Title Reading 33 Real Estate Investments.pdf ✅

Question #1 of 26 Question ID: 1586356 Which of the following least accurately identifies a type of publicly traded real estate security? A) Investment trusts. B) Direct mortgage lending. C) Operating companies. Question #2 of 26 Question ID: 1586357 Which of the following is most likely to represent a publicly traded real estate debt investment? A) A real estate operating company (REOC). B) Secured bank debt collateralized by real estate. C) A mortgage real estate investment trust (Mortgage REIT). Question #3 of 26 Question ID: 1586375
Patricia Ly, CFA, is a portfolio manager who wishes to add diversification to her portfolio through the addition of a real estate investment. Ly finds the following data for a particular industrial REIT: Net operating income (NOI): $710,000 Funds from operations (FFO): $630,000 Assumed cap rate: 6% Shares outstanding: 90,000 shares Storage property average P/FFO multiple: 13x. Industrial property average P/FFO multiple: 10x. Ly decides to perform a valuation on this REIT. The value per share of this REIT using a price- to-FFO approach is closest to: A) $91 B) $112 C) $70 Question #4 of 26 Question ID: 1586362 Which of the following is least likely a difference between real estate investments and traditional asset classes like stocks and bonds? A) Real estate tends to be indivisible B) Real estate tends to be difficult to value C) Real estate tends to be homogenous Question #5 of 26 Question ID: 1586366 Compared to transaction-based indices used to track the performance of private real estate, appraisal-based indices are most likely to exhibit an apparent: A) time lag. B) higher volatility.
C) higher correlation with other asset classes. Kent Clarkson, Tony Chekov and Peter Chanwit are investment consultants for a large public pension fund. They are partners in Clarkson, Chekov and Chanwit Consulting also known as 3CC. From previous meetings with the pension board, it has been established there will be an increase in exposure to real estate for the overall portfolio. Because of the defined benefit plan's significant size and their staff's expertise, the pension fund can invest and manage all forms of real estate investments. Partners of 3CC are to recommend a form of real estate investments, and recommend potential investments. Expected Real Estate Market Conditions Both residential and commercial real estate prices have fallen over the last five years. This trend is not expected to persist. It is a 'buyer's market' – the current supply exceeds the current demand and prices are lower than the intrinsic value. Although interest rates have fallen to historically low rates, the volume of real estate transactions remains low. Current average 20-year commercial mortgage rates are 3.75% and expected to stay relatively flat for at least 7 more years. Loan underwriting standards have become more stringent and loan-to-value (LTV) ratios are expected to be lower than the earlier average rate of 80%. The four forms of real estate under consideration as an investment choice for the pension fund are: Private: equity option is to buy commercial properties and manage them; debt option is to directly lend to commercial property investors. Public: equity option is to buy equity REITs; debt option is to buy mortgage REITs or CMOs. The following information was collected by 3CC partners to aid their analysis. The returns and standard deviations of the four possible forms of real estate investments considered are listed in Exhibit 1. Correlations of real estate index with Treasury bill returns, US aggregate bond returns and US stock returns are listed in Exhibit 2. Exhibit 1: Returns and Standard deviation (past 20 years) Returns σ Private Equity 9.5% 6.5% Private Debt 5.5% 8.5% Public Equity 11.5% 21.0%
Public Debt 6.2% 22.5% Treasuries 3.5% 0.6% Exhibit 2: Correlation of Real Estate Index With Other Asset Classes (past 20 years) Real Estate Index Correlations ρ US Treasuries 0.35 US Aggregate Bonds -0.05 US Stocks 0.25 The partners make the following statements: Kent Clarkson: We should eliminate the private debt option from consideration. Returns for private debt are likely to be low since interest rates are likely to remain low and the amount of underwriting that is going to be required as a lender doesn't seem worth it. Tony Chekov: I like the equity options better than the debt options based on Clarkson's private debt expectations. Peter Chanwit: I prefer the private option over the public option since the pension fund staff can better actively manage the real estate projects and possibly outperform the index. The partners have identified specific REIT managers who have consistently outperformed their indices for the public option. They have also contacted potential high creditworthy borrowers in case of private debt. For the private equity option, the partners are looking at different commercial properties. They have narrowed their choices to hotels and multi- family units. Peter Chanwit is analyzing two specific buildings. Green Oaks Hotel and Blue Ridge Apartments are next to each other; have exactly the same number of units, same amenities; were built 10 years ago by the same construction company; and managed by the same property management company. They are currently owned by different entities that are also looking to provide the financing on the following basis. Green Oaks Hotels Blue Ridge Apartments Asking Price $25,000,000 Asking Price $25,000,000 Annual NOI End of Year 1 $2,187,500 Annual NOI End of Year 1 $2,125,000 LTV 75.0% LTV 70.0%