Apartment REITs Could Face Rentals Glut

Editor's note: This column is a special bonus for readers. It first appeared on Street Insight on Nov. 3 at 7:29 a.m. EST. To sign up for Street Insight, where you can read Kass' commentary in real time, please click here.

As I mentioned recently on Street Insight, I continue to short the iShares Dow Jones U.S. Real Estate (IYR Quote) fund. Indeed, the apartment real estate investment trusts remain my most favored short area -- and I have yet another piece of evidence that makes me confident in my trade.

As background, what draws me to the short side is a record gap between bond yields and REIT dividends, 25 times-plus cash-flow multiples, record-high P/E ratios averaging over 42 times, premiums to net asset values, and lofty assumptions for residential and nonresidential values and rent increases (+6%) in 2007-08 that are imbedded in EBITDA and profit estimates.

The group trades at a 175% premium to the average S&P 500 P/E. As recently as late 2001, REITs traded at 11 times earnings, and valuations are, shockingly, in line with the Internet as the highest multiples in the marketplace. ...