UWS property taxation and finance - Essay Example

? UWC PROPERTY TAXATION AND FINANCE al Affiliation Key words: Financing, Taxation Introduction The paper provides a full funding analysis and interpretation for Mirvac Property Trust financial Structure. It further discusses the development funding, Average Weighted Cost of Capital, Internal Rate of Return, and management burden for the Mirvac Property Trust. Consequently, the paper discusses the Net tangible Asset, unit price, tax exposure, and gearing leverage and ratios for the trust. Additionally, the paper talks about the market capitalization and specific data inputs for the micro-property (“BZW Mirvac property trust BMT”, 2006). Discussion Development Funding The Mirvac Property Trust has two development funding; Meadow Springs and Seascapes. The Meadow Springs Estate is a residential estate located around and within a championship golf course in Mandurah (Compton, 2000). The estate is located approximately seventy five kilometers south of the Perth Central Business District. Meadow Springs is serviced by the Mandurah railway and Perth, allowing an easy commute for the Perth workers. The area has various shops, stores, and supermarkets located within the area. Mandurah area features various recreational facilities like restaurants, cinema complex, walkways, and parks. Meadow Springs is therefore a residential development site valued at $15.8M. The Mirvac Development Fund for Seascapes is closed end, unlisted, single project fund. The investment strategy for the fund is maximizing the value of investors by offering returns the development and investment of subdivision project and quality land (Harriss, 2008). Seascapes are a residential community located in Mandurah located seventy five kilometers Perth South. The project is comprised of the development of forty eight hectare land with subunits approval for five hundred and fifty five residential Lots in addition to a Grouped Housing Site. Seascapes are extended to view the foreshore of the Indian Ocean and are celebrated by tourists and residents alike for its relaxed atmosphere, waterways, and beaches. The property type for Seascapes is a residential development site valued at $23.6M Weight Average Cost of Capital The minimum amount that Mirvac Property Trust earns to pay each financial investor is 7.5% to 8.0% for passive invested capital and 11.5-12.0% of active invested capital. WACC is important for the Mirvac Property Trust because it enables the company to maintain their relationship with investors and grow their revenues. Weighted Average Cost of Capital for Mirvac Property Trust is composed of both equity financing and debt according to Mirvac Property Trust optimal mix of financing equity and debt. Weighted Average Cost of Capital has enabled the Mirvac Property Trust to make decisions about the proposed projects (Harriss, 2003). The Mirvac Property Trust came up with the above figures by computing Weighted Average Cost of Capital using the formula Weighted Average Cost of Capital = wt*rt+wp*rp +ws*rr. Where wt is long-term debt, wp is preferred stock,ws is the common stock, rt is the long term debt cost, rp is the preferred stock cost, and rr is retained earnings stock. Therefore, the projects below the anticipated Weighted Average Cost of Capital are rejected, while those above Weighted Average Cost of Capital were chosen. The weights for Mirvac Property Trust used both the historical and target proportions. The target proportions were the capital mix that the Mirvac Property Trust achieved. Internal Rate of Return The Mirvac Property Trust has a target unlevered ten years IRR Internal Rate of Return of more than 11 percent. This is because the Mirvac Property Trust maximizes the property security and income growth and maintains a portfolio that is diversified (Lindholm, 2004). Mirvac trust has also continued to raise the portfolio quality through the disposal of non-aligned asset above or at valuation. The trust has utilized the development division to come up with commercial assets that are of high quality. Consequently, the development group strategy is to attain the unlevered average project of greater than 18% for the internal rate of return. This is achieved when the trust focus on master planned, large or infill apartment, land projects and house. Additionally, the Trust actively pursues the quality retail, industrial and retail projects for the company and external parties. Therefore, following the sales most of the trust’s non-core assets and other business, the company has embarked to its crucial competencies. The two competencies are the development and property investment, while maintaining the trust’s self-funding model. The targeted IRR Internal Rate of Return for the average assets that are unlevered are more than eleven percent and for projects the Internal Rate of Return is more than eighteen percent. The investment priorities for the trust are industrial assets and high quality office, meanwhile using development division for the organic portfolio growth. Management Burden The management for Mirvac has implemented the various processes and systems to make sure that the Mirvac stakeholders and security holders are protected. The management has had problems of ensuring that the company is managed properly to maintain corporate governance standards. The Mirvac Property Trust has encountered a burden in fostering culture that values the ethical behavior, respect, and integrity to protect the interests of stakeholders (Matthews, 2011). Net Tangible Asset The total assets of the Mirvac Property Trust, excluding intangible assets such as patents, goodwill, and trademarks minus the total liabilities is net tangible asset. Mirvac Property Trust computes its Net Tangible Asset is using the formulae Total assets- total liabilities-intangible assets. As each Mirvac Limited and Mirvac Propety Trust share is a different CGT asset, separate cost base for the companies is worked out. The trust has done this by apportioning the total cost base in every Mirvac security between the Mirvac Limited Share and Mirvac Property Trust unit. One possibility of apportionment is allocation of total cost base on their net tangible asset values of Mirvac Limited and Mirvac Property Trust (“Mirvac Group: a culture of excellence”, 2002). Their values are as shown in the table below Dates Mirvac Limited % Mirvac Property Trust % Mirvac Commercial Trust % 1999 – 2002 32.10 39.20 28.70 2002 – 2004 26.50 73.50 0 2004 – 2006 28.30 71.70 0 2006 – 2007 20.72 79.28 0 2007 – 2008 17.81 82.19 0 2008 – 2009 13.78 86.22 0 2009 – 2010 10.32 89.68 0 2010 – 2011 8.87 91.13 0 2011 – 2012 4.45 95.55 0 2012 – 2013 3.44 96.56 0 2013 – Date 4.17 95.83 0 The key financial metrics for Mirvac Property Trust are statutory net profit that is attributed to Mirvac security holders of $ 552 M. The previously closed provision for the Trust was $273.2 M. The net operating profit from the trust was $ 194.2 M. The net tangible Asset per stapled security is $1.645, the total asset of $8.4B, and net asset for $ 5.7B. Unit Price Mirvac securities are quoted on ASX. Mirvac information on unit price is set below. Mirvac Information Unit Price Sales Price $ 1.45 Last three Months High $ 1.60 Low $ 1. 41 Closing Price $ 1.48 Additionally, the table below shows the unit prices for Mirvac for the last 24 months Time period Mirvac 27 April 2011 $1.46 5 day $1.44 10 day $1.43 30 day $1.45 60 day $1.47 90 day $1.49 6 month $1.49 12 month $1.39 18 month $1.31 24 month $1.48 Gearing ratio and leverage The Mirvac Property Trust has a lower degree of leverage, thus considered less risky. The acceptable level for Mirvac Property Trust is determined by comparing it with WOT (Oates, 2001). Some of the gearing options for Mirvac Property are calculated below: Debt to equity ratio: = Total Debt / Total equity = 2.2B/ 5.945B =0. 37 times Equity ratio =equity / assets =5. 956B/8.3B =0.72 Debt ratio = total debt / total assets =2.2B/8.3B =0.2651 Earnings per Share = Earning/ Average Share = 0.04 times From the above ratios it is evident that the Mirvac Property Trust is less vulnerable to collapsing in the business cycle because it continues to service the debt irrespective of how sales are. The Larger percentage of the equity offers a cushion and is portrayed as a financial strength. Cash Flow The cash flow for Mirvac comes from the operating activities like depreciation, and changes in the accounts receivable. Additionally, the trust acquires its cash flow from the capital expenditure, investments, and other investing activities. Consequently, the cash flow from financing activities includes the dividends paid, net borrowings, and sale purchase of stock. During the construction process, all the interest cost are maximized to the inventory.The interest costs are released in the Profit and Loss on settlement through the cost of borrowing capitalized during the development process(Slee, 2011). The interest cost, and finance and interest charges payable are expensed directly to profit and loss upon their completion. The total projected return for Mirvac suffered a loss. This led to an increasing interest cost and resulted in a negative project cash flow. During the second year, when the construction process delays, it becomes apparent and the inventory impairment is highlighted to reflect the diminished project net realizable value. The gross margin is unaffected by interest impairment and the finance delay is caused by the time delay. In case the impairment is related to the rising cost of development costs, it leads to margin becoming negative making the gross margin to be zero. The inventory is not recorded at the impairment time but the loss provision is included in the balance sheet. The provision is unleashed against the cost of interest upon settlement. Market Capitalization Market Capitalization for Mirvac is the total market value of the organization’s equity. Market capitalization is one of various ways that Mirvac uses to value its firm. Mirvac calculates its market capitalization by multiplying the issued number of shares by the price of stock. Mirvac has multiple equity types, making the trust to have the market cap to be the total of the industry cap of various types of shares. Therefore, the market capitalization is calculated as Share price * outstanding shares = 6.41 Billion. The market capitalization of the Mirvac Property Trust is rated below average compared to other related companies. The Mirvac Property Trust market capitalization is estimated to be 6.41 Billion claiming about 35% of the listed equities under the office industry of REIT. The market capitalization for Mirvac Property Trust us 56.35% lower than the financial sector and 155.64% higher than the office industry (Sobul, 2005). Therefore, the stock market capitalization is 45.77% higher than that of the company. The Mirvac Property Trust Summary is as shown in the table below Company Summary Market Cap: 6,413,590,847 Issued Shares: 3,654,938,678 Security type TRUST UNITS Six First listed 18/06/1999 First traded 16/06/1999 Sector: Financials 40 Industry Group: Real Estate 4041 Industry: Real Estate 4041 Sub Industry: Data Inputs and KPI Some of the crucial KPI for Mirvac are health safety environment, corporate governance, news, reports, and case studies, management of sustainability, sustainability policy, and sustainability awards. The trust has strategic plan, key performance target, independent external recognition, management system, and learning and development for each and every indicator (Veillette, 2005). Reference ? BZW Mirvac property trust BMT. 2006. Melbourne, Vic.: SBC Warburg, 1996.00. ? Compton, R. T. 2000. State and local taxation of property. New York: The Board. ? Harriss, C. L. 2008. Property taxation: economic aspects. New York: Tax Foundation]. ? Harriss, C. L. 2003. The Property tax and local finance. New York: Academy of Political Science. ? Lindholm, R. W. 2004. Property taxation and the finance of education. Madison: Published for the Committee on Taxation, Resources and Economic Development by the University of Wisconsin Press. ? Matthews, D. W. 2011. Taxation of intellectual property. Lake Mary, FL: Vandeplas Publishing. ? Mirvac Group: a culture of excellence. 2002. Edge cliff, N.S.W.: Focus Pub. Pty Ltd. ? Oates, W. E. 2001. Property taxation and local government finance. Cambridge, MA: Lincoln Institute of Land Policy. ? Slee, R. T. 2011. Private capital markets valuation, capitalization, and transfer of private business interests 2nd ed. Hoboken, N.J.: Wiley. ? Sobul, M. 2005. Property taxation and school funding. Columbus: Ohio Dept. of Taxation. ? The 63rd Texas Legislature Pre-session Conference: judicial reorganization, revenue sharing, property taxation and school finance. 1973. Austin: Lyndon B. Johnson School of Public Affairs. ? Veillette, P. D. 2005. Property taxation. Washington, D.C.: National Education Association. Read More