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A Look at the REITs that Outperformed the Broad Market for 2009
Following the empirical evidence that banks share price moves are outstripping their fundamental performance,
I have decided to run the same analysis with REITs that have beat the
S&P 500. In the chart below, General Growth Properties had to be
stripped out since it had a 3,000% return, it made the rest of graph
participants illegible. Click to enlarge.
The metrics used to segregate the companies were:
- TTM NOI / Current EV
- Y-o-Y Growth in Rental Income
- Q-o-Q growth in Rental Income
- Y-o-Y Growth in NOI
- Q-o-Q growth in NOI
- Y-o-Y Growth in FFO
- Q-o-Q growth in FFO
- EBITDA/Interest expenses
- Total debt-to-Gross real estate investments
- Total Debt-to-Current EV
- Trailing 12 months EBITDA
- Trailing 12 months interest expenses
- Trailing 12 months NOI
- Plus
a whole host of other performance related criteria. All in all, very
rich and informative model for those interested in the space.
A heat map was created to visualize the trend in fundamentals for those
companies whose performance bested that of the broad market. As one may
have guessed, the heat map is throwing off a lot of red, with implied
cap rates (NOI/EV) going up as quarter over quarter net operating
income declines in the face of both rising share prices and drastically
falling rents and land values. Below is a snapshot of the heat map.
Although this is a subscriber download, there is definitely something
to be gleaned from trends highlighted below. Twilight zone, here we
come...
Click to enlarge...
This screen shot shows both net operating income, and the industry's
own made up version, funds from operations, both trending down in
general on a quarter over quarter basis. What is not shown in the
screen shot, but can probably be implied is that net operating income
divided by enterprise value is also facing a negative trend (going up).
One can make the argument that the share prices of these companies are
increasing due to the forward looking promise of improved performance
and a better outlook, but the evidence at hand certainly does not
support such a viewpoint. As detailed in the Bank Performance Post, the macro seen looks negative for the foreseeable future. Referemce the snippets from the
Middleton vs Ackman vs Hovde on GGP - public edition document:
Commercial Real Estate credit losses are REALLY ramping up as well, and this is just the beginning! See CRE 2010 Overview.
While you're at it, check out "The Latest REIT Updates are Now Available"
for added measure.You can see that not only is the collateral behind
the failing residential loans imploding at an unprecedented rate, but
the stuff behind the failing commercial loans make residential housing
look downright rosy in comparison. Compare and contrast how fast the
CRE values are falling against those of the residential values that get
much more press and airtime in the mainstream media...
See CRE Consulting for more info on CRE trends.
Tell me, dear readers, are we in Japan yet???!!! Don't let those who
don't run the numbers tell you otherwise. We are following damn near
(save some differences in structural rigidity) lockstep in their path.
Okay, I'm busted! Not exactly lockstep. Our property decline is probably STEEPER! Look at the second leg.
"Wait a minute buddy!" is being shouted at me from behind the Internet
pundit's bullish keyboard. We are in the midst of a recovery, and GDP
is forecasted to increase. You know, forecasted by the same guys who
somehow missed the biggest stock market and economic drop of a
lifetime. Yeah, I know... The GDP thang! Well, wasn't GDP humming right
along when all of this mess started. This is about assets and
liabilities, not revenue inflows and outflows. I hope you guys have
been practicing the use of your chopsticks, cause here we go, GDP
increase and all!!!
A tertiary advantage to this exercise
is that REIT who look like they may have actually deserved an increase
in share price are exposed as well. If one were to look at the first
few REITs in the list, you
will find those that have the strongest fundamental performance trends
over the last four quarters. Yes, they are there.
The REITs with the healthiest set of fundamentals are specialty REITs,
not retail or office. Subscribers should reference the first three
companies at the top of the model in the last tab, "Heat Map".
All levels of subscribers may download the model here: REITs that beat the broad market for 2009 2010-01-11 05:07:31 315.69 Kb.
Prove it.
Outlooks are obviously a matter of opinion. The snide come back is, prove the outlook is not better. I hold that a year ago was a near-death outlook and today is materially better than that (but still maybe not great).
But do not take my word -- ask dedicated REIT buyside institutional investors (say Cohen&Steers)and analysts (say Greenstreet), ask sell side analysts (say Citi or Stifel), survey REIT management teams, rating agencies (yikes), etc - pick your reasonably qualified source and ask if today is better than one year ago for public REITs. We know the market thinks the outlook is better (understanding markets are not always right in the short run).
And you are drawing a very tight connection with the outlook for Public REITs and the outlook for commercial real estate. They are connected, but not as tightly as you think. Public REITs are a) a very small part of the commercial real estate market and b) better capitalized and prepared for the coming problems and opportunities. REITs are not immune, just better than the average commercial real estate investor.
A number of REITs were heavily counting on taking advantage of a blood bath in the markets to make some great acquisitions. They have been very disappointed in this regard. Maybe some distress opportunities will present themselves in 2010/11, but most of those REIT scavenge-hunters have dramatically reduced their expectations about the availability of bargains.
I am actually quite familiar with real estate, having invested directly in it myself for a decade. I also have my own team of dedicated analysts, hence do not need to ask the "sell side" who you should know have an agenda other than making you money.
As I stated before, prove it. I feel I can prove the contrary to your opinion. Go to my site, search for and download the CRE 2010 outlook.
1. "Well if that's the case, how can you make a statement like this?"
Because your bar chart only has about 50 REITs (there are over 100 REITs) and I am certain there are other REITs that outperformed the S&P that are not on the bar chart.
2. "That's because many were near bankrupt!"
So the real question is were REITs generally closer to bankruptcy than the average S&P company?? I would suggest REITs were closer to bankruptcy in no small part due to their higher leverage. Which is why they dramatically under-performed the S&P going into the March low.
3. "The outlook for REITs actually look worse, not better."
The outlook for public REITs today is better than March 2009, December 2008 or November 2008. Ask dedicated REIT buyside institutional investors, ask sell side analysts, survey REIT management teams, rating agencies (yikes), etc - pick your reasonably qualified source. We know what the market thinks (I understand the market can be wrong over short time periods like the one year time period you are focused on).
4. "I am showing how the prices of various REITs are moving contrary to the fundamental trends."
The fundamental outlook for REITs is better today than it was. So directionally share prices are moving consistent with the direction of the outlook (improving). What matters most is the change in fundamental outlook at the margin. If the outlook is sub-par, but is better than it was, then the outlook is improving and share prices just might move higher despite the sub-par absolute outlook. It is share price vs. expectations that are already reflected in the share price that matters. If those expectations improve, share prices tend to improve. Near death was priced in at December 2008. They are not as near-death now.
Again, the commercial real estate can "fall" and REIT prices go up if in fact the fall is not as deep as what was previously expected.
Well if that's the case, how can you make a statement like this?
From the get go, your credibility is suspect. You are commenting (and inaccurately at that) on something which you have not read.
That's because many were near bankrupt!
The outlook for REITs actually look worse, not better.
I have not analyzed the merits of an investment. You, again, seem to be missing the gist. I am showing how the prices of various REITs are moving contrary to the fundamental trends.
I did, and took great pains to do so in excruciating detail. The REITs that I found to be weak were truly weak. See the following:
Will the commercial real estate market fall? Of course it will. Sunday, 09 December 2007
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Do you remember when I said Commercial Real Estate was sure to fall? Dec 20, 2007
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The Commercial Real Estate Crash Cometh, and I know who is leading the way! Sunday, 06 January 2008
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Generally Negative Growth in General Growth Properties - GGP Part II
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General Growth Properties & the Commercial Real Estate Crash, pt III - The Story Gets Worse
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More on GGP: A Granular View of Insider Selling and Lease Rate Growth
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GGP part 5 - The Comprehensive Analysis is finally here
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My Response to the GGP Press Release, which seems to respond to blogs...
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For those who were wondering what sparked that silly press release from GGP.
GGP: Foreclosure vs Asset Sale
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GGP Refinancing Sensitvity Analysis
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GGP part 7 - Share value under the foreclosure analysis
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GGP part 8 - The Final Anaysis: fire sale of prime properties
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Analysis of GGP's recent Q1 results
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GGP Conference Call
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Reader's legal observation on GGP
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GGP Can't Afford its Dividend
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Press release announcing new equity financing - something that I didn't explicitly model in my own
analysis, but after reviewing information without the benefit of official documentation, there were no
surprise nonetheless...
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We did find some surprises, and my blog readers chimed in with their expertise and opinions...
Just working off the data presented in the post vs links to other information. Don't think I am missing the essence of the post -- i.e., REIT (real estate) outlook is not good therefore REITs should not have outperformed in 2009 (a single year) and/or are significantly over-valued now. Fortunately or unfortunately, the market does not work in that simple way.
Sometimes what matters most is the relative change in the fundamental outlook. The outlook at December 2008 (or March 2009) was MUCH worse than December 2009 - at December 2008, REITs had near-bankruptcy scenarios creeping up the probablility scale. Maybe December 2009 outlook is not great, but it is materially better than December 2008 for REITs -- accordingly, strong 2009 returns. And I believe the improvement in outlook exceeded the improvement in S&Ps outlook -- understanding that is in the eye of the beholder.
I do not see 2009's single year outperformance as alarming as you do. To put it in context of the long term investor you purport to be, REITs have under-performed the S&P over the past three years (which obviously includes REITs stellar 2009 gains). So are REITs over-priced or under-priced now vs the S&P?? Hence my concern with short artifical time periods being used to evaluate the merits of an investment.
Maybe you should have analyzed whether REITs were under-priced at December 2008 given their fundamental outlook vs the S&P -- this might explain 2009's over-performance.
There could very well be $50 billion of annual losses in commercial real estate the next three years (not the best back drop for REITs), but the bulk of the problem is not within public REITs and it may very well mean little/nothing in making 2009's REIT returns overly irrational.
And I am not a huge REIT bull -- but I think they will provide competitive returns with the S&P over the long run going forward.
First, the analysis does not cover all the REITs that are >$500 million mkt cap and outperformed in 2009, but no matter.
Second, outperforming in 2009 is a near meaningless criteria -- many underperformed prior to 2009 based on end of the world scenarios and major issues about refinanciability of debt - much of which got resolved for public REITs in 2009. So the market recognized this an un-did some of the price pain previously inflicted. Choosing a single calendar year as some relevant factor to focus on is silly. Why not pick March 2008 to March 2009?? Market pricing and underlying fundamentals are frequently out of step with each other - so not in and of its self a problem.
Third, the vast majority of commercial real estate (CRE) problems (call it $50 billion per year for the next 3 years) will not be in the public REITs - they will be with other less capitalized private owners. It may create some market choppiness, but nothing most public REITs can't handle. And CRE pales in comparison to residential.
Fourth, try looking at 10 and 15 year returns and you will see REITs outperformed the S&P over those time periods too (meaningfully for the past 10 years). I have been very well treated to positive total returns from one low-risk, low leverage REIT for each of the past one, three, five, ten and fifteen year periods averaging over 12% annually.
My take away over the past 15 years is, if you collect a decent dividend with some modest growth and avoid complete blow-out disaster companies, over time you EASILY beat the S&P. Problem is no one invests, most are just traders who generally are just too clever for themselves -- many who post on this site (but I enjoy reading...and shaking my head -- love to see their brokerage statement -- activity off the charts, results not so much).
Have you downloaded the analysis or are you just guessing?
I see you are probably just guessing. Outperforming the S&P while your fundamentals and macro outlook are rapidly deteriorating hardly culminate to "meaningless". If anything, it is very meaningful, with the bulk of that meaning being those companies are increasing in price against the trend of the fundamentals. Many of the scenarios weren't "end of the world" but reflected the end of the credit bubble and the inability to roll over overpriced debt and service the respective cash flows while paying a dividend. The "so-called" solutions were stock splits in lieu of cash dividends, as well short terms solutions that have not done anything to mitigate the macro issues.
I think you should try re-reading the material carefully and with a more objective eye. I am not a trader.
Government sponsored entities relating to commercial real estate... Oligarchs/Plutocrats always win. Buy commercial real estate the government won't let you fail.
I own some puts on MAC and SLG. I hope they start going down. They've been killing me the last few months.
REIT's often move together. REIT's with otherwise good fundamentals dropped in price when financing became difficult. Buying nursing home REIT's (NHP, HCP) on the dip were profitable positions in the last year. They were overleveraged, but otherwise stable. I'm waiting for them to drop on the next REIT crisis.
The REIT run up looks like a mania--but it has looked like that for the last 6 months. The bullish case seems to call the tune to date. Why?
Remember, the dot.com and residential real estate bubble lasted well over 6 months. Keep that in mind. If this is truly a bubble, then by definition respect for fundamentals will be suspended - that is until they are respected.
R-e-s-p-e-c-t... Bring it
http://www.youtube.com/watch?v=z0XAI-PFQcA
"Why"?
Because the reality of the liabilites to the banks and brokers attached to all the CRE derivatives and mortgages are too big a risk to "recogonize".... so they are not recognized. "Extend and pretend" .... hide under the covers until the boogie man goes away.