Institutions are increasingly pushing underperforming listed property companies to take steps to create value, Guy Barnard of Janus Henderson and Alan Carter of Stifel tell The Property Chronicle
Managers of UK-listed real estate companies have had a tough ride over the last few years, waiting for the uncertainties of Brexit to clear, but some should prepare for more testing times ahead, according to two established players in the sector.
Guy Barnard, co-head of global property equities at Janus Henderson Investors, and Alan Carter, salesperson at Stifel, say the stark division between favoured growth stocks, accorded a premium to their assets, and shunned value plays, trading at a discount, can only get more pronounced.
“I have been unswerving in my views over the last four years to buy the expensive stocks and sell the cheaper ones. You might say that turns everything on its head. But this is Darwinism at work in its most eﬀective way,” says Carter.
“What’s doing well will continue to do well and what’s doing badly will continue to do badly. Those with premium-rated paper are largely in control of their destiny but weaker ones, with no currency, will be blown around with what occurs, largely outside their control. I don’t see what changes that.”
Barnard says: “The market is prepared to pay a higher rating if it trusts the level of growth going forwards and is stand-oﬃsh where there is disruption or uncertainty for earnings. Until there is light at the end of the tunnel catching a falling knife becomes a dangerous game for investors.”
The acquisition in October of US trust Liberty by fellow logistics asset owner Prologis exemplifies this trend. Prologis, Barnard’s biggest holding, made an all-share oﬀer valuing Liberty at US$12.6bn, a 20% premium to its net assets. That was in line with recent deals from the likes of Blackstone.
This made sense given Prologis’ own low cost of capital – its own shares have been trading at a 35% premium to net assets – and the benefits of scale in the sector.
Such companies benefit from being able to use their equity as currency to make acquisitions. “They get the double whammy of being able to grow externally which is very accretive to earnings and dividends,” says Barnard.
“They don’t need another chief executive to manage additional assets. The good getting bigger and becoming more eﬃcient is something we support.”
For the unloved companies in the sector, the situation is grim indeed, however. Managements of such entities are vulnerable to being taken over by the better ones seeking to expand.
Carter is blunt about this. “There is little doubt that in certain instances the remuneration of chief executives and finance directors significantly overstates their contributions to what value they have achieved for their companies.”
Barnard is also casting a critical eye over management. “We and other institutional investors are examining management remuneration proposals with a far higher degree of scrutiny today than was the case several years ago,” he says.
“We are trying to find out whether they are aligned with shareholders’ long-term returns. We are voting more actively and expressing our dissatisfaction where we don’t think things are as they should be. I think that pressure will only continue.”
Up until the end of 2015, property companies had an easier ride, contends Carter. Quantitative easing eﬀectively meant all assets increased in value willy-nilly. At the same time rents were still rising and tenant demand held up better than expected.
“It’s only over the last four years you’ve started to see this disaggregation between winners and losers, when cap rates have stopped falling in most sectors and as rents have started to stabilise or fall back in London oﬃces,” he says.
“The losers have continued to be extremely well remunerated while giving pretty tardy returns for their investors. It’s most obvious in the retail sector. Retail companies were so late to accept what the vast majority of people had worked out: that retail was going through a very diﬃcult period.”
Institutions’ gaze will most firmly be fixed on companies which have been trading at a discount to their net assets for some time, says Barnard.
“OK, there is a cyclical element and Brexit uncertainty does not help, but when you see discounts sustained for a long period then I think if you believe your NAV then you should be selling assets to close the discount or buy back stock. Or, more extreme, do what Green REIT has now done.”
That Dublin property company’s management recently said it would tender for shares at its NAV of €1.3bn and go private after a sustained period of seeing its stock trade at a 30% discount to its book value.
“That should be applauded,” says Barnard. “If you are trading at a materially lower rating and not delivering returns greater than your peers, there will be pressure to explore strategic alternatives.” Many of the companies trading at a discount are those which have a mix of assets in their portfolios.