ABM Consolidation Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Introduction

The report presents a case about AMB, which is a leading pension real estate advisory firm that has recently proposed to turn itself into a publicly traded Real Estate Investment Trust (REIT) and is planning to persuade its client to contribute their real estate assets to new REIT. Further, the report also includes considerations of Anne Shea, who is the Assistant Vice President at Curator’s Fund; which is considering exchanging her shares in the commingled fund for the shares in REIT.

Real Estate Investment Trust (REIT)

Real Estate Investment Trust (REITs) invests in and own properties by offering investors a highly liquid method of investing in high density markets.

Most REITs earn their revenue from property rent and leases. In order to boost real estate investments, REIT receives special tax consideration for investing in highly liquid market i.e. if more than 75% of their profits are generated through rents from real estate property and they distribute at least 90% of their current period profits as dividend to shareholders, then the trust will not be subjected to corporate tax.

Advantages and Disadvantages of Public Real Estate

Advantages

a) Liquidity: Public REITs are more liquidate as compared to private REITs. Public REIT shareholders can easily exchange their shares in the stock exchange.

b) Low sales commission: Brokers charge low sales commission on public REITs as compared to private REITs, which provides an opportunity for investors to retain high cash flows in order to invest in further shares.

c) Information easily available: The information of public REIT is easily available as compared to private REIT; which will benefit the investors in its valuation and in future potential decisions.

Disadvantages

a) High agency cost: Public REITs have to suffer increased agency cost for managing its agency relationships; whereas, this cost is reduced in private REITs.

b) Increased statutory compliance: Public securities are required to comply with increased laws and regulations of the stock exchange and any other governing body; whereas, in private securities the organization is required to comply with minimum statutory requirements.

c) Disclosure of competitive information: Public securities are susceptible to disclose increased information that can be used by the competitors.

An analysis of Ann’s Vote and the Advantages of a Roll-Up to the Curator's Fund

Although, there are some risks and uncertainties associated with the consolidation but the benefit of roll ups will be excessively enough; which will benefit both the parties and provide an opportunity to achieve economies of scale, cost effective and value added means of managing properties. Further, it will also improve the liquidity position because the securities are tradable in the market that provides an opportunity for the company to exchange the securities in return for cash. Further, it will also benefit in enhancing franchise value that will generate FFO growth.

Our analysis in Appendices 1 shows that the private market net asset value before IPO will result in a total of $1,077,545 whereas; if it went public then it will result in a total market valuation of $2,113,664. The private market NAV is calculated by taking the capitalization rate of 9.5% and an existing debt of $606,666; whereas, in calculating public market valuation, the interest expense is charged at 8% and a capital expenditure has been considered as $18,014.

Risks associated with consolidation

The major risk with the asset allocation is that the REIT stocks are negatively correlated with private real estate returns, which will eliminate diversification benefits. The next issue with the REIT is that it had not been stable over the past few years and there is an incredible risk that the premium to net asset value will be reduced or eliminated if market stopped to grow. Further, the last risk associated is concerned with the reasonableness of the valuation performed.

Importance of REIT in Pension Fun

REIT plays a very important role in pension funds because it offers both income and upside. Further, it also provides an opportunity for pension funds to increase both liquidity and returns, and decrease volatility that will attract them so as to boost their investments in REITs.

An analysis of REIT’s nature and an evaluation of REIT as “Growth Stock” or “Value Stock”

REITs are securities that invest its major funds in real estate to produce income and distribute its majority of returns to their shareholders. Many individuals are interested in investing in stocks whereas some are interested in investing in real estate. REIT provides a combination of both by the individuals that are investing in securities and later on the trust will be investing in real estate. (Pagliari, 2005, 158)

Growth investors believe that the securities are above average earnings growth on the other hand, value stocks believe that the stocks are undervalued due to fallen out of favor in market place. Although, REIT invests its major funds in real estate properties, but it will depend of the economic factors of the country because a growing economy may tend them to believe REIT as growth stock whereas, a depressed economy may tend them to believe it as value stock................................

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