Mini Case 2:

Performance Attribution Analysis

Task 1 (30 points): Construct the cash flow proforma statement for the following project by filling out the white cells of the following table.

A 2-year levered equity investment between t=0 and t=2.

The first NOI is 10 at t=1, and NOI grows at 5%/yr until t=3.

The cap rate is 5% (going-in) at t=0 and increases by 0.5%/yr to 6% (going-out) at t=2.

Capital Expenditures are 10% of NOI.

The investment is levered with a two-year interest-only loan at a 5% interest rate with the face value of 80 (i.e., the initial loan amount is 80).

Cash flow pro forma statement

T=0

T=1

T=2

T=3

Today

1 year later

2 years later

3 years later

Cash flow at the beginning of the project

Cash flows for the first period (between t=0 and t=1)

Cash flows for the second period (between t=1 and t=2) and the last CF

[Cap Rate]

NOI

Acquisition CF at t = 0 (<0)

Capital expenditures (<0)

Disposition CF at t = 2 (>0)

Property BT CF

Loan at t = 0 (>0)

DS incl. the final pmt. (<0)

Equity BT CF

Task 2 (70 points):Estimate the percentage-point contribution to the equity IRR of (1) the baseline return under no NOI growth and no cap rate change, (2) NOI growth, (3) cap rate changes, and (4) leverage. Furthermore, (5) estimate the equity IRR by adding (1), (2), (3), and (4). Of course, you could calculate equity IRRs under alternative assumptions using spreadsheet, but you can answer these questions without computing an IRR if you understand the approximate method explained in the lecture. Write legibly your explanations and calculations.

(1) Baseline

(2) NOI growth

(3) cap rate changes

(4) leverage

(5) The estimated equity IRR