=4 as the property got completed in 1990 and assumed to be owned since then. As per the above assumptions, the PV of Cash flow comes to be $166,29,051 which when compared to initial investment of $89,00,000 seems favourable and shows a return of 16.91% as per BV of investment. Its greater than 11% return the JKJ Pension Fund is looking to generate. So Sarah Griffin can choose to hold the property.