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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.

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The metrics used to segregate the companies were:
  1. TTM NOI / Current EV               
  2. Y-o-Y Growth in Rental Income               
  3. Q-o-Q growth in Rental Income           
  4. Y-o-Y Growth in NOI
  5. Q-o-Q growth in NOI
  6. Y-o-Y Growth in FFO
  7. Q-o-Q growth in FFO
  8. EBITDA/Interest expenses
  9. Total debt-to-Gross real estate investments
  10. Total Debt-to-Current EV
  11. Trailing 12 months EBITDA
  12. Trailing 12 months interest expenses
  13. Trailing 12 months NOI               
  14. 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...

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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  File Icon Middleton vs Ackman vs Hovde on GGP - public edition document:

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Commercial Real Estate credit losses are REALLY ramping up as well, and this is just the beginning! See CRE 2010 Overview. 

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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...

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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.

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"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!!!

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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.

Tomorrow, I will present a similar model for the insurance industry.