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