ERES 20122Giacomo Morri – Roberto Lupieri NAV discount analysis using the “appraisal...

ERES 20122 Giacomo Morri – Roberto Lupieri

NAV discount analysis using the “appraisal reduction”

Giacomo Morri – Roberto Lupieri

presented at the 19th Annual ERES Conference June 13th - 16th, 2012 Edinburgh


General outline on NAV Discount

• Why do property companies trade at deviations from NAV?

• What explanatory factors does closed end fund and real estate literature

suggest?

• Cross-sectional variations in deviations from NAV

– Company-specific factors?

– Time-specific factors?

• The existence of premiums

– Most ‘economic’ factors implicitly assume a discount (i.e. CGTL)

• Changes over time in sector deviation from NAV

2


Data sample

• A ten-period database data 2007-2011 on quarterly

basis:

– 21 UK property companies (REITs)

– 42 France property companies (SIICs)

• Collected a large number of company specific and

market variables mainly from databases– Bloomberg

– Hemscott

– Orbis

– Morningstar

3


Paper outline

A. Which are the explanatory factors for discount?

– (traditional approach Rational and Behavioral)

B. How does gearing distort the estimation of NAV deviation?

– (previous studies using unlevered discount)

C. How does market sentiment & property misestimation distort

the estimation of NAV deviation?

– (finally something new!)

4


Nav Discount Literature (traditional approach)

Rational explanations– Tax– Agency costs– Reputation– Gearing– Liquidity– Risk– Size– Performance– Dividend yield

Behavioural explanations– Noise trading– Capital flows– Market segmentation– Sector discount effect

5

•Not always consistency in findings

•Different explanatory variables

•Specifications often unstable

•Low explanatory power


Un-gearing the discount

• Traditional discount calculation is distorted by gearing effect

• A change in amount of borrowing produces a change in the

NAV discount independently

• We attempt to “clean” this effect from the calculation of NAV

Target: better understanding of leverage effect

6


Un-gearing the discount

7

A B

market asset value (A) 100 100

debt value (D) 0 12

NAV 100 88

market value (MV) 80 68

discount to NAV 20% 23%

enterprise value (MV + D) 80 80

Unlevered NAV (NAV + D) 100 100

Unlevered discount 20% 20%


NAV discount Methodology

• Traditional NAV discount

• Unlevered NAV discount

8


a Property portfolio 800b Cash and cash equivalents 80c Other assets 120

d = a + b + c Gross Asset Value 1.000e Financial liabilities 400

f = d - e Net Asset Value 600g Market Value 450

h = g/f -1 NAV discount 25,00%i = g - f € Discount 150

j = i/a Appraisal Reduction Coefficient % (ARC) 18,75%k = a * (1-j) Sentiment Adjusted Property portfolio 650

l = k + b + c - e Sentiment Adjusted NAV 450

Appraisal Reduction Coefficient (ARC)

9


C1 C2 C3 C4a Property portfolio 800 500 960 500b Cash and cash equivalents 80 50 80 100c Other assets 120 100 120 5

d = a + b + c Gross Asset Value 1.000 650 1.160 605e Financial liabilities 400 300 0 300

f = d - e Net Asset Value 600 350 1.160 305g Market Value 450 200 770 160

h = g/f -1 NAV discount 25,0% 42,9% 33,6% 47,5%i = g - f € Discount 150 150 390 145

j = i/a Appraisal Reduction Coefficient % 18,8% 30,0% 40,6% 29,0%Weighted Average ARC 30,3% 30,3% 30,3% 30,3%S.A. Property portfolio 558 349 670 349Cash and cash equivalents 80 50 80 100Other assets 120 100 120 5S.A. Gross Asset Value 758 499 870 454Financial liabilities 400 300 0 300S.A. NAV 358 199 870 154Market Value 450 200 770 160S.A. NAV discount -25,7% -0,6% 11,5% -4,1%€ S.A. Discount -92 -1 100 -6

Appraisal Reduction Coefficient (ARC)

10


Average time-specific ARCs

11

UK ARC French ARC

0,00

5,00

10,00

15,00

20,00

25,00

30,00

35,00

1/9/

06

1/12

/06

1/3/

07

1/6/

07

1/9/

07

1/12

/07

1/3/

08

1/6/

08

1/9/

08

1/12

/08

1/3/

09

1/6/

09

1/9/

09

1/12

/09

1/3/

10

1/6/

10

1/9/

10

1/12

/10

1/3/

11

-10,00

-5,00

0,00

5,00

10,00

15,00

20,00

25,00

30,00

35,00

40,00

1/9/

06

1/12

/06

1/3/

07

1/6/

07

1/9/

07

1/12

/07

1/3/

08

1/6/

08

1/9/

08

1/12

/08

1/3/

09

1/6/

09

1/9/

09

1/12

/09

1/3/

10

1/6/

10

1/9/

10

1/12

/10

1/3/

11


Reducing appraisals

A new approach partially based on Behaviour Approach

– to eliminate the market sentiment from the NAV discount

through an Appraisal Reduction Coefficient (ARC)

– ARC artificially abates the discounts and leads to a

recalculation of the relevant NAVs

Target: better understanding of company specific factors

12


Dependent variable & models

13

No Sentiment

Adjustement

Sentiment Adjusted

NAV

Traditional NAV

Discount

Unlevered NAV

DiscountUK & France


Dependent variable & models

• Model UK1 Traditional NAV Discount

• Model UK2 Unlevered NAV Discount

• Model UK3 Sentiment Adjusted Traditional NAV Discount

• Model UK4 Sentiment Adjusted Unlevered NAV Discount

• Model F1Traditional NAV Discount

• Model F2Unlevered NAV Discount

• Model F3Sentiment Adjusted Traditional NAV Discount

• Model F4Sentiment Adjusted Unlevered NAV Discount

14


Independent variables

1. Gearing

2. Liquidity

3. Size

4. Management remuneration

5. Performance

6. Investment activity

7. Market sentiment

15


UK results: correlation matrix

16

MGMTEXP AVG GEARING LIQUIDITY INVACT ROA SIZE

MGMTEXP 1.0000

AVG 0.0949 1.0000

GEARING (0.0779) 0.0829 1.0000

LIQUIDITY (0.3209) (0.2212) (0.0577) 1.0000

INVACT (0.0893) (0.0832) 0.3159 0.0987 1.0000

ROA (0.0347) (0.1587) (0.3413) 0.1083 (0.0327) 1.0000

SIZE (0.4808) (0.0812) 0.2141 0.4315 0.0841 0.0465 1.0000


UK results: traditional and unlevered

17

Model UK1 Model UK2

Coeff. P-value Coeff. P-value

Intercept 54.1014 0.0236 (119.516) 0.0304

GEARING 1.5064 + 0.0049 (0.3456) - 0.0047

LIQUIDITY 0.0540 0.1938 0.0016 0.8645

MGMTEXP (50.7851) 0.2393 (6.0051) 0.5335

INVACT 0.9256 0.2515 0.4308 + 0.0175

ROA 1.2814 + 0.0000 (0.0989) 0.1293

SIZE (49.9386) - 0.0048 7.1957 - 0.0740

AVG 1.1451 - 0.0028 0.3838 + 0.0000

Adj-R2 20.2910% 30.7355%

F-prob 0.000035 0.000000

Model1 Model2

Model3 Model4

No Sentiment Adjustement

Sentiment Adjusted NAV

Traditional NAV Discount

Unlevered NAV DiscountUK


UK results: Sentiment Adjusted

18

Model UK3 Model UK4


Intercept 88.7416 0.0056 16.9376 0.8676

GEARING 2.2841 + 0.0015 (0.5571) - 0.0149

LIQUIDITY 0.0785 0.1571 (0.0029) 0.8699

MGMTEXP (61.6359) 0.2846 (37.9148) - 0.0413

INVACT 1.3447 0.2122 1.3899 + 0.0001

ROA 1.3078 + 0.0009 (0.3064) 0.0146

SIZE (80.0619) - 0.0008 (6.9868) 0.3527

AVG 0.0201 0.9683 (0.5225) - 0.0015

Adj-R2 21.8714% 39.0794%

F-prob 0.000011 0.000000

Model1 Model2

Model3 Model4




Unlevered NAV DiscountUK


France results: correlation matrix

19

MGMTEXP AVG GEARING LIQUIDITY INVACT ROA SIZE

MGMTEXP 1.0000

AVG (0.0161) 1.0000

GEARING (0.0919) 0.1153 1.0000

LIQUIDITY (0.0739) (0.1342) (0.1368) 1.0000

INVACT (0.0489) 0.0869 (0.0126) (0.1073) 1.0000

ROA (0.1109) 0.0614 (0.1060) 0.0314 (0.2367) 1.0000

SIZE (0.3842) 0.0101 (0.0340) 0.1177 (0.0297) 0.0452 1.0000


France: traditional and unlevered

20

Model F1 Model F2


Intercept (64.7968) 0.2208 (28.0596) 0.4683

GEARING (0.0404) - 0.0041 (0.0222) - 0.0311

LIQUIDITY (0.0250) - 0.0317 (0.0117) 0.1696

MGMTEXP 2.8220 0.6393 (2.8857) 0.5124

INVACT 0.4673 + 0.0009 0.2919 + 0.0043

ROA (0.6566) 0.2674 (1.1297) - 0.0094

SIZE 2.3921 0.5723 0.7511 0.8085

AVG 1.1539 + 0.0000 0.7734 + 0.0000

Adj-R2 54.2518% 51.9246%

F-prob 0.000000 0.000000

Model1 Model2

Model3 Model4




Unlevered NAV DiscountFrance


France results: Sentiment Adjusted

21

Model F3 Model F4


Intercept (94.3886) 0.1874 (47.1788) 0.2708

GEARING (0.0556) - 0.0035 (0.0039) 0.7267

LIQUIDITY (0.0305) 0.0530 (0.0131) 0.1653

MGMTEXP (1.9111) 0.8145 (1.4286) 0.7695

INVACT 0.6447 + 0.0007 0.4073 + 0.0003

ROA (0.9017) 0.2602 (1.5571) - 0.0013

SIZE 3.7779 0.5097 1.5772 0.6456

AVG 0.1952 0.3692 0.1741 0.1812

Adj-R2 49.5817% 52.6864%

F-prob 0.000000 0.000000

Model1 Model2

Model3 Model4




Unlevered NAV DiscountFrance


Main findings & Conclusions

22

M1Uk M2Uk M3Uk M4Uk M1F M2F M3F M4F

Gearing + - + - - - -

Liquidity -

MgntExp -

Invact + + + + + +

Roa + + - -

Size + + -

Avg + + - + +

Never!

Seldom


Final conclusions

• Using ARC (M3 & M4)

– Average Sector Discount becomes statistically insignificant at all the

relevant levels in all, but one regression

– ARC is useful in eliminating the market sentiment

– Firm-specific factors are better able to explain NAV deviations:

Gearing

Investment activity

23


Further research and extension

• Longer time series & Pan European Sample– Bubble period (investment activity)– More transparency – Other countries

• Appraisal Reduction “Sensibility”– NAV Discount does not depend on misestimation

only, but how much it depend on ARC?

24


Contacting Author

Giacomo Morri, PhDSDA Professor & Director Master in Real Estate Accounting, Control, Corporate Finance & Real Estate DepartmentSDA Bocconi School of ManagementMilan – [email protected] www.propertyfinance.it

ERES 20122Giacomo Morri – Roberto Lupieri NAV discount analysis using the “appraisal...

Documents

Transcript of ERES 20122Giacomo Morri – Roberto Lupieri NAV discount analysis using the “appraisal...