Lukas Hartwich, analyst at Green Street Advisors, joined REIT.com for a video interview during REITWise 2015: NAREIT’s Law, Accounting and Finance Conference held in Phoenix.
Hartwich outlined the various factors Green Street considers when determining the valuation of a company.
“Growth is definitely a consideration,” he said. “But, first and foremost, what we look at is the value of the underlying real estate.”
Other factors include the capability of management teams and whether they understand the importance of capital allocation and balance-sheet management, Hartwich added.
Furthermore, Green Street considers whether management teams understand the optimal leverage level for their companies, Hartwich said. This is important, he explained, in order for them to eliminate the risk of financial stress in a downturn and to allow them to take advantage of opportunities when they do arise.
Hartwich also discussed the impact of leverage on a REIT’s share price. He noted that recent research from Green Street Chairman and Director of Research Mike Kirby concluded that a ratio of 30 percent or below is optimal on a debt-to-asset level.
“We’ve found that companies that have operated at that level have outperformed over the long run. Lower leverage tends to lead to better performance over time,” he said.
Green Street also considers intangibles when determining valuation. Hartwich explained that Green Street starts by looking at net asset value before subtracting the market value of liabilities to get to the market value of the equity. Green Street then goes on to consider the track record of the management team, leverage, overheads and corporate governance issues.
“We try to give credit for all these different metrics when we look at a company and where it should be valued,” Hartwich said.