Disclosure: Assess Quantity Versus Quality

7/21/2016 | By Jim Sullivan

Published in the July/August 2016 issue of REIT magazine.

The IPO of KIMCO Realty Corp. (NYSE: KIM) in 1991 launched the “Modern REIT Era.” Since then, the industry has grown from an equity market cap of $9 billion to roughly $1 trillion today. A key contributor to the success of the Kimco deal – which was completed at a time when capital for commercial real estate owners was scarce and expensive – was management’s willingness to provide portfolio data and operating performance disclosure allowing investors to thoroughly understand the company’s property portfolio and operating platform. 

Kimco set a high bar regarding how publicly traded REITs should disclose information. Companies that completed IPOs after Kimco were expected to follow a similar path, and most have admirably contributed to creating a sector where investor transparency is top notch.

Today, the challenge for many REITs is that their portfolios have expanded significantly, their geographic presence has broadened, and their business models have become increasingly complex with activities such as development and investment management. To help investors understand their businesses beyond the SEC disclosure requirements, most REITs produce supplemental information packages and investor decks that are used on roadshows and at industry conferences.

A key obstacle for REIT management teams is presenting information that proves useful to investors who now use an array of valuation techniques – net asset value, earnings multiples, discounted cash flow models, et cetera – and performance measurement tools, such as same-property NOI growth, FFO accretion and stabilized development yields.

The reaction of some REITs has been to expand supplemental packages and investor decks by dozens of pages to include all conceivable portfolio metrics and data points. Unfortunately, it is often the case that “more is less” when pages of relatively unimportant detail are layered upon the really critical information. A more effective strategy for REITs is to limit disclosure to just the most important data that investors and analysts need to assess operating performance and to determine a reasonable valuation.

In addition to facts and figures, management teams should strive to help shareholders understand the two most important areas impacting REIT relative share price performance – balance sheet management and capital allocation. Historically, there has been an inverse relationship between balance sheet leverage and REIT share price performance, so management teams should be explicit about their balance sheet management philosophy and long-term leverage targets. In addition, REITs should also identify the important guideposts dictating when they should deploy new capital aggressively and when they think they should be tapping on the external-growth brakes.

There are many examples of REIT best-in-class disclosure, and investor attention spans are short. So it is surprising that many REITs continue to disclose information in a way that obfuscates the most important valuation drivers. For REITs that have been piling on more disclosure pages for many years, it would be wise to step back and assess quantity versus quality.

Effective investor messaging should continue to grow in importance as the success of the REIT sector attracts new investors that will naturally gravitate to the REITs whose investment merits are most easily understood.

Jim Sullivan is Managing Director of the Advisory & Consulting group at Green Street Advisors.

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