Investment Recommendation For Stag Industrial Inc. Harvard Case Solution & Analysis

Standard Deviation and Correlation

The standard deviation provides an indication of risk that how much the predicted value will deviate from the mean. Hence, low standard deviation values suggest that the value will not deviate much from the expected value.

The correlation of market capitalization rate with 10 year projected treasury rates and risk premium is determined which indicated that the correlation is not strong among these variable i.e. there are lesser chances that the 10 years projected treasury rates and risk premium will increase or decrease with the incline or decline in the market capitalization rate.

Correlation

Investment at Current Market Price

Z score for Total Annual Return Greater than Required Rate of Return

• According to Z score formula, the probability at which the investors will earn high rate of return on their investment at market price in comparison with the required rate of return i.e. 10% is 0, because with the expected cash flows rate of return that the investor can earn is 5.71%.
• According to Z score formula, there is still 0 percent probability that the investor will earn rate of return higher than required rate of return minus 2 percent i.e. 8 percent will still be greater than the projected rate of return of the company i.e. 5.71%.
• The Z score of 92.8 percent indicates that there is 92.8 percent probability that the investors will earn a rate of return greater than the yield of 10 years treasuries.
• Z score of probability of loss more than 5 percent of the investment

The Z score indicates that there is a 26.9 percent probability that the investor will undergo more than 5 percent loss on his investment.

Investment at Intrinsic Value Price per Share

The REIT value per share is 70.62 according to the levered required rate of return taken as an input for calculating the value per share of the STAG Industrial Incorporation.

Z score for Total Annual Return Greater than Required Rate of Return

• The Z score formula indicates that the probability at which the investor will earn high rate of return on their investment at market price in comparison with the required rate of return i.e. 10% is 0, because with the expected cash flows; rate of return which the investor can earn is 7.85%.
• According to Z score formula there is still 0 percent probability that the investor will earn rate of return higher than required rate of return minus 2 percent i.e. 8 percent will still be greater than the projected rate of return of 7.85% with the inputs assumed for the company.
• The Z score value of 100% indicates that there is 100 percent probability that the return from the investment will be as high as the current yield of 10 year treasuries.

Z score of probability of loss more than 5 percent of the investment

• The probability of loss more than 5 percent of the investment is zero percent in comparison with the input assumed and their standard deviation, which was calculated through Z score analysis.

Conclusion

STAG Industrial Incorporation specializes in real estate investment trust and follows the umbrella partnership real estate investment trust, providing a capitalization rate of 6.44 percent i.e. net operating income of 6.44 percent on the investments in equity REIT of STAG Industrial Incorporation whereas the market capitalization rate is 4.50 percent which is less than the capitalization rate provided by the company. Moreover, the probabilities of return greater than the required rate of return of the investors, greater than projected 10 years yield of treasury and loss of more than 5 percent of investment is determined in the analysis.

The capitalization rate is less than the investor required rate of return but is greater than the market capitalization rate which provides us with the probability of zero percent that the return will be as high as required rate of return based on the assumption which are undertaken for the valuation of the company. The positive indication which is determined after conducting probability analysis that there is 100 percent probability that the returns will be greater than the 10 year projected treasury yields and the loss will not be greater than 5 percent of the investment based on the assumptions undertaken for valuation.

All the findings and results appears to be positive for the investors, therefore, the investors should invest in equity REIT of STAG Industrial Incorporation. Moreover, the other advantage of investment in equity REIT that the investors will not be subjected to liquidity constraints of real estate market because the shares of the company could be traded on stock exchange and thus indirect investment through REIT in real estate market could provide greater than average return as the real assets are directly related to inflation........

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