Perform a quick assessment on potential investment of Ascend REITs

Ascend REIT Evaluation Consider the following situation: You are working as a financial advisor for several institutional investors and have decided that a public REIT is the right investment choice for your specific portfolio goals. Information for the following public REIT ends up on your desk. Review the summary of the prospectus below. Ascend REIT is a large and diversified commercial REIT in North America. The stated objective of the fund is to provide a high level of return by tracking the performance of a benchmark index based on the performance of other REITS and other real estate-type investments. Currently, the fund engages in a continuous offering of shares of beneficial interest of the fund and has a registered 500,000 shares as of 2020. The most recent value per share was $9.50. Ascend requires a minimum investment of $4,000 for regular accounts and $1,600 for retirement plan accounts. While broker fees vary, shareholders don't pay a transaction fee on purchases and sales or reinvested dividends. Total annual fund operating expenses are reported at 1.15%, including management fees and other expenses. Ascend REIT's portfolio includes various retail and hotel properties throughout North and Central America. Returns to shareholders include cash distribution on a monthly basis. The management uses key strategies to invest in geographically diverse properties and conducts ongoing analysis of the performance of the assets, including identifying opportunities for further development. The principal manager of Ascend has managed the trust since it was established in 1991. Management of the Ascend REIT tout their strong occupancy levels. Their main source of value creation is through adding value and redevelopment. The financial management style of Ascend espouses a long-term and conservative approach, claiming to minimize its risk related to interest rates by utilizing limited levels of debt. The management team also boasts over 150 years of collective experience in construction, development, and management of commercial properties in the North American region. The most recently reported AFFO by asset type is the following: - Retail: 29% - Hotel: 71% A brief overview of the REIT's balance sheet is in the following table: Assets Cash Rents receivable Properties: Cost basis Accumulated depreciation Properties: Book value Total net assets Liabilities Short term Mortgage debt Total liabilities Shareholder equity Total liabilities and equity $72,300,000 $4,700,000 $900,000,000 $630,000,000 $270,000,000 $347,000,000 $12,000,000 $105,000,000 $117,000,000 $230,000,000 $347,000,000 Using the seven valuation criteria discussed previously, and thinking carefully about what we've discussed regarding real estate as an industry, perform a quick assessment of this Ascend REIT'S investment potential. ENTERPRISE VALUE FOCUS INSIDE OWNERSHIP YOUR EVALUATION ALIGNMENT OF SHAREHOLDER AND MANAGER INTERESTS LIQUIDITY STRENGTH OF BALANCE SHEET OVERHEAD COSTS How do you evaluate an investment in a public REIT? There are seven key questions to ask: 1. What is the enterprise value of the REIT? Portfolios of real estate assets are valued based on the cash flows they generate. However, the total value of a REIT frequently exceeds the simple present value of its adjusted funds from operation (AFFO). To what are investors ascribing this surplus value? Enterprise value can add a premium of between 5% and 15% on top of the value of the REIT's underlying real estate assets. In the United States, public REITS have usually traded at a premium, and in Europe, REITS have usually traded at a discount. Questions investors ask when evaluating a REIT's enterprise value include the following: How strong is the borrowing capacity of the management group? How much of the REITS portfolio is available for development? How good is the management team at negotiating? 2. What is the REIT's focus? Industrial? Office? Retail? Think back to the property types we learned about in Lesson 1 of this module as well as the defining aspects of real estate. It takes a lot to become a major player in any property type, and this also applies to managers of REITS. Additionally, a REIT will focus on a specific geographic area and asset size. Generally, the more focused the REIT is in its investment types, the better it performs. 3. 4. 5, 6. 7. To what extent are the inside owners invested? Substantial insider owners tend to take a longer-term view of the trust. They have "skin in the game," and that can pay off big time for other investors. How well are the interests of shareholders and management aligned? Ideally, the general partner of any REIT will only be successful if the limited partners are successful-and the deal structure and terms reflect that. How liquid is the REIT? In general, the larger the REIT, the more liquid the shares. Only smaller, very specialized REITs are likely to be less liquid, but they may or may not offer a specialized expertise offering better returns. How strong is the balance sheet? Most REITS limit the levels of debt they will employ. The higher the leverage, the more risk the investor is assuming. This is especially important when equity markets get sour and the debt levels rise or an economic downturn lowers the operating cash flow.. What are the overhead costs? Excessive overhead costs and excessive or misaligned compensation of lead employees can also hurt the stock's value. Ascend REIT Evaluation Consider the following situation: You are working as a financial advisor for several institutional investors and have decided that a public REIT is the right investment choice for your specific portfolio goals. Information for the following public REIT ends up on your desk. Review the summary of the prospectus below. Ascend REIT is a large and diversified commercial REIT in North America. The stated objective of the fund is to provide a high level of return by tracking the performance of a benchmark index based on the performance of other REITS and other real estate-type investments. Currently, the fund engages in a continuous offering of shares of beneficial interest of the fund and has a registered 500,000 shares as of 2020. The most recent value per share was $9.50. Ascend requires a minimum investment of $4,000 for regular accounts and $1,600 for retirement plan accounts. While broker fees vary, shareholders don't pay a transaction fee on purchases and sales or reinvested dividends. Total annual fund operating expenses are reported at 1.15%, including management fees and other expenses. Ascend REIT's portfolio includes various retail and hotel properties throughout North and Central America. Returns to shareholders include cash distribution on a monthly basis. The management uses key strategies to invest in geographically diverse properties and conducts ongoing analysis of the performance of the assets, including identifying opportunities for further development. The principal manager of Ascend has managed the trust since it was established in 1991. Management of the Ascend REIT tout their strong occupancy levels. Their main source of value creation is through adding value and redevelopment. The financial management style of Ascend espouses a long-term and conservative approach, claiming to minimize its risk related to interest rates by utilizing limited levels of debt. The management team also boasts over 150 years of collective experience in construction, development, and management of commercial properties in the North American region. The most recently reported AFFO by asset type is the following: - Retail: 29% - Hotel: 71% A brief overview of the REIT's balance sheet is in the following table: Assets Cash Rents receivable Properties: Cost basis Accumulated depreciation Properties: Book value Total net assets Liabilities Short term Mortgage debt Total liabilities Shareholder equity Total liabilities and equity $72,300,000 $4,700,000 $900,000,000 $630,000,000 $270,000,000 $347,000,000 $12,000,000 $105,000,000 $117,000,000 $230,000,000 $347,000,000 Using the seven valuation criteria discussed previously, and thinking carefully about what we've discussed regarding real estate as an industry, perform a quick assessment of this Ascend REIT'S investment potential. ENTERPRISE VALUE FOCUS INSIDE OWNERSHIP YOUR EVALUATION ALIGNMENT OF SHAREHOLDER AND MANAGER INTERESTS LIQUIDITY STRENGTH OF BALANCE SHEET OVERHEAD COSTS How do you evaluate an investment in a public REIT? There are seven key questions to ask: 1. What is the enterprise value of the REIT? Portfolios of real estate assets are valued based on the cash flows they generate. However, the total value of a REIT frequently exceeds the simple present value of its adjusted funds from operation (AFFO). To what are investors ascribing this surplus value? Enterprise value can add a premium of between 5% and 15% on top of the value of the REIT's underlying real estate assets. In the United States, public REITS have usually traded at a premium, and in Europe, REITS have usually traded at a discount. Questions investors ask when evaluating a REIT's enterprise value include the following: How strong is the borrowing capacity of the management group? How much of the REITS portfolio is available for development? How good is the management team at negotiating? 2. What is the REIT's focus? Industrial? Office? Retail? Think back to the property types we learned about in Lesson 1 of this module as well as the defining aspects of real estate. It takes a lot to become a major player in any property type, and this also applies to managers of REITS. Additionally, a REIT will focus on a specific geographic area and asset size. Generally, the more focused the REIT is in its investment types, the better it performs. 3. 4. 5, 6. 7. To what extent are the inside owners invested? Substantial insider owners tend to take a longer-term view of the trust. They have "skin in the game," and that can pay off big time for other investors. How well are the interests of shareholders and management aligned? Ideally, the general partner of any REIT will only be successful if the limited partners are successful-and the deal structure and terms reflect that. How liquid is the REIT? In general, the larger the REIT, the more liquid the shares. Only smaller, very specialized REITs are likely to be less liquid, but they may or may not offer a specialized expertise offering better returns. How strong is the balance sheet? Most REITS limit the levels of debt they will employ. The higher the leverage, the more risk the investor is assuming. This is especially important when equity markets get sour and the debt levels rise or an economic downturn lowers the operating cash flow.. What are the overhead costs? Excessive overhead costs and excessive or misaligned compensation of lead employees can also hurt the stock's value