1) ABC REIT is an equity REIT which owns a number of properties operated as Australian-branded childrens theme parks called Wombat World. The REIT has been operating for six years now. Overall commercial real estate prices in the markets in which this REIT operates have been fairly flat / constant over that time period. The REIT has the following financial information in the current year: Income statement ($m) Net operating income (NOI) $30 Head office expenses and executive compensation (Corporate G&A) ($6) Depreciation ($20) Loss on property sale ($5) Mortgage interest ($15) Net income ($16) Balance sheet ($m) Assets: Commercial real estate $600 Depreciation ($120) Cash $20 Liabilities and equity: Mortgage debt (interest only mortgage) $300 Equity $200 Assume that the market capitalization at todays stock price of the REIT is $110MM (i.e. this is the market value of the equity of the REIT based on its current stock price). (a) This REIT has negative net income. Does this necessarily mean that it had negative net cash flows from operating activities and/or negative AFFO? Why or why not? (Explain in a couple of sentences) (b) Could you calculate cash flows from operating activities and/or AFFO directly from the above information? Why or why not? (Explain in a couple of sentences note you are not being asked to actually calculate these metrics, just explain whether or not it is possible) (c) Calculate the funds from operations (FFO) for this REIT. What multiple of FFO is the REIT trading at in the market (in other words, how large is the market value relative to FFO)? (d) Calculate the Net Asset Value of the REIT (gross, not per share) assuming the cap rate of 6%. What does the Net Asset Value relative to the market capitalization tell you? (e) Based on the REITs market capitalization, what value is the market placing on the commercial real estate business owned by the REIT? State any assumptions you have to make in doing this calculation. (f) Does it seem like this REIT is well-managed? Why or why not? Do you have any recommendations or suggestions for anything that the REIT could do to improve its future prospects? (g) If you were the bank who lent the money for this REITs mortgage debt, would you be at all worried about the REIT defaulting on its mortgages? To support your answer, please calculate at least one metric that you would use to assess credit risk for commercial mortgages.