Goldman Sachs: REIT Valuation Back To "Bubble Levels"

Tyler Durden's picture

Goldman is out with a new piece which highlights some substantial cautionary language on perspectives before the REIT landscape. Not surprisingly, the biggest question mark is the digestion of the peak in CRE delinquencies which is expected to occur over the next 12-24 months. This is no surprise to anyone who has walked along Madison Avenue golden mile: the mecca of ultra high real estate, where a deluge of recently emptied storefronts demonstrates the deterioration for the highest tier of CRE. One can only presume how much harder hit the middle and lower end of commercial real estate across America must be.

While the worst of the current US recession appears to have passed, we caution that CRE trends are just starting to soften and will remain weak into 2011; as such, REITs should underperform the broader equity markets during the next stage of the recovery (6-9 months). In fact, we anticipate a decline in FFO of more than 10% for REITs next year, on top of the 15-20% expected decline in 2009. Hence, 2011 should be the bottom with growth resuming thereafter. Over the next 12-24 months, we see the combination of rising CRE loan defaults, deteriorating fundamentals (similar to the 2001 downturn), and more stringent lending standards (50% LTV loans at higher rates) resulting in a “challenging road ahead” for REITs.

And this most notable disclosure from Goldman on REIT valuations:

We believe investors should use the recent rally in shares (+42% since July 13) to reduce exposure to the REIT sector. REIT shares now trade at levels not seen since the “bubble years” in credit from 2004 to 2007, based on a current EV-to-EBITDA multiple of 14.3X, or an implied cap rate at the mid-6.0% level. In our view, the stocks are indicating one of two outcomes: (1) low cap rates are here to stay (similar to Europe and Japan) or (2) growth rates will be significantly higher than we have projected in the near term. We do not see either outcome as likely.

A peculiar change to a very cautious posture for Goldman, which does present some of the positives in the space, virtually all derivatives of "unlocked" equity and credit markets. Then again, while it took a few brief months to go from systemic gridlock to credit bubble mania courtesy of trillions of liquidity pumped into the market by the Federal Reserve, the inverse is just as likely, and any sharp and dramatic reversal in equities is likely to lead to a freeze in funding of the kind we say in December 2008 and again in March 2009.

At the same time, we are beginning to see signs of life in the CRE funding market with several recent unsecured debt issuances in the 5.5%-8.5% range, depending on the credit profile of the issuer. This compares with all-in rates in the 10%-13% range only a few months ago and, thus, a materially improved market for raising capital.

And here are some representative charts demonstrating the euphoria that has gripped investors looking for yet another bubble.

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Anonymous's picture

Conviction buy list addition coming for CBL?

inflationary's picture
inflationary (not verified) Aug 14, 2009 2:29 PM

Once it's achieved the strenght and self esteem to be released into the wild with plenty of self justification and fibionacci support it'll not only survive but thrive.

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Daedal's picture

REITdiculus. This has been obvious for a while now. I guess GS acquired their shorts on the Reits, and is now queing dumb money.

Anonymous's picture


Karston1234's picture

One can only presume how much harder hit the middle and lower end of commercial real estate across America must be. online degrees | universities | online universities

Anonymous's picture

what about Alt-A's and Option ARM's in addition to CRE?

Anonymous's picture

Does GS understand that all their research reports just make people wonder whether the prop desk is trading with or against them?

Any value in the reports is lost because of that. And I do think some of the reports still have value, it's just impossible to figure out which ones...

JohnKing's picture

Yeah, just like the shell game on the corner.

Sardonicus's picture

gee, they were just bullish on reits two weeks ago and they underwrote all the secondaries, 3rdaries, and 4thdaries that trash bins like SPG put out.

Not anything new I guess.  They packaged and sold real estate sludge to the world, had the unmitigated audacity to brag they were not infected by it, and then shorted everything they created and sold.

Did the same thing with all the Muni bonds they underwrote for the last three years too.

Anonymous's picture

What's the best way to find out who underwrote secondary offerings?

Sardonicus's picture

It is always mentioned in the SEC filings who the lead underwriters are.

Daedal's picture

If you read any of the books from the 90's (Liar's Poker, Fiasco, Wall St. Meat, Monkey Business), this is all playing out the same fashion. Banks make money by blowing up their customers -- not always, but they work twice as hard to unload bad paper onto someone else. Pump and Dump helps them achieve that with bad quality assets.



Anonymous's picture

of course!..after the secondary's are done now they turn on them.


Anonymous's picture

I guess it's time to get a few more people into SRS and then squeeze the $hit out of them.

Anonymous's picture

That's right. You can't tell if they are bullshiting or not to suck more in.
Better to wait than short just yet.

lizzy36's picture

Bank failure friday starting early?

FDIC Taking Colonial Into Receivership

BB&T To Buy Colonial BancGroup -

Anonymous's picture

how do you calc a Cap rate again Tyler?

SWRichmond's picture

"While the worst of the current US recession appears to have passed"

Current recession, eh?  Is this part of the strategy of "the recession has ended", and then we have another, deeper one?


Gilgamesh's picture

CRE value decline slowing.  Must already be in recovery, using CNBC and Administration math.

08-14 13:03: US Commercial real-estate values fall 6.9% in Q2 vs. 10.8% decline in Q1, according IPD

max2205's picture

GS speakath with forked tongue

max2205's picture

Recession is over, sell the news!!!!

e1even1's picture

is anyone here not expecting a massive hideous cre bailout? i think that could account for some of the reit euphoria.

Anonymous's picture

I'm not. The people who are holding commercial real estate are not bankers or unionized. There is no benefit to be gained to bailing them out.

Anonymous's picture

"Real" equity in most REITs are below 0. Assets minus liabilities.

They survive on cash flow from poor tenants stuck with recourse rent.

It will revert to reality at some point.

inflationary's picture
inflationary (not verified) Aug 14, 2009 2:29 PM

It's unbelivable what we let these criminals get away w/... as the next reply says.. (Blackstone)

recommended: good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions

Anonymous's picture

It was GS and Mother Merrill who pumped this sector. Now they're worried about valuations? Too funny for words.

Ducky's picture

Congress just does not understand they there are on the shamwow end of Glengary Glen Ross.

Can't wait to see how many $100M days GS has on the short side this quarter

Anonymous's picture

So long as the consumer is deleveraging, saving in "lazy" portfolios of bonds, cash, MM's and CDs, batting a cautious eye to cost, and losing their jobs, the RE market, in general, will suck. That's the cost of a consumer nation where 70% of GDP is consumer spending.

Once the Fed stops pumping trillions into the market and buying up treasury securities, credit markets will likely stop again because the banks don't trust the people they preyed off of to be suckers anymore, partially because they learned a lesson, at least the semi-smart ones, and / or they lost their jobs and income. The Fed has become the risk-taker in this market, and people have been bullish on a Fed-backed liquidity wet dream. They're quickly coming to the end of their ropes though, and one wonders when in the next months that will come to an end.

Milton's picture

So, GS is already short the REITs and their Bonds?

Pump and dump in reverse. Yawn...

Gilgamesh's picture

GS buying up OLP today, along with FCH and GBE.

Anonymous's picture

Burning buildings will solve over-supply problem.

Via Bloomberg;

"California firefighters battling blazes that threaten more than 1,250 homes may be hampered by stiff winds and temperatures close to 100 degrees."

Gilgamesh's picture

People can't even torch their NPL property correctly anymore:

tahoebumsmith's picture

While the worst of the current US recession appears to have passed, we caution that CRE trends are just starting to soften and will remain weak into 2011. Ok girls I said it now lets get back to the pep ralley. Goldman boys, they're the best, now get back out and steal the rest ...........

pams's picture

it is not fair... maybe you should change the future safari

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