REIT Graphic Representation Of Risk Perception

A three-axial analysis of some of the most prominent REIT names yields some interesting results. The chart below is a 3D scatter plot of Z spreads of REITs bonds (for this analysis bonds maturing in 2015/2016 were selected) based on today's bond market levels (Z spread is the CDS equivalent spread for a specific bond; as most names are trading sub 1,000 it is fair to say that convexity is not much of an issue), versus the company's leverage level, and juxtaposed to today's stock market capitalization of the underlying company.

The chart above excludes outliers Prologis whose 5.625% of 2016 had a 1,577 bps Z-spread on 19.7x leverage and DDR, whose 5.5% of 2015 bonds had a 2,145 Z-spread on 10x leverage. PLD indicatively has $1.7 billion market cap while DDR is at $267 million.

If one assumes efficient markets, the greater the leverage (higher on the chart) and the greater the risk perceived from the credit side (further right on the chart), the worse the prospects for equity recovery. Yet as the chart above shows there are some pretty dramatic aberrations.

I leave the chart for your consideration without making explicit conclusions, although will note that either credit or equity markets are mispricing risk substantially at many of these companies.