On a Saturday afternoon in May 20XY, Robert Boyle and his wife Janet were sitting on the porch of their house on Saltspring Island, British Columbia, watching the fog roll in. The couple frequently spent weekends on the island, when the demands of Roberts business and Janets teaching job would permit. Robert was the president of Robert Boyle & Associates, a closely held real estate investment trust (REIT) located in Vancouver. From a small office there, Robert had been managing the development of shopping centres for a little over eight years. Robert conducted most of the business himself, and the associates, a group of about 40 friends, family members, and business colleagues, provided most of the financing. The trust had been quite successful, and today it owned two shopping centres, which produced rental income in 20XX of almost $6 million. (See Tables 1 and 2 for Boyle & Associates financial statements for 20XX.)

Table 1

Robert Boyle & Associates Income Statement For the Year Ending 20XX (in millions) Loan income........................................................... $ 0.240 Rental income......................................................... 5.992 Other income........................................................... 0.168 Total income........................................................ 6.400 Amortization........................................................... 0.920 General and administrative expense........................ 0.435 Operating income.................................................... 5.045 Interest expense....................................................... 0.945 Net income.......................................................... $ 4.100 Dividend paid.......................................................... $ 4.100 Note: Boyle & Associates qualifies as a REIT, so it pays no income tax.

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Table 2

Robert Boyle & Associates Balance Sheet As of December 31, 20XX (in millions) Assets Cash and equivalents................................................................................ $ 2.100 Land development and construction loans............................................... 2.000 Property owned, net of amortization........................................................ 16.000 Other assets............................................................................................... 0.900 Total assets................................................................................................ $21.000 Liabilities and Equity Bank borrowings...................................................................................... $ 2.000 Mortgages on property.............................................................................. 7.000 Other liabilities......................................................................................... 0.550 Total liabilities...................................................................................... 9.550 Common stock.......................................................................................... 11.550 Retained earnings...................................................................................... 0.000 Total equity............................................................................................ 11.550 Total liabilities and equity......................................................................... $21.000

You know, Janet, Bob said wistfully, we ought to move out here permanently. Theres just no comparison between life here and on the mainland.

You get no argument from me, Janet replied. Ive been telling you that ever since we bought this house.

You could develop real estate just as easily from here as in the city, you know. Which reminds me, whats the latest on the Saltspring Centre project? Youve been quiet about it for about a week now. Janet referred to a proposal Robert had made a few months ago to build the first shopping centre on Saltspring Island.

Robert sighed. Well, its on the back burner right now for lack of financing. Im convinced that it would make us a lot of money; but, the trouble is, it will take a lot of money to get it builtabout $10 million, in fact, and thats more than weve ever had to raise before.

Oh, come on, Janet said. (She had always been an active participant in the business.) Youve built two shopping centres so far, and didnt have any trouble getting the money for them. Why dont you just borrow some more?

Too much borrowed already, Im afraid, Robert replied. Our debttoassets ratio is quite a bit over the average for REITs now, and our investment dealer says that another loan, or even a bond issue, would be quite expensive in terms of interest cost. (See Table 3 for comparisons between Boyle & Associates and a sample of other REITs.)

Table 3

Industry data and comparisons (in millions)

Company Total Revenue Net Income Number of Shares Long-Term Debt Total Equity JKL Realty Trust.................................... $ 4.3 $ 2.6 1.423 $ 3.1 $ 24.0 UVW REIT............................................. 7.8 1.5 2.500 21.2 12.3 Cousins Properties Inc. ........................ 52.5 29.6 17.165 14.1 110.7 Bradley REIT.......................................... 7.1 1.3 3.360 11.0 6.8 Mortgage Growth Investors Inc. ........ 14.0 9.9 7.730 19.8 123.9 Dial REIT (newly established).............. 1.736 10.3 31.3 Average of companies listed............... 14.3 7.5 5.653 13.3 51.5 Robert Boyle & Associates................... 6.4 4.1 4.000 9.5 11.6 Company Total Assets Earnings per Share Dividend per Share Book Value per Share JKL Realty Trust.................................... $ 27.1 $ 1.83 $ 1.75 $ 16.84 UVW REIT............................................. 33.5 0.60 0.57 4.92 Cousins Properties Inc. ........................ 124.8 1.72 1.64 6.45 Bradley REIT.......................................... 17.8 0.39 0.37 2.01 Mortgage Growth Investors Inc. ........ 143.7 1.28 1.23 16.03 Dial REIT (newly established).............. 41.6 1.64 18.02 Average of companies listed............... 64.7 0.97 1.20 10.71 Robert Boyle and Associates.............. 21.0 1.03 0.98 2.89 Company ROE ROA Debt to Assets Asset Turnover Net Profit Margin JKL Realty Trust.................................... 10.8% 9.6% 0.11 0.16 60.5% UVW REIT............................................. 12.2 4.5 0.63 0.23 19.2 Cousins Properties Inc. ........................ 26.7 23.7 0.11 0.42 56.4 Bradley REIT.......................................... 19.2 7.3 0.62 0.40 18.3 Mortgage Growth Investors Inc. ........ 8.0 6.9 0.14 0.10 70.9 Dial REIT (newly established).............. 0.25 Average of companies listed.............. 12.8 8.7 0.31 0.22 37.5 Robert Boyle and Associates.............. 35.5 19.5 0.45 0.30 64.1 Company 5-Year EPS Growth Dividend Yield P/E Ratio Recent Share Price JKL Realty Trust.................................... 1.1% 11.7% 8.2 $15.00 UVW REIT............................................. 8.1 5.8 16.3 9.75 Cousins Properties Inc. ........................ 2.9 9.8 9.7 16.75 Bradley REIT.......................................... 12.3 2.8 34.2 13.25 Mortgage Growth Investors Inc. ........ 7.1 6.2 15.5 19.88 Dial REIT (newly established).............. 8.5 19.25 Average of companies listed............... 5.3 7.5 14.0 15.65 Robert Boyle and Associates.............. 9.7

Well, what about the shareholders? Janet insisted. Cant they contribute some more equity money? (Boyle & Associates 40 existing shareholders held 4 million shares with a book value of $2.89 each.)

Robert responded with a smile. You know the answer to that already, he said. You and I are the biggest shareholders. But even if all 40 shareholders put in an equal amount it would cost each of us $250,000. You and I dont have that kind of cash, and Im sure the rest of the shareholders dont either.

Well, then, Janet continued unperturbed, you need some more shareholders. Why dont you sell shares to the public? Im sure it would be a great success once people knew what the companys plans were.

Page 587Yes, thats what our investment dealer said, too, Robert replied. But I have some reservations. For instance, look at the dilution effect. You know, to qualify as a REIT and, therefore, to pay no income tax at the corporate level, we pay out 100 percent of earnings every year as dividends. Anything that affects earnings per share, then, affects the shareholders dividends. If we issue a whole lot of new shares, earnings per share will be diluted severely, and the existing shareholders will be most unhappy!

But, Robert, Janet said, arent you ignoring the money you will make on the proceeds of the shares issue? It seems to me that the income from the investment ought to more than offset the initial dilution, producing even more earningsand dividendsthan before. Surely the shareholders will see that.

Maybe so, Robert said, but thats not the only problem. Suppose, for example, that the whole shopping centre deal falls through? (It was not certain at this time that the residents and government authorities on Saltspring would approve the project.) If it does,Page 588 the price of our companys shares, now publicly traded, will surely fall, to the dismay and embarrassment of us all. You know, managing a publicly traded company is not at all like managing a private one. The pressure for shortterm performance is terrific. If I dont produce, Ill be voted out of office at the next shareholders meeting.

And thats another thing, Robert continued, warming up, shareholders meetings. Look what you have to go through as a publicly traded company: shareholders meetings, annual reports, BC Securities Commission filings, disclosure notices, regulators poking around; why, the administrative tasks alone will require a couple of fulltime people! Besides that, look at the cost of the issue itself. The investment dealer will take a cut of about 6.5 percent of the issue, and well have to pay about $60,000 outofpocket for legal and accounting fees and printing expenses. I bet wed have to issue almost $11 million in shares just to get $10 million in cash. Pretty expensive!

Yes, thats so, Janet agreed. But even so, the benefits might outweigh the costs. One thing you havent mentioned is the increase in liquidity for the companys shares you would get if they were publicly traded. You know most of our existing shareholders have been with us for the whole eight years, and they have quite a bit of money tied up in this one basket. How can they diversify their portfolios or sell their holdings outright? I bet theyd love to see the shares publicly traded in the market with an established price.

All right, you may have a point, Robert conceded. Tell you what; Ill write a letter to our existing shareholders outlining the pros and cons, and ask them to respond with recommendations. If the prevailing sentiment is to go public, well do it, and if its not, we wont. In the end, though, the whole discussion may depend on how badly we want to build the Saltspring Centre. If we want it, well probably have to go public to build it.

I knew you would have it all figured out, Janet said, approvingly. Now, how about a martini?