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Even in the bad times, the management teams of the UK’s biggest listed property companies take home good money, with salaries in the high six figures and above the norm. In the good times, chief execs earn £1M+ as standard, with payments of £5M or more not uncommon. But which of them are actually adding any value?
That is the question researchers at Green Street Advisors have tried to answer in a new report called Management Value Added: Separating the Best From the Rest. Green Street has for some years tried to identify which U.S. REIT management teams add the most value to their companies. Now it is applying that analysis to Europe.
Green Street has come up with a metric called management value add, which it said is a good measure of what management can actually contribute in terms of how well a company’s portfolio performs. The company said it is a much better measure than total shareholder returns at measuring management input.
It strips out the rise or fall of the value of a company’s portfolio, because that is something determined by the wider market, and which management can’t control. In retail at the moment, for example, there is pretty much nothing management could do to make the value of the portfolio go up. And in logistics recently it has been pretty hard to get it wrong, such has been the interest in the sector.
“Management does, of course, exercise some influence over the value of the portfolio through operational skills, but even though operations are the focus of a lot of managerial and analytical attention, they are far from the most important driver of [net asset value] growth,” Green Street said.
Instead, management value add focuses on two main factors: balance sheet management and capital allocation acumen.
Courtesy of British Land
British Land’s Chris Grigg
Some of the main elements of balance sheet management are making sure you have low leverage, which has been positively rewarded by public markets. On the flip side, having to issue equity at below net asset value is highly detrimental.
As for capital allocation acumen, companies do well when they grow when their shares are trading at a premium to NAV, and sell assets when discounts exist but they can get full price in the market, Green Street said. Development is a mixed blessing, working sometimes, less effective at others.
Which UK REITs have the best management teams by Green Street’s measure?
Over three years, British Land comes out on top, adding about 5% to the value of the company’s portfolio, Green Street said. It was closely followed by self-storage specialist Safestore, which added about the same amount of value. Great Portland Estates, Derwent London and Landsec make up the top five management teams in the UK, Green Street said. Unite and London Metric Properties also received an A grade from Green Street.
Courtesy of Landsec
Landsec Chief Executive Rob Noel
When looking at the past five years, the names are similar but in a slightly different order. Landsec’s management team is the top performer, having added close to 7% to the value of its portfolio, Green Street said. It is followed by industrial specialist Hansteen, which also gets an A grade, despite the management having been criticised for paying itself too much in another report on executive pay issued by Green Street last year. Derwent London, Great Portland and Safestore round out the top five management teams, in that order.
It is interesting to note that the management teams of Landsec and British Land are often criticised by analysts for adding little value, because the companies they manage are large and diversified compared to sector specialists like Derwent or Great Portland. But Green Street’s analysis puts them at the top of the league. Whoever follows outgoing Landsec Chief Exec Rob Noel may have a tougher job than appears at first glance.
And at the bottom? Intu brings up the rear by a country mile in terms of value creation by management over both three and five years. According to Green Street, the company’s management have destroyed close to 65% of the portfolio’s value over the past five years. Finnish shopping centre company Citycon’s management is the next lowest, having destroyed around 5% of the portfolio value. It has been operating in the beleaguered retail sector, but it has played a bad hand badly, the analysis indicates.
The outlier of Intu apart, the numbers show that management does not have a massive impact on a listed property company, despite the huge profile and riches that are afforded to chief executives and other top executives.