The full capital commitment is rarely invested immediately and is drawn down over time as more investment opportunities are identified. This is money that investors have promised to contribute to the fund in order to purchase an asset or fund any expense. Market forgot to check his math.In private equity, money that is committed by limited partners to a private equity fund is referred to as committed capital. Market will get this figured out but it is quite obvious that Mr. There are several ways to exploit this and the most straightforward is to go long the less levered REITs that had a significant drawdown such as HPP, KRC, PLD, CUZ and ESRT and short the more levered REITs that had a much less significant drawdown such as CIO, SIR, PKY, PDM, and GOV. This analysis implies that a 90% leveraged REIT and a REIT that employs no leverage would have likely had a similar drawdown which does not stand to reason and therefore presents a mispricing in the REIT market. There should be a relationship between the drawdown of a REIT and the leverage it employs with less leveraged REITs having less of a drawdown than more levered REITs. The R-squared value of 0.0025 indicates that there is almost no relationship between the drawdown in each REIT and the leverage it employs. The best fit line shows that REITs that employed more leverage actually performed better in the drawdown than did REITs that employed less leverage. The chart below shows the return of each REIT over the period compared to the leverage of each REIT. The period in which the most concentrated drawdown happened was Augto Septemso the total return of each REIT over this period will be used and compared to the leverage of each REIT. Nevertheless, REITWatch reports a debt ratio of 29.7% and Boston Properties reports a debt ratio of 30.16% as of the same date as the REITWatch report which is not materially different.Īs for the difference in leverage attributed to the change in each REIT's stock price between Jand August 18, 2015, this would also be a minor change in leverage so the debt ratio reported in REITWatch is a good estimate of each REIT's leverage as of August 18. Below is a calculation of this by Boston Properties that lays out the calculation. The second is that in order to calculate the economic leverage employed by each REIT, one would need to account for the REIT's share of unconsolidated JV debt and their JV partners' share of consolidated debt. The first is the obvious that stock prices changed between Jand August 18, 2015, the day prior to the drawdown. I will concede that the debt ratio reported in REITWatch does not reflect the most precise calculation of leverage for each REIT prior to the significant drawdown for several reasons. Below is a screen shot of the report which reports each REIT's debt ratio based upon the close of its stock price on July 30, 2015. To make things easy, I used the debt ratio reported in NAREIT's REITWatch publication from July 2015 which reports data as of July 30, 2015. In order to compare the drawdown of each REIT to its leverage, the leverage needs to be established. Therefore leverage should have been the major factor in each REIT's drawdown. This is because there was very little material information released for any of these REITs as earnings had already been announced for the second quarter of 2015 prior to the drawdown. The thing is, when the market decreases in such a short amount of time, the most important factor that should influence the drawdown of each REIT is the amount of leverage it employs. The observation I had made was that the plunge in REIT prices seemed to have no relationship to how much leverage each REIT was using. Lo and behold my observations were substantiated by a bit of analysis. I noticed a strange occurrence during the recent weeks in the office and industrial REIT sector so I decided to quantify it.
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