EPRA earnings and the requirement for debt valuation
SummaryRecent changes in the EPRA NAV measures have led many CRE borrowers to include a valuation on their debt portfolios. The following commentary summarises the changes, and how Chatham is assisting clients in this valuation and reporting process.
What has changed?
In late 2019, the European Public Real Estate Association (EPRA) announced modifications to its BPR (Best Practice Recommendations) which meant changes in the measurement of NAV – a key KPI for the industry. These changes are designed “to improve transparency, comparability and the relevance of financial reporting in the listed real estate… The changes will level the playing field between Non-REITs and REITs and ensure the EPRA BPR remain aligned with the International Financial Reporting Standards (IFRS) developments”*.
Going forward, those publishing EPRA metrics will need to replace the former NAV measurements (EPRA NAV and EPRA NNNAV) with three alternatives:
- EPRA Net Reinstatement Value (NRV) – assumes entities never sell assets and represents the value to rebuild the entity
- EPRA Net Tangible Assets (NTA) – assumes entities buy and sell assets
- EPRA Net Disposal Value (NDV) – shows shareholders’ value under a disposal scenario
These EPRA sets of metrics make adjustments to the NAV, per the IFRS statements, to provide information on the fair value of the assets and liabilities of a real estate company under different investment scenarios. Under the BPR, all three must be reported.
What does this mean for real estate investors?
These new measures mean that investors are now required to measure the fair value of financial instruments, including loans and borrowings held at amortised cost under IFRS to calculate the NDV. The objective of this fair value measurement is to estimate an exit price from the perspective of a market participant that holds the asset or owes the liability.
Such a calculation should consider changes in the risk-free rate, debt capital markets, and the risk associated with the underlying real estate asset.
Chatham’s Independent Debt Valuation service
At Chatham, we are independent debt valuation experts, with a proven and auditable methodology adopted by many of our real estate clients. We perform independent debt valuations on over 2,200 loans for 190+ funds globally. Our service can be tailored to the reporting outputs required in each unique situation.
We would be delighted to discuss how you are approaching this debt valuation requirement, and how Chatham’s expertise in this area might be beneficial.
Contact Chatham's valuations team
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.20-0373
Our featured insights
Request your Q2 2021 Average Market Credit Spreads report
The information presented in this report represents average credit spread conclusions segregated by property type and grouped by LTV for the quarter ending June 30, 2021. Debt mark-to-market had a slightly negative impact on equity fund returns in Q2 driven by spread compression in fixed...
Capital markets and accounting considerations in real estate M&A
Mergers and acquisitions involve a multitude of complexities and risks. Speed and accuracy at every stage of an acquisition is critical to not only winning the deal but also giving the transaction the best chance of financial and strategic success. Financial risk associated with the valuation of...
U.S. real estate market update—July 27, 2020
In reviewing what has transpired in the commercial real estate (CRE) lending markets over the past six months, we found it helpful to re-read our market commentary as it was written at the end of each of the last three quarters.
Financial risk management serving commercial real estate since 1991
Chatham Financial is the largest independent financial risk management advisory and technology firm. A leader in debt and derivative solutions, we provide access to in-depth knowledge, innovative tools, and an incomparable team to help mitigate risks associated with interest rate and FX exposures.
The renewed importance of impairment testing
Real estate market participants remain cautious, requiring significant areas of judgement in quantifying updates to cash flow modeling and discount rates.
Debt valuation recommended policies and best practices
The purpose of this document is to provide a framework for understanding best practices in marking debt to market for the purpose of financial reporting. This document is focused on clarifying policy and practice nuances related to debt valuation.
FAQ: Market volatility and impact on debt valuations
The following are answers to commonly asked questions around market volatility and its impact on debt valuations.
Derivative valuation methodologies for real estate investments
Chatham provides daily valuations for tens of thousands of interest rate, foreign currency, and commodity derivatives. The interest rate derivatives valued include swaps, cross currency swaps, basis swaps, swaptions, cancellable swaps, caps, floors, collars, corridors, and interest rate options.