JKJ Pension Fund Case Solution
A portfolio manager at JKJ Pension Fund i.e. Sarah Griffin is in charge of the real estate investment department of company. The company has hired her in order to make a strategic plan on how the company should deal with the real estate portfolio, and to give suggestions on the new investment opportunities.
Additionally, the pension funds is the fastest way of savings in the local markets and largest pool of private capital in the international market. Also, the JKJ Pension Fund is the important player in the real estate industry by Sarah Griffin. She had to consider wide range of concerns from diversification by type of property to the management ease to effectively evaluate the overall portfolio strategy. JKJ pension fund did not make any sales and new investment for the three years regardless of its core focus on managing the eleven existing properties due to collapse of the real market in 1990
Question 1. Portfolio Strategy as a whole
The company already owns around 11 real estate properties, and wants to invest more in this sector. Sarah Griffin is planning to construct her strategy on a lot of factors that include the geographic location of the properties, the size and the type of property to invest in. She also needs to understand the market for a particular property and how quickly its value will increase and how manageable the property will be. She is also considering to increase the number of advisors so she could get a wider range of advises to construct the portfolio.
Question 2 & 3. Valuations and decision making
Criteria to hold or sell
The criteria for the decision to hold or sell a given portfolio of the JKJ pension fund, is to evaluate the difference between the market value of the property and the amount of investment carried out by the business. If the market value of the portfolio is greater than the capitalized amount of the company then the result will be to trade the property. On the other hand, if the property has lower market value than the invested amount, the decision will be to hold the portfolio for use, wait until the market value goes greater than the investment value of the property.
The portfolio detail and the decision regarding the portfolio are given as follows:
There are three undeveloped sites in this portfolio that are labeled as Lots A, B and C in the Will shire section of Los Angeles. The Lot A’s area is of 120,000 ft 2 land where, according to current zoning 812,000 ft 2 can be built, Lot B consists of the 180,000 ft 2 of extended land where 900,000 ft 2 space can be built and Lot C consists of the 60,000 ft 2 land where according to current zoning 270,000 ft 2 can be built. Furthermore, the Lot A can generate the yearly profit of $35,000 while the Lot B contains holding costs of around $24,000 annually.
This property has positive future cash inflows. On the other side, the risk related with the investment is also minimal. The capitalization degree for retail and residential is fluctuating between 7.5 – 9.5%, and this hotel is presently rented for 20 years, so, the level of risk is low for the property 1 option.
Sarah Griffin must hold this selection as the market value $ 540,909 of undeveloped sites is lower as compared to the financing of $ 3,600,000.
Will shire Plaza Garage:
Will shire Garage’s area comprises of a 3,500 spaces on five heights from three are subterranean; this area is located beside the Royale Plaza Hotel. Additionally, there is around 1600 monthly car parking as well as 1000 temporary spaces that are available on the daily and hourly basis. There are also approximately 900 spaces that are used by a neigh boring situated hotel.
Moreover, the cash flows for the Will shire Garage representing the earnings in flows for the future growth and profits of the investment. The market capitalization rate for the garage is fluctuating between 10.0% – 12%, whereas the level of the risk for the Will shire Garage is average as the Will shire Garage is giving earnings presently by three different spaces.
Sarah Griffin must hold this option as the fair value of Will shire Garage is$10,730,000 is a lesser amount as compared to the investment of $21,400,000.
Will shire Ground Leases
Will shire Ground Lease is the ground lease that involves three tenancies that include Will shire East Associates, Sid’s Restaurant and Banco Los Angeles. The Will shire East Associates has no renewal procedure while the lease of this option would end in the year 2043 with the Net fixed rent payment of $58,000 per annum. In addition to this, Sid’s Restaurant has renewal options of 55 years at FMV along with the Net fixed rent of $74,996 every twelve months, while lease of this option would end in the year 2017. Lastly, Banco Los Angeles has no renewal options and lease of this option would end in the year 2023 with Net permanent rent of $85,000 each year.
Besides this, the level of the risk connected with the Will shire Ground Lease is stumpy as all the three available options are presently leased. The capitalization rate for the office and industrial properties is 8.5-10%.
Sarah Griffin ought to sell this option as the market value $ 1,981,782 of Will shire Ground Lease is more as equated to its investment $1,500,000.
Riverbank Central Hotel
The portfolio of JKJ pension Fund named Riverbank Center Hotel is a 28 floor structure that contains 375 accommodations and is a 161618 square foot structure. The hotel is a four star and AAA 4-diamond rating hotel as well as it is the easy contact through interstate 10 and 65. The tenancy of the hotel in the year was 53% that was expected to upsurge by 58% in 1994 and 60% in the year 1995.
Moreover, the net cash flows for the Riverbank Center Hotel are constructive, representing the promising results for the future development and earnings for the investment. While the level of risk is modest and the capitalization rate for hotels is range in the middle of 9.5-12%.
Sarah Griffin have to hold this opportunity as the market value $3,712,102 of the Riverbank Center Hotel is less as compared to its investment $18,750,000……………
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