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Correlation Between Apartment REIT Revenue, Stock Prices Still Strong

Other Factors Also Figure In

By | Wednesday, October 19, 2016

Statistically speaking, when homicides go up, so do ice cream sales. Do homicides cause increases in ice cream sales? Do ice cream sales cause homicides? Of course not: summer causes more homicides and ice cream sales.

This is a classic example of the fallacy that correlation does not equal causation. But if this dictum is taken too far, one ends up dismissing clear cause and effect relationships — even when analyzing only two variables. 

We’ve written before about the relationship between the apartment REITs' reported revenue and stock prices. With the end of 2016 fast approaching, we can re-assess this relationship, particularly in light of the significant changes occurring in the apartment market.

Using Axiometrics-surveyed rental revenue and stock price data, we identify an exceptionally strong relationship between the two variables (indexed at 2005 = 100). Taking the data altogether, there is a whopping 99.2% association between REIT revenue and REIT stock prices. There is no question, then, that one variable, rental revenue, is driving the other, stock prices, although many other factors also play into the stock price. 

Looking at the seven REITs that have traded publicly from 2005-present, the correlations range from 95.4% (Camden Property Trust) and 99.1% (Post Properties). Sept16REIT_7-1.jpgIn other words, the robust relationship that we find for all the REITs, taken together, also holds for each of the REITs individually.

In its simplest form, this means that for UDR, as an example, 98.6% of the movement in stock prices is a function of rental revenue by itself. That still leaves 1.4% of the change in stock price unexplained. Below are graphical representations of the strong correlations for each of the seven REITs considered here.

 

 

 

 

 

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