The Property Column

June 8, 2009 11:38 pm

Public listings come with health warnings

A favourite game among real estate bankers is to play fantasy IPO, putting together various property entrepreneurs with investors and dreaming of how much could be raised on the public market.

“Doing a Leslau”, as it has come to be known following the flotation of an investment company last month by Nick Leslau, has thrown up interesting combinations.

Some might even happen, given continued amazement that the cash shell is still trading at a premium. But those entrepreneurs should remember that having a public listing comes with a health warning.

These are uncertain times for the listed sector, which has seen share prices reflect fluctuations between depression to optimism, and shareholders want strong leadership from managers.

Some complain that direction is lacking at the moment, with a desire to know if the large real estate investment trusts in particular will just be rent collectors, and a geared play on a future recovery, or something a tad more ambitious.

There has been anger that some managements have never properly accepted responsibility during the slump and are now not articulating clearly enough how they are going to get back in the game. No one saw the severity of the downturn, of course, but plenty entered overleveraged and undercapitalised.

To date, shareholders are privately expressing their displeasure, but it may not be long before the more public displays of anger as being shown in Australia, where companies are going for a second round of fund raising.

Certain UK companies – such as Great Portland Estates, Shaftesbury and Derwent Valley – appear to be exempt from criticism having at least avoided the need for emergency cash calls.

That two of the three subsequently sought additional cash for opportunities was then also treated favourably because they came with clearly defined strategies of how to make money. Similarly, the focus of specialised companies such as Big Yellow is attractive, while Segro has undeniably seized its chance, launching a takeover bid for rival Brixton. Having stabilised balance sheets, however, there is a lack of communication of ideas from the bigger reits about their next steps as the sector emerges from the worst. There is not much to distinguish among the big diversified companies, which are seen as going through a period of soul searching.

Land Securities insists there is no overarching review, but it is the case that the new chairman is kicking the tyres to see if it is fit for purpose. There are bound to be worries over talk of divisions among the board, but concerns rest mainly on the lack of clarity in its strategy.

British Land’s Chris Grigg is coming to the end of his honeymoon period. Noises from British Land have been more aggressive, but he could do well with a bold statement of intent in the next quarter.

Hammerson is also being asked questions about future strategy, with a debate still to be had about its Anglo-French spread. The company is at least unlikely to need another rights issue following recent sales, but it could remain a net seller of assets; similarly Liberty International, which has kept a low profile.

It is difficult to see when any of the larger reits will step on to the front foot to generate outperformance for shareholders, and they need a solution to a lack of equity that remains a constraint on any future activity.

Remuneration has naturally become a focus. So far, there has been only one serious sign of discontent, with the Wellcome Trust, a usually passive investor, voting against approval of remuneration report at the annual general meeting for Invista Real Estate. Although unlikely to carry the day, as its second largest shareholder, Wellcome Trust’s actions can be taken as a serious warning shot.

There are several reits raising management payouts. Some, such as Great Portland Estates and Derwent London, can at least argue that they did not need to tap markets for cash and given a relative outperformance.

Not as easy at British Land and Hammerson, which have both accepted some bonus payments, although the managements of Land Securities and Liberty have mostly skipped.

Executives should be have proper incentives but it seems bad politics at the very least to take much money out of companies strapped for cash. Quintain made a rare admission last week – when forgoing its own bonuses – that there was a “feeling of responsibility” for its performance.

The debate over whether reits should be single sector specialists is again being talked about by shareholders, as niche expertise is one way to add value, as well as a point of difference for sector- allocating investors.

Large reits carry portfolios of generally excellent quality, but, given their size, Land Securities and British Land are in particular trackers of the property index. This has attractions for generalists looking to buy the index, but it could mean underperformance when compared with smaller companies adding value through opportunistic buying and development.

On the positive side, cash flows are generally secure, while when asset values are fully written down, shareholders will be able to benefit from a leveraged play on the recovery if nothing else.

To some extent, large reits are constrained by balance sheets still encumbered with debt, and asset values and rental income continuing to fall. But they could do with clearer direction before too long, even if initially this is to explore the benefits of sector focus or to evaluate the different risks and rewards of value-adding trading, development, and income-producing asset management.

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