Misleading Earnings Put Equinix & the Real Estate Sector in Danger

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The earnings recovery remains an accounting mirage. I highlighted the divergence between accounting earnings and economic earnings – the real cash flows of the business – at the beginning of the year. Through the first three quarters of 2018, that divergence has only grown more pronounced.

My full report shows that six out of 11 sectors have negative economic earnings over the trailing twelve months. Most notably, the Real Estate sector’s economic earnings continued to decline and turned negative through the first three quarters of 2018. Meanwhile, funds from operations (FFO) continue their misleading upward and positive trend. This disconnect makes the Real Estate sector my worst-rated sector for ETFs and mutual funds. The Real Estate sector as a whole, and Equinix (EQIX) in particular, is this week’s Danger Zone pick.

GAAP Earnings Mislead Investors

The Real Estate sector, and especially REITs, have looked strong so far in 2018 based on funds from operations. Trailing twelve months (TTM) funds from operations are up 5% vs. 2017, and up 72% over the past five years.

However, Figure 1 shows that this accounting earnings growth is an illusion. Economic earnings have fallen from $300 million in 2017 to -$4.7 billion over the TTM period.

Figure 1: Economic Earnings Vs. FFO: Real Estate