Real Estate Rules

Foreword xiii  Preface xix  Introduction – A Sector Not to Be Ignored 1  Real Estate Is an Important Asset Class 1  Two Undesirable Features of Real Estate 5  Listed Real Estate Has Attractive Features 6  But Listed Real Estate Is Not Always Preferred (Although It Should Be!) 8  Listed Real Estate Is a Great Hunting Ground and Poised for Growth 9  Book Organisation 11  Notes 12  The 20 Golden Rules of Real Estate 13  Part I Real Estate 15  Chapter 1 High Yield for a Reason 17  How Is the Yield Exactly Calculated? Is It ‘Dressed Up’? 18  Is It a Good Asset? 19  Chapter 2 Look for a Rent Compounding Machine with Minimum Capex 21  Real Estate with Strong Supply/Demand Dynamics 22  Ability to Capture Rental Growth Potential 29  Minimum Capital Expenditure and Incentives 33  Chapter 3 Scan for Value Add Potential 35  Refurbishment, Extension and Alternative Use 35  Cluster or Platform Creation 36  Development 36  Acquisitions and Disposals 37  Services 37  Chapter 4 Real Estate Is Cyclical 39  Warning Signs 40  Taking the Contrarian Side 44  Note 45  Chapter 5 Expected Returns Should Beat Cost of Capital 47  Yield and Price per Square Metre 48  Expected Return 48  Beat the Cost of Capital 49  Conservative Underwriting 51  Act! 52  Chapter 6 Central Bank and Government Stimuli (or Lack of) Can Be Game Changers 55  Central Banks Tend to Get Their Way 58  Engineered Volatility, but … 58  Bail Out if ‘Majority Is in Trouble’ 59  Stimulus or Restrictive Policy Will End One Day 59  Arbitrage Opportunities Opening Up 59  Part II Capital Structure 61  Chapter 7 Prudent Use of Financial Leverage: Don’t Get Caught Out by Downturns 63  Capital Markets Do Not Reward High Leverage, the Opposite! 64  Loose or No Covenants 65  Can Absorb a Value Decline of at Least 40% 65  No Endless Leverage on Valuation Gains 66  Increasingly Difficult to Degear above 50% LTV 67  Note 69  Chapter 8 Don’t Assume That Financing Will Always Be Available 71  Sufficient Cash Flow 72  Spread in Maturities and Lenders 72  Equity Should Be Raised When Conditions Are Favourable 72  Alternative Financing 73  Good Relationships with Debt Providers 73  Rights Issues Value Destructive in Downturns 74  Notes 78  Part III Management 79  Chapter 9 Continuous Value Creation Is Key 81  Value Creation Leads to Superior Shareholder Value 81  Optimising Total Returns from the Real Estate (ROIC) 83  Optimising the Capital Structure (WACC) 84  Cœur Défense – An Example of Strong Value Creation 85  M&A Can Add Value, But Frequently It Has Not 90  Notes 97  Chapter 10 Radical Action Needed in Case of Shareholder Value Destruction 99  Change Management, Board and/or Governance 100  Return of Capital 100  Circle Property Trust: Liquidating Itself 101  Chapter 11 Overconfidence Leads to Downfall 103  Capital & Regional – The Remarkable Example of Overconfidence 104  Chapter 12 Corporate Governance Should Be Top Nudge 107  Risk Management 109  Transparency 110  Governance Dynamics 110  Remuneration 111  Compounding Goodwill 115  Part IV Investing in Listed Real Estate 117  Chapter 13 Scrutinise Property Investment Vehicles 119  First Impressions Can Be Misleading 119  Focus on Cash Flow 122  Mosaic Theory 125  Notes 126  Chapter 14 Significant Upside Based on Multicriteria Valuations 127  Historical Performance Analysis 127  Six Basic Valuation Metrics 128  Modelling 131  Invest with Margin for Error 134  Chapter 15 Focus on (Upcoming) Value Creators, Be Careful with Destroyers 137  Introducing a Framework: Get on the Right Highway! 138  (a) Firing on All Cylinders 139  (b) Potentials 144  (c) Stuck 144  (d) Fighting for Survival 146  The Accelerator Effect 147  Note 150  Chapter 16 Look for Maximum Pessimism and Maximum Optimism 151  Chapter 17 Ensure Management, the Board and Other Shareholders Are Aligned with Investment Objectives 155  Management and Board Alignment 156  Investigate the Shareholder Base 159  Note 160  Chapter 18 Be Aware of Self-Liquidating Companies 161  Unsustainable Dividends 161  Sustainable Dividend Policy 162  intu Properties Plc – In Denial 163  Chapter 19 When Trust Is Gone, There Is No Limit to Downside 177  Spotting Red Flags 177  The Downfall of SBB 178  Adler Group: Everything That Possibly Could Go Wrong Went Wrong 181  Note 192  Chapter 20 Understand the Stock Market (Rules) 193  Have a Conviction, Listen to the Models 193  Be Proactive 194  Analysts Not Good at Spotting ‘Turning’ Points 194  When Management Teams Are Upset … 194  Every Day Is a New Day 195  Have a Wish List 195  The World Wants to Move Forward 196  Can Management (and You!) Present a Convincing Business Case with Numbers in One Minute? 196  Kitchen Sinking and Conservative Guidance 196  The Market Is Lazy and Does Not Reward Complex Companies and Long-Term Developments 197  Don’t Be Too Eager Picking Up Stocks in a Downturn 197  Watch Out for the Wallstreet Crowd! 197  The Psychology of Numbers and Patterns 198  Activism or Company Repositioning Takes Time 199  Exploiting the Reversal Patterns for Similar Companies 199  Benefit from Benchmark Investors 200  Monitor Insider Trading and Shareholder Notifications 201  Acknowledgements 203  Appendix I: Some Terminology 207  Appendix II: Six Basic Valuation Metrics Explained 211  Appendix III: The Great Financial Crisis (GFC) 215  2004 – Cheap Credit 217  2005 – Securitisation 217  2006 – Strong Valuation Growth 218  2007 – Credit Crisis 219  2008 – Lehman Collapse 219  2009 – Balance Sheet Revival (Rights Issues) 220  2010 – Economic Uncertainty 221  2011 – Wait and See Attitude 222  2012 – Slow Recovery 223  About the Author 225  Index 227