MY Perception is Reality
On September 18, 2008, AFTER ProLogis lowered guidance, Merril Lynch issued a research report on ProLogis. The stock was around $42 at this time and they reiterated a BUY and humorously titled the report: “Perception Becomes Reality”. Mr. Volatility referenced the report in his post titled, “Who’s Reality Does Perception Become“. Here is a screengrab of it:
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Today, not even a month later, Merril comes out with a downgrade of ProLogis to NEUTRAL. Hmmmm… what could have prompted this? Was there another earnings warning? NO. Did another 10Q come out? NO. The only two major events for ProLogis since then have been: (i) its Carbon Recognition Disclosure Practice (I’m sure someone wasted a few months of their life writing that!) and (ii) Jeffrey Schwartz’ appointment at Emory (congrats again Jeff!).
Anyhow, something prompted Merril to change their opinion and here is what it said:
“However a few downgrades are necessary
We are downgrading Prologis (PLD) and AMB Property (AMB) to Neutral from Buy as we believe the risk to earnings remains to the downside due to the lack of debt availability, coupled with the potential for slower development lease up. Our NAVs for both companies now provide $0 value for merchant development profits or value added conversations so investors should have more comfort in these valuations.”
They go on to say:
“Industrial, Healthcare & Storage:
Re-aligning ratings to fit IRR expectations
We are becoming more conservative on valuations in aggregate. In the text below, we highlight our specific sector thesis, as well as the resulting PO and rating changes that have resulted from our recent IRR and cap rate analysis.
Industrial: You can’t price, what you don’t know…
While we continue to believe in the secular growth opportunities offered by both PLD and AMB, we are finding the valuations increasing difficult to support given:
1) the perceived lack of funding for both consolidated as well as JV maturities/commitments – which may impair and limit balance sheet capacity; 2) softening global economies – which may negatively impact leasing and rent growth; and 3) the relentless upward bias in cap rates – which, when combined with a continued decline in stabilized development yields, is causing profit margins to narrow precipitously.
Further, as global industrial developer valuations have fallen in recent months, we believe much of the Street has now moved toward a “pure-play” NAV analysis, and therefore has fully discounted the unknowns associated with financing uncertainty, merchant development/VAC gains, and any promoted interests. This leaves only tempered rental revenue prospects, and to a lesser degree, management income, from which to value. Given our similar “pure-play” NAV analysis, combined with our more conservative IRR and cap rate assumptions, we are making the following ratings changes:
…
PLD: Downgrading to Neutral and lowering our PO to $27.00
We have left our prior cash NOI assumption for PLD intact; however we have increased our IRR hurdle rates by 125bp to 9.25%. This in turn has resulted in a 65bp increase in our cash NOI cap rate to 7.95%. Subsequently, the net impact of eliminating any multiple benefit for CDFS gains and any other promoted interests from our NAV model, we obtain a current NAV of $29.72 (revised down 40%) and a forward NAV estimate of $31.32.
As a result, when we apply a 14% discount to our forward NAV estimate ($31.32), commensurate with our assessment of risks associated with both PLD and REITs overall, we obtain a new price objective of $27. Together with a safe and attractive 7.6% yield, we expect PLD to deliver a 7.4% total return over the next 12 months, which supports a Neutral rating.”
I hope Merrill will have the guts to stick by this assessment a week from now when earnings come out. However, I doubt it. These are the same monkeys that got our country into it’s current mess. They have destroyed our’s and our parent’s IRA’s and 401K’s. People rely on these guys. If they did not read the reports, they are negligent. If they did read them, they are idiots. Either way, they have done damage to people who trusted them.
I know I sound mad. I am. I am sick of con-artists acting like they are authorities. As far as I am concerned, they belong behind bars for misleading the public. If they are not doing it intentionally, they are grossly negligent.
So what do you think prompted them to change their rating so quickly? I like to think it was this email:
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Of course, I never got a response and maybe that’s why I’m mad. Oh well, I guess money will have to comfort me.