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Is Goldman Preparing To Upgrade The REIT Sector?

Tyler Durden's picture





 

Just when it seemed that all the stops had been pulled on the REIT juggernaut and nothing else would be able to surprise to the upside, save for Vornado finding an ancient Mayan city made of 24k gold in its back yard, after we read the attached research report on US REITs from Goldman analyst Jonathan Habermann, we have a dead taste in our mouth. The reason for that is we believe Goldman is within 2-4 weeks of upgrading the entire REIT space to something comparable to a Conviction Buy (not sure if that is possible for an entire industry, but we are confident GS will find a way).

The source of our consternation, the following phrases. As always, with Goldman what is not said is much more valuable than what is said.

Industry context

Since the start of 3Q earnings, shorter lease term sectors have delivered relative  outperformance versus the long lease term segments, marking a clear divergence in performance from the year-to-date trend. The gap was meaningfully apparent as Industrial and Apartments delivered amongst the strongest price performance over the last few weeks. Before we declare a shift in sector strategy, we point out that the data reflects our recent view that a more “balanced approach” to sector strategy will take hold in 2010, with a focus on growth leaders and income names.

Source of opportunity

We maintain our focus on our lists of growth leaders and income names as we think relative growth and the ability to pay an all-cash dividend should become increasingly important in 2010. It is becoming more evident that companies with access to capital and stronger balance sheets should be in a position to deliver higher growth in the near term. Our income list has a net cash yield of 5.4%.

3Q earnings highlights – stronger than we expected

Many of the 36 companies we follow met or exceeded our 3Q estimates, a positive sign, but we caution that growth should remain at a depressed level in 2010 and 2011. In fact, 2010 should be another tough year, with FFO down roughly 15%, but a relief from the earnings steep slide of 2009 (down 25%); we see only modest positive growth in 2011. Several highlights from the most recent quarter: (1) 88% of REITs we cover met or exceeded consensus estimates, which is reflective of solid results and a focus on expense control in a market defined by weak fundamentals; (2) Lease term is still important, as SS NOI for malls and office exceeded results from apartments and industrial names, a relative call we have been making for most of 2009; but, as we pointed out already, we are increasingly focused on the near-term growth which should favor a more balanced sector strategy in time; (3) Focus will remain on two key areas in 2010 – operating performance and the balance sheet. In short, with declining rents and  occupancy to persist next year, relative operating results will drive upcoming growth as well as REITs that can deliver external growth given their better balance sheet.

A sector upgrade (with umph, gusto and, of course, conviction) would make a lot of sense strategically: lately Merrill has been unable to raise equity for a company if Cohen & Steers were to drop $1 billion on their door step in exchange for a $500 million secondary. As such, Goldman is about to flex its pipes. And as everyone knows, the best way to curry favor with 20 or so companies is by having the CEO's stock holdings appreciate by 10% overnight.

We hope we are wrong in our cynicism, as the real estate market, and particularly the CRE subset via REITs, is so distorted that it bears absolutely no resemblance with underlying fundamental cashflow reality. Another upgrade will just make this distortion even more unfathomable, yet in today's banana market, this may be the most expected outcome. It would also explain Mr. Cramer's recent all-in bet on CRE. As everyone knows, the man never speaks without an agenda. And what better way to be proven right than to have his former employer upgrade his chosen sector. Little does it matter that in 4 years CRE will look darker than a black steer's tuchus on a moonless prairie night.

 

 

 


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Tue, 11/10/2009 - 21:12 | Link to Comment JohnKing
JohnKing's picture

Why stop now, the party is just getting started.

Wed, 11/11/2009 - 00:14 | Link to Comment Fritz
Fritz's picture

Yes - With banks now legally allowed to lie to investors and depositors about the status of non-performing CRE loans, whats not to like?

 

Tue, 11/10/2009 - 21:30 | Link to Comment Daedal
Daedal's picture

Apparently "Stronger than expected" = "Conviction Buy".

 

Similar logic:

Person 1: Have you ever been to Paris?

Person 2: No, I've never been to Paris.

Person 1: So you were in Paris a long time ago...?

Person 2: Well, since I'm 40 years old, I'd say that's how long I haven't been there.

Person 1: Well, relatively speaking, that's not too long ago.

Person 2: Yeah, now that I think about it, I'd say I was there rather recently.

 

 

Wed, 11/11/2009 - 09:18 | Link to Comment justrichard
justrichard's picture

OMG  thanks for making me laugh this morning.  

Wed, 11/11/2009 - 09:57 | Link to Comment Anonymous
Tue, 11/10/2009 - 21:27 | Link to Comment Cursive
Cursive's picture

In short, with declining rents and  occupancy to persist next year, relative operating results will drive upcoming growth as well as REITs that can deliver external growth given their better balance sheet.

I hereby nominate the above sentence for oxymoronic statement of the year.  If you can't dazzle with brilliance, then baffle them with B.S.

Wed, 11/11/2009 - 00:11 | Link to Comment Anonymous
Tue, 11/10/2009 - 21:30 | Link to Comment Anonymous
Tue, 11/10/2009 - 21:30 | Link to Comment Anonymous
Wed, 11/11/2009 - 09:41 | Link to Comment deadhead
deadhead's picture

it was DDR

Tue, 11/10/2009 - 21:32 | Link to Comment Squid-puppets a...
Squid-puppets a-go-go's picture

calamari souffle`, anyone ????

Tue, 11/10/2009 - 21:33 | Link to Comment Anonymous
Tue, 11/10/2009 - 21:34 | Link to Comment tip e. canoe
tip e. canoe's picture

"Over the Mountains of the Moon, down the Valley of the Shadow, ride, boldly ride…if you seek for El Dorado." - edgar allen poe

Tue, 11/10/2009 - 21:35 | Link to Comment alien-IQ
alien-IQ's picture

I think my head is going to explode...In fact...I'm sure of it.

Tue, 11/10/2009 - 21:41 | Link to Comment Careless Whisper
Careless Whisper's picture

GoldSach is a taxpayer backstopped hedge fund.

Tue, 11/10/2009 - 21:51 | Link to Comment Gilgamesh
Gilgamesh's picture

That manages secondary REIT stock offerings.  After upgrading them, of course.

Tue, 11/10/2009 - 21:49 | Link to Comment deadhead
deadhead's picture

wouldn't be surprised.  the fed, treasury, fdic, obama administration know that cre is collapsing and what better way to get some capital in there than to sucker more money out of the little guy via his dumb mutual fund pm as well as those brilliant overseers of the nation's pension funds.

hey, this play has worked pretty well for a banking system that is close to an insolvent piece of shit so why not try it on cre.

we are witnessing the greatest con job on a mass scale in american history. 

instead of being honest, recognizing the debt problems we have, fixing it now and taking our medicine, we will make it much worse.

 

Tue, 11/10/2009 - 22:39 | Link to Comment Anonymous
Wed, 11/11/2009 - 01:17 | Link to Comment Anonymous
Wed, 11/11/2009 - 09:43 | Link to Comment deadhead
deadhead's picture

Bingo!  We have a winner here!

Tue, 11/10/2009 - 21:51 | Link to Comment Anonymous
Tue, 11/10/2009 - 21:52 | Link to Comment Careless Whisper
Careless Whisper's picture

Hey if GoldSach is a bank, then anyone can be a bank, even Apollo Management:

http://www.thedeal.com/dealscape/2009/11/apollo_explores_possibility_of.php

 

Tue, 11/10/2009 - 21:54 | Link to Comment D.O.D.
D.O.D.'s picture

SPY up 2 cents durring market hours, new highs in A/H.  They must have read this article, and realized, Goldman doesn't have to make sense, it has to make dollars, and that is bullish...

Tue, 11/10/2009 - 22:00 | Link to Comment buzzsaw99
buzzsaw99's picture

That's a great call because if the REITs don't perform then the fed will buy them. Or Calpers...

Wed, 11/11/2009 - 05:42 | Link to Comment Anonymous
Tue, 11/10/2009 - 22:14 | Link to Comment Tommy
Tommy's picture

Maybe this is like their $200 oil call of last year.  Just trying to get as many suckers on the long side while they short REITs out the back door.

Wed, 11/11/2009 - 00:17 | Link to Comment Handle with care
Handle with care's picture

This would be my guess.  No-one can really believe there is any upside in REITS at this level.

 

I ZH had a n article before at how GS Conviction BUY orders coincided with stock collapses

Tue, 11/10/2009 - 22:14 | Link to Comment Tommy
Tommy's picture

Maybe this is like their $200 oil call of last year.  Just trying to get as many suckers on the long side while they short REITs out the back door.

Tue, 11/10/2009 - 22:16 | Link to Comment RobotTrader
RobotTrader's picture

Charts are pretty ripe for a "surprise" upgrade.

Gap 'em up, baby.....

Would not be too surprised....

Tue, 11/10/2009 - 22:33 | Link to Comment Gilgamesh
Gilgamesh's picture

The timing of this report completely explains the stampede into REITs at the close yesterday...

Tue, 11/10/2009 - 22:19 | Link to Comment Fish Gone Bad
Fish Gone Bad's picture

As I said before, the Dow will take out 14,000 so that Buffett can cover his bet.

Tue, 11/10/2009 - 22:22 | Link to Comment Anonymous
Tue, 11/10/2009 - 22:31 | Link to Comment par068
par068's picture

All GS has to do is a levitation act with an equity offer of enough

to cover most of the interest payments.

Fed already said they only have to make a partial payment.

Where does it say what "partial" means anyway.

A few eagles will do.

Tue, 11/10/2009 - 22:35 | Link to Comment Anonymous
Tue, 11/10/2009 - 22:36 | Link to Comment jedwards
jedwards's picture

Anyone else keeping track of all the layoffs in tech?  EA, Adobe, Sprint (not really tech but I"m sure it will affect Palm)... this is not the sign of a growing economy.  You would expect companies to want to ramp up or at least retain their people if they are expecting things to recover soon.

Tue, 11/10/2009 - 22:46 | Link to Comment Anonymous
Tue, 11/10/2009 - 22:37 | Link to Comment Anonymous
Tue, 11/10/2009 - 22:38 | Link to Comment Anonymous
Tue, 11/10/2009 - 22:54 | Link to Comment Anonymous
Tue, 11/10/2009 - 22:55 | Link to Comment Fritz
Fritz's picture

If the squid does a sector upgrade, you can bet it will be for the sole purpose to dump their REIT and CRE inventory into the market, while booking fees on a few secondaries.

It may be a last desperate act to bailout Whitehall before CRE blows sky high.

 

 

 

Tue, 11/10/2009 - 23:04 | Link to Comment Anonymous
Tue, 11/10/2009 - 23:09 | Link to Comment Anonymous
Wed, 11/11/2009 - 00:04 | Link to Comment msorense
msorense's picture

The cover of Business Week is about CRE and the caption says "DEEP TROUBLE - Why the commercial realestate crisis looks so scary".  It starts out with a story about the disasterous deal GS did with an Arizona luxury resort.  See story:

http://tinyurl.com/y8otatf

Maybe they are trying blunt the storm that's coming?  As a trader, I'm trying to prepare myself for yet another strong rally to the upside for IYR.  When the fuck will this shit end?  What will it take?  Are they waiting for some external event to take place (i.e. 9-11)?

Wed, 11/11/2009 - 00:40 | Link to Comment Argos
Argos's picture

Arizona Grand Resort!?!  I live in Phoenix and have never heard of the place.  I had to google it.  What an absolute crap part of town.  Nearest best neighbor, a run down Indian casino and an auto rack track.  Did I mention the major freeway it borders?  Oh, and how about the fact that it's competing against at least 200 other golf course/resorts in the immediate area.  What a crap idea.

Wed, 11/11/2009 - 00:36 | Link to Comment Careless Whisper
Careless Whisper's picture

Do the bankstas have blood on their hands? Mother of dead soldier wants to know why there's money for banks but not equipment to save lives.

http://www.telegraph.co.uk/news/newstopics/politics/defence/6539575/Mother-of-dead-Afghanistan-soldier-attacks-Gordon-Brown-over-equipment-failings.html

 

Wed, 11/11/2009 - 00:58 | Link to Comment jedwards
jedwards's picture

I understand everything about CRE being in the shitter... but why is SRS at its historic lows?  Even TD recommended SRS back in Jan/Feb and the news has only gotten worse for CRE, but nothing seems to be bringing it down.

 

Has the news about CRE been leaking so slowly that no one cares, and all the bad news is already out of the sector?  

Wed, 11/11/2009 - 10:04 | Link to Comment Anonymous
Wed, 11/11/2009 - 02:16 | Link to Comment Johnny G.
Johnny G.'s picture

The horror!!  These GS cocksuckers put out 99 pages of decent research in August '09 explaining the untenable equity position of Reits; and how we should long/short the debt v. equity in their "State of the Markets Best Long Short Risk Strategies for Hedgies".  Not that I wasn't already positioned that way: but at least I thought the dickhead/cocksucker (should that be two words or one?)/politically correct/pussy whipped fags weren't gonna fucking turn tricks for a God damn pfennig as some tranny shot coke rocks up their ass 'cause their nose was bleeding and they couldn't stop defacing the straw; would stand up to their end of the research.

I'm done with GS.  I'll never aspire to run for Governor of New Jersey, New York or Treasury Secretary.  May God call on them for the amazing, work they've done for society...and I hope he calls very soon. 

Now would be good.

Wed, 11/11/2009 - 02:48 | Link to Comment Anonymous
Wed, 11/11/2009 - 05:48 | Link to Comment Kreditanstalt
Kreditanstalt's picture

It's OK.  We may yet be saved more nonsense...

Jonathan Habermann.  That name rang a bell:

http://www.zerohedge.com/content/reit-cbls-brief-and-painful-stay-goldman-sachs-conviction-buy-list-0

It is quite likely this character doesn't know a Buy from a hole-in-the-ground.

Wed, 11/11/2009 - 05:57 | Link to Comment Anonymous
Wed, 11/11/2009 - 10:06 | Link to Comment Anonymous
Wed, 11/11/2009 - 10:27 | Link to Comment Anonymous
Thu, 11/12/2009 - 04:20 | Link to Comment Anonymous
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