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)

(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.