1. ERES 20122Giacomo Morri – Roberto Lupieri NAV discount analysis using the “appraisal reduction” Giacomo Morri – Roberto Lupieri presented at the 19 th Annual ERES Conference June 13th - 16th, 2012 Edinburgh

2. ERES 20122Giacomo Morri – Roberto Lupieri 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

3. ERES 20122Giacomo Morri – Roberto Lupieri 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

4. ERES 20122Giacomo Morri – Roberto Lupieri 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

5. ERES 20122Giacomo Morri – Roberto Lupieri 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

6. ERES 20122Giacomo Morri – Roberto Lupieri 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

7. ERES 20122Giacomo Morri – Roberto Lupieri Un-gearing the discount 7 AB market asset value (A)100 debt value (D)012 NAV10088 market value (MV)8068 discount to NAV20%23% enterprise value (MV + D)80 Unlevered NAV (NAV + D)100 Unlevered discount20%

8. ERES 20122Giacomo Morri – Roberto Lupieri NAV discount Methodology Traditional NAV discount Unlevered NAV discount 8

9. ERES 20122Giacomo Morri – Roberto Lupieri Appraisal Reduction Coefficient (ARC) 9

10. ERES 20122Giacomo Morri – Roberto Lupieri Appraisal Reduction Coefficient (ARC) 10

11. ERES 20122Giacomo Morri – Roberto Lupieri Average time-specific ARCs 11 UK ARC French ARC

12. ERES 20122Giacomo Morri – Roberto Lupieri 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

13. ERES 20122Giacomo Morri – Roberto Lupieri Dependent variable & models 13 No Sentiment Adjustement Sentiment Adjusted NAV Traditional NAV Discount Unlevered NAV Discount UK & France

14. ERES 20122Giacomo Morri – Roberto Lupieri Dependent variable & models Model UK1Traditional NAV Discount Model UK2Unlevered NAV Discount Model UK3Sentiment Adjusted Traditional NAV Discount Model UK4Sentiment 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

15. ERES 20122Giacomo Morri – Roberto Lupieri Independent variables 1.Gearing 2.Liquidity 3.Size 4.Management remuneration 5.Performance 6.Investment activity 7.Market sentiment 15

16. ERES 20122Giacomo Morri – Roberto Lupieri UK results: correlation matrix 16 MGMTEXPAVGGEARINGLIQUIDITYINVACTROASIZE MGMTEXP1.0000 AVG0.09491.0000 GEARING(0.0779)0.08291.0000 LIQUIDITY(0.3209)(0.2212)(0.0577)1.0000 INVACT(0.0893)(0.0832)0.31590.09871.0000 ROA(0.0347)(0.1587)(0.3413)0.1083(0.0327)1.0000 SIZE(0.4808)(0.0812)0.21410.43150.08410.04651.0000

17. ERES 20122Giacomo Morri – Roberto Lupieri UK results: traditional and unlevered 17 Model UK1Model UK2 Coeff.P-valueCoeff.P-value Intercept54.10140.0236(119.516)0.0304 GEARING1.5064 + 0.0049(0.3456) - 0.0047 LIQUIDITY0.05400.19380.00160.8645 MGMTEXP(50.7851)0.2393(6.0051)0.5335 INVACT0.92560.25150.4308 + 0.0175 ROA1.2814 + 0.0000(0.0989)0.1293 SIZE(49.9386) - 0.00487.1957 - 0.0740 AVG1.1451 - 0.00280.3838 + 0.0000 Adj-R 2 20.2910%30.7355% F-prob0.0000350.000000

18. ERES 20122Giacomo Morri – Roberto Lupieri UK results: Sentiment Adjusted 18 Model UK3Model UK4 Coeff.P-valueCoeff.P-value Intercept88.74160.005616.93760.8676 GEARING2.2841 + 0.0015(0.5571) - 0.0149 LIQUIDITY0.07850.1571(0.0029)0.8699 MGMTEXP(61.6359)0.2846(37.9148) - 0.0413 INVACT1.34470.21221.3899 + 0.0001 ROA1.3078 + 0.0009(0.3064)0.0146 SIZE(80.0619) - 0.0008(6.9868)0.3527 AVG0.02010.9683(0.5225) - 0.0015 Adj-R 2 21.8714%39.0794% F-prob0.0000110.000000

19. ERES 20122Giacomo Morri – Roberto Lupieri France results: correlation matrix 19 MGMTEXPAVGGEARINGLIQUIDITYINVACTROASIZE MGMTEXP 1.0000 AVG (0.0161)1.0000 GEARING (0.0919)0.11531.0000 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)0.04521.0000

20. ERES 20122Giacomo Morri – Roberto Lupieri France: traditional and unlevered 20 Model F1Model F2 Coeff.P-valueCoeff.P-value 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 MGMTEXP2.82200.6393(2.8857)0.5124 INVACT0.4673 + 0.00090.2919 + 0.0043 ROA(0.6566)0.2674(1.1297) - 0.0094 SIZE2.39210.57230.75110.8085 AVG1.1539 + 0.00000.7734 + 0.0000 Adj-R 2 54.2518%51.9246% F-prob0.000000

21. ERES 20122Giacomo Morri – Roberto Lupieri France results: Sentiment Adjusted 21 Model F3Model F4 Coeff.P-valueCoeff.P-value 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 INVACT0.6447 + 0.00070.4073 + 0.0003 ROA(0.9017)0.2602(1.5571) - 0.0013 SIZE3.77790.50971.57720.6456 AVG0.19520.36920.17410.1812 Adj-R 2 49.5817%52.6864% F-prob0.000000

22. ERES 20122Giacomo Morri – Roberto Lupieri Main findings & Conclusions 22 M1UkM2UkM3UkM4UkM1FM2FM3FM4F Gearing+-+---- Liquidity - MgntExp - Invact++++++ Roa++-- Size++- Avg++-++ Never! Seldom

23. ERES 20122Giacomo Morri – Roberto Lupieri 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

24. ERES 20122Giacomo Morri – Roberto Lupieri 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

25. ERES 20122Giacomo Morri – Roberto Lupieri Contacting Author Giacomo Morri, PhD SDA Professor & Director Master in Real Estate Accounting, Control, Corporate Finance & Real Estate Department SDA Bocconi School of Management Milan – Italy giacomo.morri@sdabocconi.itwww.propertyfinance.it giacomo.morri@sdabocconi.itwww.propertyfinance.it