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Case Assignment: Angus Cartwright IV Part 2 Your boss, Angus Cartwright, has just returned from a meeting with John and Judy DeRight

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Case Assignment: Angus Cartwright IV

Part 2

Your boss, Angus Cartwright, has just returned from a meeting with John and Judy DeRight. The DeRights have asked him to identify and recommend investment opportunities in the greater Washington D.C. area. Angus has presented them with the facts in the case and, based on a few back of the envelope calculations, the DeRights have decided that they are interested in investing in one of the two apartment buildings under consideration, either Alison Green in Montgomery County, Maryland or Ivy Terrace in Arlington, Virginia. 

 

Angus is back in the office after his annual visit to the homeland and is so pleased with your work on the financials that he asks that you to complete the analysis and make a recommendation to John and Judy; informing them of the risks and returns associated with each property and recommending which property is the best investment for them based on your analysis and insight. You are scheduled to meet with the DeRights at 6:00 pm on Wednesday, April 21.

 

Submit your work product in a single PDF document to: Prof.KBHiggins@optimum.net

 

Instructions:

 

This is the second part of a two-part case assignment. In this part, you will reproduce exhibits 6, 8, & 9 (or calculate the partitioned IRRs directly as performed in class rather than reproducing Exhibit 8) for both Alison Green and Ivy Terrace. The structure of exhibits can be found within the Angus Cartwright IV HBS case and Exhibits 1 through 5 for each property are provided and will serve as the starting point. If you wish to use the exhibits that you completed for the first part of the case do two things: 1) check that the IRR for each property equals the target IRR provided in the first part of the case assignment, and 2) if you change the growth rate for the cash flows from operations from 3% to 2% for each property, the IRR for Alison Green changes to 13.39%, the IRR for Ivy Terrace, 13.08%. This check ensures that you will be working with the same set of projections. 

 

Your analysis is limited to the two residential properties and you are to choose one, and only one, as your recommendation to the DeRights. Furthermore, do not take the price differences between the two properties into consideration, assume that they are focused on adding real estate to their portfolio and the size of the investment is immaterial at this point. 

 

You can work either individually or in pairs. You and your partner should work as an independent unit. If you or your team needs clarification about something from the case or are having trouble, please feel free to contact me. Please format your work so that it can be uploaded in one single PDF document. Your analysis and spreadsheets are due by class time on Wednesday, April 21.

 

The standard investment recommendation contains the following elements: 

• A one paragraph executive summary providing a general overview of the analysis, including the recommendation and essential characteristics of the preferred investment that make it attractive relative to the alternative. This should be the first page of your document and concisely summarize the analysis of the properties.
• A detailed analysis of the information presented in the cash ow statements based on the scenario provided in the case. This section should be no more than three pages and include the benefits and costs associated with each property as they relate to financial performance and the perceived risks. It is important that this section of the document be comprehensive in its assessment of risk and return, but also well-structured and to the point. The DeRights are well aware of the information presented in the case, so there is no need to rehash known facts except as they relate to particular issues. 
• Pro forma cash flow statements and supporting information for the two properties. This involves reproducing exhibits 1, 2, 3, 4, 5, 6, 8 and 9 in the case for each of the two properties. 
• In addition to the exhibits, provide comparative graphs illustrating the sensitivities of returns to assumptions about the growth rate of cash flows from operations, terminal cap rate, and LTV.

 

Recommendation & Analysis: 

• Executive summary  o Which property do you recommend? 
  • Does it meet the DeRights investment objectives? 

§    John and Judy do have slightly different goals; John prefers income, Judy prefers appreciation. Despite this, assume they both prefer the property offering the best risk/return prole. They can, after all, restructure the cash flows from their investment so that John receives more of a share from income and Judy more of a share from appreciation once they have purchased the property; however, this is beyond the scope of your recommendation.

• • Why is the property preferred? 
• Detailed analysis  o Identify your recommendation. Explain your choice in terms of risk, return and how the property meets the investment objectives of the DeRights. 
  • Detailed discussion of the differences between the two properties regarding risk and return. 
  • Discuss the risks and unknowns associated with each property and compare the two properties in these terms. Are there other factors that come into play?
• Appendix
  • Exhibits 1, 2, 3, 4, 5, 6, 8 and 9 from the case study for each of the two properties.
  • Graphs of sensitivities: IRR vs. terminal cap rate, IRR vs. LTV, IRR vs. growth rate of cash from operations.  These are comparative graphs with both Allison Green and Ivy Terrace on one graph for each sensitivity.

 

Help and hints: 

• Read the entire Properties section. Some qualitative information about risk and future supply is contained in the descriptions of the residential properties but applies to the office properties as well. 
• All of the investment ratios and risk measures that you calculate as part of constructing the exhibits are relevant to your analysis and should be included in your discussion of the risk and return of investment. If there are other measures we have discussed in class that are not presented in the case, you should feel free to incorporate them into your analysis. 
• Assume that the difference in prices of the properties do not play a role in the DeRights decision.