Nov 9, 2009

Quality rather than quantity

The debate about the need for more transparency in the real estate listed sector is back in the Germany. In principle there is nothing bad about the requirement for more transparency. I hope that alstria has in the past demonstrated many times its willingness to provide the market with the right set of information at the right time.

There is in my opinion a dangerous amalgam between transparency and throwing unsorted information to investors. I make a big difference between being transparent and publishing each and every data available in a company. Being transparent is not equivalent to ticking each box of a list of information that needs to be published by a company. Transparency is a dynamic and subjective notion. It is about disclosing the right information at the right time and in a way that is understandable by an investor. It is a judgment call.

The reality is that no investor will ever know the company as well as the management. No investor will ever have the deep knowledge of our assets or operation that we have. And they do not need to. However, it is part of our job to provide them at the right time with the key elements of information that is relevant for them at the time of the disclosure. It is also crucial that we present the information in a way that can be understood.

Transparency is too often confusing by disclosing tons of numbers that are compiled (costly) by companies, audited by auditors that are looking at them from a pure formal standpoint, and read by almost nobody. An increase in transparency often ends in additional disclosure requirements in a process which usually does not tend to reduce the existing disclosure, but add an additional layer of information, making the whole exercise difficult to follow even for the management.
There are voices in Germany claiming that the discount at which German Real estate companies are trading when compared to their Net Asset Value (NAV) is to some extend linked to a lack of transparency. This is true. But the lack of transparency do not come from the real estate companies, but from the market itself. German Real estate companies like alstria, are bound by the same rules and regulations than all the other European listed companies. The main difference is due to the fact that investors do not have any reliable market information to benchmark what is published by real estate companies. When the UK or French companies for example publish the revaluation of their portfolios, investors can benchmark the information published to the IPD indices, or other relevant market intelligence tools (like Immostat in France). They cannot do that in Germany, as there is no clear international recognized leadership that provides independent (from brokers or companies) market data. Local sources of information do exist and are doing a good job considering the opacity of the market. However, their analysis of the market performance, tend to diverge one from the other, as they work with different sources of information. This only adds to the overall confusion, and creates additional caution from investors. This is what creates uncertainty and in turns creates doubts in times of troubles.

By nature a listed company is more transparent than its counterparty in the private sector. This also holds true for the real estate sector in Germany. German listed property companies are no matter what, the most transparent vehicles available for shareholders that wish to invest in German real estate.

It might be true, that not all listed companies publish the age of their assets or their individual value, but this is no argument to say that they are not transparent. Which other German real estate investment publishes its accounts on a quarterly basis, and publicly answers questions from professional analysts? Which other German real estate investment has to meet its shareholders once a year in a General Meeting and answers all questions asked by shareholders? Which other German real estate investment is bound to publish within minutes any changes in its business that might impact its share price (adhoc disclosure)? The answer is simple, there is none. The open ended funds which are often named, on the bases of a tick the box exercise, as a model of transparency might publish the age of the assets and the value on a property by property basis, but do not publish any basic financial information like balance sheet or P&L. Not even under German GAAP!!!!

At alstria’s last General Meeting a representative of a retail shareholders association asked a question which I believe summarizes relatively well the transparency requirements and the overall debate. He argued that we were disclosing too much information (revenues, FFO, German GAAP, IFRS, Net Income, LTV, portfolio value, contractual rent, average rent per square meter, weighted average lease length, portfolio yield…). He asked about the three numbers he should be looking for in order to judge the performance of the company. His point was that by publishing too much information he was not able to figure out what he should be looking for. Point taken. I would feel that we have improved alstrias transparency when he (or any other investor for that matter) will be able to understand the performance of the company, without the need of a PhD in accounting or finance. In order to do so, I do not believe that we would need to disclose more information. It will all come down to how and when the right set of information is presented.

“It is quality rather than quantity that matters”. This is actually not a new concept. It was already phrased by Seneca, in 65 AD. Maybe we would be well advised to re-visit his writing when it comes to transparency discussions.


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