Developing a leverage metric for the listed real estate sector

Baris Sari

Baris joined the EPRA’s Financial Reporting and Accounting team in June 2021. After he graduated with Honors from the HEC-ULg Management School in Belgium and obtained Master’s degree in Financial Analysis, Baris started his career at Deloitte Luxembourg as a Financial Auditor on the Real estate and Private Equity Markets. During his first year in Luxembourg, Baris also obtained his Certificate of the Formation complémentaire des candidats experts-comptables (Luxemburgish CPA). After 3 years in Luxembourg, he took part in the Global Deployment Program at Deloitte US and worked in their Philadelphia Office for another 2 years.

Loan to value (LTV) is a key metric for the real estate sector. It is used by equity analysts and investors to understand the overall leverage of a company and the susceptibility of this leveraged position to a change in property values. It is also used by rating agencies, banks and bondholders for the purposes of raising debt capital.
However, in reviewing various LTV calculations disclosed by EPRA members, it was clear that there was no one definition that was universally used. Indeed, how one intends to use an LTV metric will impact what is included in the calculation. Some EPRA members focus on the LTV as a metric for raising debt capital and therefore tend to prepare an LTV calculation with balance sheet debt only. Others focus on an LTV metric for users focusing on equity investment, and this tends to be calculated on a look-through basis, including a company’s share of joint venture debt and property assets. Many companies also have specific individual items unique to them that also impact their LTV calculation.
On top of that, we also reached out to the rating agencies and found out they used their own bespoke methodology when assigning corporates an LTV. Adding the bank covenants requirements to the mix and it was clear enough to conclude that no apple-to-apple comparative LTV was available for users of the financial statements. We decided to remediate this. The idea of designing such a metric has been on the table for a hot minute now. Back in 2014, the idea was attempted, but the project never saw the light of day because the task of creating a metric that would fit all purposes seemed too challenging at the time. Well, not any more today.
Indeed, in early Q4-2020, the idea resurfaced, and discussions regarding the introduction of an EPRA LTV metric to the Best Practice Recommendations (BPR) were initiated. To go forward, the Financial Reporting and Accounting Committee at EPRA decided to create a Sub-Committee that would entirely be focused on the development of the new BPR. Key participants in the debate include the wider EPRA membership and key industry stakeholders, such as property companies, investors, analysts and Big 4 assurance and accounting firms.
After approximately one year and a half of detailed analysis, assiduous review and ongoing discussions, the EPRA LTV was finally ready to be released in the public domain. It was included as part of the New EPRA BPR Guidelines approved by EPRA’s Board of Directors on March 16, 2022.
Our approach was driven by the objective to create a shareholder gearing metric that is not meant to replace pre-existing ones but rather to help equity holders understand the gearing of their shareholding. The EPRA LTV was aimed to provide shareholders with a metric designed for the listed real estate companies comparable across various jurisdictions and irrespective of the sector (retail, office, logistics, etc.) they operate in. Helping investors to understand and better compare our members’ LTVs has been the main focus all along this project.
Adjustments composing the L and the V parts of the EPRA LTV have been thoroughly discussed during the Sub-Committee Meetings. When aiming at designing a one-for-all tool in an environment as described previously, it might appear easier to agree to disagree. One of the key adjustments on which it was arduous to reach a consensus was the hybrid instruments.
As a basis for our debate, we conducted a sample analysis in order to observe how hybrid debt instruments were treated in the current market. Out of 21 companies selected , only convertible bonds were identified within ten of them, and 80% of the time, they were classified as debt and included on the L side of their respective LTV. There was no real guidance on how hybrid instruments should be treated, and it was agreed that they would be treated as debt until conversion.
Another highly discussed adjustment referred to the property transfer taxes. We used the same methodology and realized that a significant percentage of the companies selected excluded the property transfer taxes from their own LTV and decided to follow the same treatment for our EPRA ratio.
Other key adjustments concerned foreign currency derivatives that would be included in the reporting currency of the company on the L side and the current accounts with equity characteristics that will be treated as equity and therefore excluded from the L because of their substance. Indeed, as the financing provided is considered an extension of the equity investment, they are treated as debt.

Finally, the EPRA LTV is based on a proportionate consolidation basis. All material equity is accounted for as investment, and joint ventures will be proportionally consolidated, i.e., accounted for in proportion to the reporting entity’s equity ownership in such investment. For subsidiaries that include third-party non-controlling interests that are fully consolidated, the proportional consolidation requires that a similar adjustment be made, i.e., the assets and liabilities that are accounted for should reflect the equity ownership of the reporting entity. A picture is worth a thousand words, and for that purpose, we built an illustrated example that will assist any preparer in computing the ratio.
The new BPR is effective for accounting periods starting on or after January 1, 2022, and will be the basis of EPRA’s BPR Awards in 2023 and beyond.
For any questions about the EPRA LTV metric please contact randa@epra.com