Tuesday, 19 February 2008 05:00

REITs are the most expensive they have ever been, and CMBS are time bombs waiting to implode

You know they say, a picture is worth a thousand words...

image002.png

The skinny black line represents the value (spread between price and yield, unadjusted for inflation) in investing in REITS over the last 33 some odd years. As you can see, the spread between price and yield went negative about the beginning of '06, right about the time that asking commercial rents dipped below existing commercial rents that had just shot through the membrane of a bubble. Is it a coincidence? I don't believe in coincidences! The last 24 months has seen REITs the most expensive they have been in over 30 years!

That first bright yellow line you see are the implied cap rates of these gems. Too close to, if not below, the risk free rate. These guys are far from risk free. Looking at the first chart, try to figure out the risk premia recieved over treasuries historically. We are far from that.

Now, the second yellow line is what I see as either distressed sales or defaults coming up this fiscal year.

VNO
Boston Properties
Equity Residential
Simon Property
General Growth Properties
Alexander’s Inc
Equity Lifestyle Property
Maguire Properties
Parkway Properties
Avg.
Cap Rate (FFO / Fixed Assets) adj. for dep.
5.3% 5.5% 4.1% 5.7% 3.4% 3.6% 4.9% 0.4% 4.0% 4.1%

Debt position
2007 0% 0% 0% 5% 4% 0% 2% 0% 0% 1.2%
2008-2009 9% 15% 15% 15% 25% 8% 18% 14% 11% 14.3%
2010-2012 50% 30% 36% 46% 58% 26% 24% 9% 49% 36.5%
2012 -and beyond 40% 56% 49% 34% 13% 67% 58% 77% 40% 48.0%
Total debt/ Investment in real estate adj. for dep. 67.4% 53.6% 51.9% 70.5% 90.4% 134.9% 87.2% 92.1% 59.2% 78.6%
Total debt / Shareholders Equity 163.1% 127.1% 175.4% 374.1% 1594.3% 1030.7% 2339.1% 1399.1% 178.1% 820.1%
Net debt/ Investment in real estate 63.0% 38.9% 51.6% 68.5% 90.2% 67.4% 86.9% 88.9% 58.4% 68.2%
Net debt / Shareholders Equity 152.3% 92.2% 174.5% 363.2% 1591.1% 514.8% 2331.0% 1350.3% 175.9% 749.5%

52 Week High 136.6 133.0 56.4 124.0 67.4 471.0 59.7 43.2 57.9
52 Week low 77.4 79.9 31.1 74.8 31.0 308.3 39.7 22.0 31.0
- Price as % of 52 week high 62% 64% 65% 67% 52% 73% 76% 56% 61%

Price Performance (Absolute)
1 months 11% 7% 11% 14% 4% -1% 9% -11% 10% 6.0%
3 months -11% -7% -1% -4% -22% -8% -2% -14% -12% -8.8%
12 months -25% -24% -30% -17% -35% -22% -22% -42% -37% -28.3%
Price Performance (Relative to SPX)
1 months 17% 13% 17% 20% 10% 5% 15% -4% 16%
3 months -2% 2% 8% 5% -14% 1% 7% -5% -4%
12 months -18% -17% -23% -10% -28% -14% -15% -35% -29%

It appears as if someone was studying thier charts (fundamental, not technical) becaue the AAA spreads are going through the roof!

The A, BBB, and BIG spreads are even uglier, much uglier. So where does that leave BSC, MS, AGO, MBI, and ABK as well as all of those other CMBS structured product mavens (LEH has been giving commercial loans up tll last quarter or so)? I'll let you come to your own conclusions.

Last modified on Tuesday, 19 February 2008 05:00