Ojas Gupta

BUSI 710: Financial Reporting and Analysis

Professor: Thomas Nickles
Case study: 2

Loren Rathbone’s Real estate investment

Loren Rathbone is a 68-year-old farmer from Moose Jaw, Saskatchewan. He bought his family
farm land by stretching his finances as much as he could, he experimented and diversified his
farmland and as going ahead he was settling for retirement. During these days he understood
that inherited family business combined with risky financial could be devastating so hedging the
total risk and opting for conservative financial approach is the best option. In 2002, he sold his
farm land for CA$900,000 and brought his net worth to $2.7 million. Instead of keeping this
money in a low- interest bank account he wanted to diversify and invested in the Canadian
Equity market. Although Rathbone is form a conservative family, his trust in the investment
representative led him to make this investment decision, but the equity market didn’t do well. He
realised that he was fine with the volatility but the short- term losses rattled him, and he took out
the money form this investment bring his portfolio back to the square one. In this case of
investing in the stock market it was guided by a good investment company, and they had certain
fiduciary responsibilities against Mr. Rathbone, along with this they did told him to be patient
and to hold on for a long time period as it’s a long term investment. But as we know the
conservative behaviour of Mr, Rathbone he took out his money as soon as he lost ¼ of his
investment. Mr. Rathbone, after losing 1/4th of his investment in the equity market, wants
something less volatile, he is looking for an investment with the least amount of risk along with
the trust of setting him up for his retirement This event, along with the prior events paints a
canvas of Mr. Rathbone’s risk tolerance ability. In addition, even at a young age to protect his
assets and avoid any significant loss and practicing the investment Mr. Rathbone admittedly
knows best, farming, Mr. Rathbone took a conservative approach.
Moving ahead looking at the second opportunity he got sounds lucrative as it was of low risk
and decent returns. The investment opportunity given by the Canadian Conference of
Mennonite Brethren Churches was highly stable and a low volatility investment. This was a great
opportunity for Mr. Rathbone and I think the 4% return on investment was also decent, this
direction of investment was within his risk tolerance level. But was this investment enough to
fulfil his retirement heeds, I don’t think so, yes he had a stable return but as humans we always
want a bit more for ourselves. In order to find new investment opportunities and diversify his
investment to build his portfolio in 2007 his son introduced him to Ms. Denise Dirks. This
investment proposal brought allot of red flags in Mr. Rathbone’s minds, and I would be
addressing these red lights further in the letter.

Investment flashing Red light

Now that we have begun understanding Mr. Rathbone’s investment history and risk tolerance,
we will better be able to recognize both the glaringly obvious and more hidden aspects of the
2008 real estate investment decision that is giving him pause. The pause that flickered red light in
his brain. The first red light is the behaviour of Ms Dirks, her responses towards Mr Rathbone
concerns reflects her general nature that raises doubts in terms of trusting her. While she may be
enthusiastic and convincing, she is unlicensed, ill-prepared, and ill-informed in offering sound
investment advice. Moreover, she is not an investment advisor to Mr Rathbone, she is a
commission based sales representative for companies, so she holds no fiduciary responsibilities
towards benefiting her client (Mr. Rathbone).
The second red light was the Exhibit 3: Baseline Capital’s Risk Acknowledgement form. The
form states that “no securities commission has evaluated or endorsed the merits of these
securities or the disclosure in the offering memorandum”. This means that he might land up in a
situation where he loses all his invested money and won’t be able to sell the securities. Along
with this, besides not being able to sell his securities his portion of the retirement saving will be
tied up and illiquid.
Moving ahead the investment opportunities in baseline capital corporation and the Yield group
with 11% and 18% coupon rate on the bonds issued seems too good to be true. This can be
termed as the third red light. Investing is bonds according to allot of investors is safe but comes
with its own risk factors included. Though this current investment opportunity, with the 11%
coupon rate looks lucrative, the Canadian real estate market at that time was suspected to be
widely over inflated. In most of the real estate investment with such sort of coupon rate, takes
around 5 to 6 years to be developed. Furthermore, the long duration of the development process
is directly proportional to returns, along with the inflated market comes the risk of change in the
interest rate if the bubble burst, leading the company into default state. According to investors
higher coupon rate comes with higher risk factors and the second investment, with the Yield
group, with 18% coupon rate seems allot riskier. Mr. Rathbone was looking at an investment that
has lower risk and volatility and this investment raises a huge red light. Even if he invests his
money and analysis that the market’s going down and tries to pull out the money from the
investment, it might come with certain terms and conditions that might not be in his favour.
Before making any assumptions about the market and company let’s look into the factors that
Mr. Rathbone should analyse and look for before investing.

Things to see before investing: Recommendations and Analysis

According to the events mentioned above, looking at Mr Rathbones conservative nature and Ms.
Dirks, unprofessional behaviour the first though that comes that the money should be invested
in any of the two companies. But nothing can be said exactly without analysing eth opportunity
in depth. Moving ahead I would recommend a few things to analyse that might stop the red light.
Firstly, it is really important to know the background of the company, since when it started, what
all projects has the company completed, what is the yield return. Along with this determioning
the property valuation is important for financing, investment analysis, insurance and taxation.
Also, the organisations expected cash flow, i.e. the money left after expenses, current ratio and
operating expenses to profit ratio of Baseline Capital to make a better investment decision.
Gathering this information by studying their financial statement and the 3 years return, would
help Mr. Rathbone formulate a base outline about the company. As said the advisor Ms. Dirks
that the company had a 3 years of interest payment history and has not missed any payment,
from these two things can be incurred. One that the Baseline capital group is not that old of a
developer company and is new to the market. Second, with the 11% coupon rate, keeping in
mind the 6% rate in eth market, it seems that the company is in a desperate need of money and
this desperation can be risky if they are not able to complete their project and give the returns as
said. Analysing the companies would also clear any bias that would be created by the sales
representatives and would also provide the clarity required to move forward.
However, in 2008 the Edmonton, Alberta, was a financial hub, with influx of people moving in
attracting wealthy people with the evolving oil and gas industry, this offer seems profitable. One
can incur that people who were shifting in the Edmonton city could afford these prices but the
over inflation puts a huge risk the financials. Also, at that time the market rate was 6% and in
terms of the investment opportunities 11% coupon rate by Baseline Capital looks less riskier and
believable than the 18% given by Yield Group. Also, because of the predicted inflation in the
market, and knowing that inflation erodes the real value of bond’s face value, which can affect
the long term maturity debts. Looking into this linkage, the bond prices are very sensitive to
change with the inflation and forecasted inflation. In my recommendation Mr. Rathbone could
invest some amount in base line group but should not consider the Yield group. As Yield groups
18% return rate would be a longer term investment as compared to the 11% by Baseline capital.
But Ms Dirks offering of 11% and then of 18% creates a suspicious scenario and reflects the risk
involved.
Secondly, looking on these analysis, Mr. can formulate a SWOT data sheet that would help him
analysing the Strength, weakness, threat and the opportunities in all. Looking into this there is
another weakness that I could analyse, Mr. Rathbones age, as he is already 68 and looking for a
stable investment, with low risk factors, and he does not have enough time or income as before
to convert his losses into profitable investments. Also, as mentioned in the letter above, the risk
acknowledgment letter shows that the company would not be held responsible for any losses
incurred by the investor reflects its culture and ethics. To sum up, this current investment
proposal highlights more alarming red lights of threats than green light of strengths and
opportunities for Mr, Rathbone. Moving ahead according to the analysing and forecasting I have
some solutions that Mr. Rathbone can look into for his risk free investment.

Solution and Path Forward

In this situation as the investment opportunity was brought in by the family member, there
should be some boundaries set from the start. Along with this, he should be given the
information he requires to make a trustworthy investment. In these circumstances the family and
investor disputes are likely to happen if thing go south so saying No should be considered
insensitive from both the sides. As a result of this Mr. Rathbone should trust his instincts and
should not be swayed away by the family and friends. Moving ahead with the suggestions that I
would propose to Mr Rathbone.
Analysing the SWOT, Edmonton’s real estate market condition and Ms Dirks behaviour toward
the investor and the conservative nature of Mr Rathbone, I would suggest him to not invest in
the Baseline Capital group and nor in the Yield group. Though the 11% return looks appealing
but it includes allot of risk that Mr. Rathbone at the age of 68 should not be a part of.
If Mr Rathbone still wants to invest the safest option with low risk and decent amount of returns
would be the US treasury bonds. As they give security and returns as said and keeps the investor
in a safe place.
Another think that Mr. Rathbone can look into after analysing the companies is to diversify his
investment, Such as 50% in US treasury bonds of funds, 15% in the Canadian conference of
Mennonite brethren churches and 15 % in the Baseline capital. This can be done to keep
maximum of his investment at a safe place with low risk with only 15% in the high risk zone. But
in order to invest in the baseline Capital group I would recommend him to change his advisor
and connect with someone that shows fiduciary responsibilities towards Mr. Rathbone.
References
Lane, B. (2016). ” Loren Rathborne’s Investment: Red Flashing Light”. IVEY Publishing.

NIELSEN, B. (2021, June 17). Understanding Interest Rates, Inflation, and Bonds. Retrieved July 24,
2021