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Songy 2011 Case Solution & Answer

Songy 2011 Case Solution

Introduction

Songy Partners was real estate developer, based in Atlanta, which had been facing critical challenges in managing three of its distressed investments, as the whole world economy was hit by the global recession of 2008. Each critical asset among the company’s portfolio represented different set of problems by the mid of 2011. The Songy partners needed a strategy to determine the path for these investments. The downturn was mainly because of the global economic recession 2008, which lead to declined operational efficiency, low investment liquidity, bankruptcies, lower demand, partnerships failures and pending loans. The company’s lenders were demanding to dispose off these assets by calling on the corporate guarantees. Due to different threats from the lenders over the foreclosure of these three assets had kept the company in a vulnerable position. The company needed to determine out whether to sell these investments in order to pay off the debt obligations or to get the loan extensions, as the economy was expected to improve in the future.

Problem Statement

Songy Partners owned three critical assets named as Dallas Hilton Garden Inn, Westminster Office & Hotel and the Carpenter Building. Due to the economic recession of 2008, the company’s operational as well as the financial efficiency declined, with a decline in the real estate market. These issues further created challenges for the company, as the company’s creditors started threatening the company about foreclosing these assets by calling on the corporate guarantees. Different lenders took advantage of the situation and offered the company with loan extension but at higher interest rates. The company’s senior management i.e. David and his partners had to make critical decision between the disposition of such critical assets or the loan extension by other creditors at higher rates.

Company Background

Songy Partners was incorporated by David Songy, Perry Waughal and Todd Nocerini in 1992. The company was founded on the four core values, which included innovation, partnerships, integrity and quality. These core values helped the company in achieving a substantial growth over the time. Initially the company enjoyed a competitive position by taking advantage of the different over the building opportunities during the 1980s, as the company purchased the buildings a t a lower prices, even at prices lower than the replacement cost. The company used to renovate such assets and it turned them into quality properties and then used them for a refinancing or resale purposes. Moreover, due to increased growth and profitability, the company expanded in other areas including Washington DC, Mexico, Houston, and Dallas etc. In addition, the company had generated an IRR greater than 20% with twenty seven projects. The company’s investment strategy worked well, as the company’s team struggled to create a long standing organization by taking advantage of the market opportunities.

Investment Analysis

The company had to take possible action courses over its critical assets, which created distinct set of challenges for the company. The assets were mainly located around the Southeast, with each asset having unique circumstances and property types. The financial analysis has been performed over the three key investments and different solutions have been proposed for each asset. The detailed analysis is covered as below

·Dallas Hilton Garden Inn

Songy Partners acquired the Wilson World Hotel in 2003. The hotel had 240 rooms and it was located in the Dallas, near to the Love Field Airport. The information about the Dallas Hilton Garden is described in the image below

Due to the economic recession, the hotels’ NOI and the occupancy rates were suffering. The Duetsche Bank was acquired by the Capmark by the end of the fiscal year 2010, which required Songy to initiate negotiations. The bank offered Songy with a loan extension of two years by the end of fiscal year 2013, but it demanded an immediate down payment of $2 MM of the $ 17.5 MM loan. The bank wanted to approve the loan at a significantly higher rate of 6.25%. Noe the company’s senior management had to decide about disposing the asset and applying off the debt obligations or to get the loan extension at a higher interest rate.

As given below, David and his team members will not be much optimistic about the Dallas Hotel and they liquidate it by the end of the fiscal year 2011. The option is to sale the property, which is generating a net present value (NPV) of -4.89 million. The entire sale proceeds would be going to the lenders and the investors would get nothing, so, selling the property does not seem a viable option.

On the other hand, the company had the option to take the loan extension till the end of fiscal year 2013. The company could take the loan of $17.5 million with an immediate $2 million down payment, at a high interest rate of 6.25%, and afterwards running the project until the project generates a positive NPV. It is assumed that the hotel will have a growth rate of 12% due to incremental occupancy rates and on wards the growth rate is assumed to be 5%. The cap rate is assumed to be 12.5%, while the weighted average cost of capital is determined as 12.75%. The valuation, as given below, shows that the property generates a positive net present value of $2.65 million, so the Songy should continue the project beyond the fiscal year 2016……………………

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