REIT Price Moves Disconnect from Reality

From The Wall Street Journal

As if life wasn't tough enough for chief executives of real-estate companies struggling with the recession, they are also having to cope with price swings in their stocks, which normally are relatively stable.

That is making it harder for them to do deals, raise capital, attract institutional investors and compensate employees.

It is also getting their dander up about a likely culprit: a popular trading strategy involving leveraged funds that investors are using to ride the daily trend in certain market sectors.

"It's a very alarming, very disconcerting impact on the stock," Equity Residential Chief Executive David Neithercut says of the funds. "Maybe somebody's making money, but I think it's a real problem for our business."

It is not difficult to see why Mr. Neithercut is upset.

On Dec. 11, a day the Standard & Poor's 500-stock index was down 3%, shares in Equity Residential fell 20%. The next day, the company's stock rose 15% while the S&P was up 1%.

The same phenomenon is taking place in dozens of REITs.

Indeed, in 57% of the trading days since Sept. 30 -- 35 out of 61 -- the Dow Jones Equity All REIT Index rose or fell 5% or more. Fifteen of those days saw moves of 10% or greater.

The S&P 500, by comparison, has had 17 days of 5% moves and two 10% days over the same period.

What's driving REIT executives particularly crazy is that the volatility has upended notions that the asset class is less affected by the day-to-day vagaries of the public market.

"It's just insane...with a business that generates much of its cash flow from leases that are not that volatile," says Hamid Moghadam, the chief executive of AMB Property Corp., a warehouse developer whose stock has lost nearly half of its value in three months. "All I can tell you is that people are very confused."

So why is this happening? Many REIT executives largely blame funds that pursue leveraged stock-trading strategies that let investors make quick, high-stakes bets on broad stock indexes or baskets of stocks in specific sectors.

Some market observers believe these funds -- known as leveraged exchange-traded funds -- increase the volatility of individual stocks in those baskets, particularly toward the end of the day, as fund managers buy or sell shares to square their books.

I own one of those leveraged REIT ETFs, the ProShares Ultra Real Estate, ticker URE.  To the REIT executives, I apologize for contributing to the volatility of your trust.

Average rating
(0 votes)