Wednesday, March 18, 2009

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. Sphere: Related Content
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10 comments:

Gentlemutt said...

Nice chart. Makes me wish I were still in the market; these look like some very attractive arb opportunities.

Jive Talkin' said...

cool. very cool.

Anonymous said...

All I can say is that you got some set of ball making that chart out of a set of balls!

Anonymous said...

Without a scaling effect on the equity market cap this isn't really very telling. If they were all the same size, sure. But if one company owns 10x the assets of another and has 2 turns higher leverage and 200bps wider spreads, I'd still expect it to trade at a significant market cap premium because you own a much bigger option.

Anonymous said...

first reaction is that the credit markets are off - compare Simon with Boston Properties. Simon has $25 billion of debt and $23.9 billion of book value real estate (I know some of that is worth more than book value, but not all and probably not 40% more, which is what it needs to be in today's market). Plus, they have a relatively high amount of currency exposure. They really shouldn't be trading a lower spread than BXP.

Anonymous said...

Can anyone tell me why Ed. Libby doesn't tell congress to fuck off and just say "i quit" - keep your dollar.

Anonymous said...

Talking about the dollar, Hey Tyler what is going on with the USD (DX)??

Is this the begining of the slip that we've all been waiting for?

Anonymous said...

tyler,...you sly dog you.
just a sly dog with a schwab account.

Anonymous said...

REALLY sharp moves in currencies today.

Fed admits it will be purchasing treasuries (it has to, there isn't enough demand to meet supply this year)...gold up, dollar down. Or is it dollar down, gold up?

Chicken or the egg?

vp3434 said...

Looks like I'm late to the thread, but can anyone figure out how Tyler calculated ~9x leverage for EQR? Looking at their balance sheet on google finance, it shows $16.5B in assets, $11.5B in liabilities, and $5B in book equity. Is there $30B in off balance sheet financing? Thanks!

Btw, anyone else like SPG as a short? I'm going to start legging in.